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The productivity paradox of information technology (IT) refers to an observed inconsistency between technological advances and productivity growth [1]. The impact of IT on economic performance has been a subject of academic research for several decades, and demonstrating performance and productivity gains from investments in IT continues to be challenging [2]. 

Although much research has demonstrated a positive relationship among IT investments, economic productivity, and business value, which provides evidence of a general relationship between IT and organizational performance [3], correlations between IT investments and productivity vary widely among companies [4]. Many studies show that information technologies have no effect on performance in an off themselves – rather, they must be combined with other resources, such as marketing, human or R&D investments, to create competitive advantage [5]. These results imply the existence of a set of organizational characteristics that are simultaneously and positively correlated with both IT investment and organizational performance. Understanding the interrelationships between IT and organizational resources, processes and structures, is therefore fundamental to organizations seeking to improve value creation and performance by use of IT. With this as point of departure, Tonecto will review, integrate and discuss practical implications of research on the interplay between organizational and technological factors.      

Several studies highlight the importance of Information systems strategy in this regard.

• Mithas and Rust [6] find that IT strategic emphasis moderates the relationship between IT investments and firm performance.
• Aral og Weill [3] find that different types of IT investments (infrastructure, strategic, transactional, and informational) have different, and potential opposing effects on various performance outcomes (innovation, efficiency improvement / cost reduction, profitability, and market valuation). Organizations therefore need to carefully make IT investment choices based on their business objectives. They should also emphasize development of organizational competencies and routines that accompany IT investments and implementation, as this may both strengthen and broaden the performance effects of IT assets. This includes development of tight relationships between business units and the IT function, development of strong cross-functional IT and business skills, development of communication competencies and structures, and development of open internet-based architectures for interaction and integration.  
• Chen et al. [7] show that organizational performance (price competitiveness, timeliness of delivery, high-quality supply, and response time relative to competitors) is positively related to the strategic flexibility of organizations. IT can support the core competencies of organizations by facilitating their specific strategic activities and combination of IT and business strategy, which leads to improved strategic flexibility.
• Sabherwal and Jeyaraj [2] find that the business value of IT is strong and significant, and emphasize the importance of alignment between business and IT strategies and interorganizational use of IT to convert IT investments into performance gains. IT investments that are aligned with an organization’s strategies and structures and that support interorganizational activities yield greater business value. They further argue that senior IT and business executives should focus on non-profitability measures and capabilities that concern organizational operations rather than financial measures, when examining the contributions of IT to their organization.

The value of IT for accessing and exploiting external knowledge is highlighted by several researchers.

• Organizations can use ICT to establish and enable social ties and by this improve their abilities to identify and access external knowledge [8].
• IT investments create additional business value through interactions with other business processes. IT is enabling R&D-intensive innovation processes, which underscores the need for coordinated investments in IT and R&D [9].
• Joshi et al. [10] and Saldanha et al. [11] show that investing in IT alone does not provide strategic value, but that it can support and strengthen organizations’ capabilities for innovation. There link between IT and innovation is hence central for the strategic value of IT.

 

Research has also shown that organizational agility is a central concept.

• Chen et al. [12] find that the impact of IT capability (consisting of the interrelated dimensions of IT infrastructure, IT business partnerships, business IT strategic thinking, IT business process integration, IT management, and external IT linkage) on organizational performance is fully mediated by business process agility. Organizations should therefore emphasize competency development and maintenance across these six dimensions, and leverage their IT capability to improve agility in managing and operating critical business processes.

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References / sources

1. The productivity paradox of information technology.
   Brynjolfsson, E. (1993). Communications of the ACM, 36(12).
2. Information technology impacts on firm performance: An extension of Kohli and Devaraj (2003).
   Sabherwal, R. & Jeyaraj, A. (2015). Management Information Systems Quarterly, 39(4).
3. IT assets, organizational capabilities, and firm performance: How resource allocations and organizational differences explain performance variation. 
   Aral, S. & Weill, P. (2007). Organization Science, 18(5).
4. Revisiting IS business value research: what we already know, what we still need to know, and how we can get there.
   Schryen, G. (2013). European Journal of Information Systems, 22(2). 
5. Does information technology improve open innovation performance? An examination of manufacturers in Spain. 
   Gómez, J., Salazar, I & Vargas, P. (2017). Information Systems Research, 28(3).
6. How information technology strategy and investments influence firm performance: Conjecture and empirical evidence. 
   Mithas, S. & Rust, R.T. (2016). Management Information Systems Quarterly, 40(1). 
7. Improving strategic flexibility with information technologies: Insights for firm performance in an emerging economy. 
   Chen, Y., Wang, Y., Nevo, S., Benitez, J. & Kou, G. (2017). Journal of Information Technology, 32(1).
8. Mitigating diminishing returns to R&D: The role of information technology in innovation.
   Ravichandran, T., Han, S. & Mithas, S. (2017). Information Systems Research, 28(4).
9. Business value of information technology: Testing the interaction effect of IT and R&D on Tobin's Q.
   Bardhan, I., Krishnan, V. & Lin S. (2013). Information Systems Research, 24(4).
10. Changing the competitive landscape: Continuous innovation through IT-enabled knowledge capabilities.
    Joshi, K.D., Chi, L. Datta, A. & Han, S. (2010). Information Systems Research, 21(3).
11. Leveraging customer involvement for fueling innovation: The role of relational and analytical information processing capabilities. 
    Saldanha, T.J.V., Mithas, S. & Krishnan, M.S. (2017). Management Information Systems Quarterly, 41(1).
12. IT capability and organizational performance: the roles of business process agility and environmental factors.
    Chen, Y., Wang, Y., Nevo, S., Jin, J., Wang, L. & Chow, W.S. (2014). European Journal of Information Systems, 23(3).

Photo by John Guccione www.advergroup.com from Pexels

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Other relevant external resources

Measuring the business value of IT: simplify with caution (Post by Rajiv Sabherwal and Anand Jeyaraj based on [2] published in LSE Business Review). 

Professor Erik Brynjolfsson talks about productivity and performance in a digital age:

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News & Insights related to relevant topics

Organizational agility Information systems strategy IT and innovation Business – IT alignment