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 / Spring 2010 / Issue 58(originally published by Booz & Company)


The Thought Leader Interview: Erik Brynjolfsson

Based in part on the Cisco example, we wrote up a set of questions that we could ask in interviews at other companies. We also drew on the work of other researchers: Paul Osterman, an MIT professor who has conducted studies on high-performance work practices, and Tom Kochan, who codirects MIT’s Institute for Work and Employment Research. We used those questions as the basis for a set of about 450 interviews, at a variety of firms, that lasted about 20 minutes each.

And then we let the data speak, to see whether these practices were correlated with higher performance and greater use of information technology. One cluster of seven management practices kept appearing in the most productive IT-intensive companies, and we started calling this combination of practices the “digital organization.”

S+B: By this you don’t just mean an organization using a lot of digital technology and IT?
Right. Of the seven management practices, only the first involved the use of digital processes instead of analog — for instance, tracking financial results through company-wide computer systems, rather than using paper systems. Open information access, in which even frontline employees have access to information from outside their departments, was another one. A third was empowering employees and decentralizing authority. For example, Cisco uses an IT system to delegate decision rights when someone goes on vacation or is out of the office. The other practices were using performance-based incentives, investing in corporate culture (as with Cisco’s badges), putting more effort into recruiting great people, and investing in human capital with, for instance, excellent training programs.

We found that companies that combined the seven management practices of the digital organization with IT were much more productive — they achieved better results with less investment — than firms that had either the digital organization without IT or IT without the digital organization.

S+B: How do the metrics for organizational practices fit together? For example, does lean production have a different impact on productivity than, say, team-building or diversity-related practices?
In measuring organizational practices, we asked people at the firms we chose a few dozen specific questions — for example, about their companies’ use of incentive pay, the responsibilities for choosing work methods, and the investments in training per employee. We found that all of these metrics are correlated with one another, and we can create a single aggregate variable, which we call organizational capital. Every firm has a rating. To simplify our econometric analysis, we normalized all the ratings so that the average firm had a score of 0 and two-thirds of the firms had a score between –1 and +1: in other words, one standard deviation from the mean.

We haven’t yet made the survey results public. We have considered creating a website where people can answer the questions, see how their company compares to others, and add their answers to our database. But to be accurate about any company, it would have to include a number of perspectives: at least one person each from the human resources and IT departments, and enough people overall to compensate for the distortion of each person’s limited perspective.

One framework I’ve found very useful for thinking about this is the concept of complementarities. It’s the idea that two practices are more valuable together than separately: doing more of one increases the returns from doing more of the other. [Stanford University economists] Paul Milgrom and John Roberts have pushed the work on this forward. This principle traditionally has been applied to two technologies improving the impact of each other. But it can also be effectively applied to work practices. That’s what our research on the digital organization is all about: understanding which management practices best complement today’s technology, as well as the technologies that are just emerging.

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