An End to the Digital Productivity Paradox

Realizing new digital value through organizational strategy and business design

There has been much discussion over the past few years regarding illusive productivity gains in the face of the widely touted transformative benefits springing from the current generation of digital technology (often labeled under the moniker of “SMACIT” – for social, mobile, analytics, cloud, and internet of things).  Economists have repeatedly observed that economic growth has been much weaker than expected given the impact that digital technology is  having on the economy, both in regards to enabling new business models and driving changes in social behavior.

Historically, we’ve seen this before – in the 1970s and 1980s economists coined the term “productivity paradox” to describe the condition where economic growth slowed at the same time that information technology was being rapidly integrated into business operations.  Nobel Prize-winning economist Robert Solow  quipped in 1987 that “you can see the computer age everywhere but in the productivity statistics.”

However, there was a subsequent acceleration in productivity and business growth in the late 1980s and an even more lively burst in the early 2000s.  While there is debate about the drivers, nature, and degree of this growth, there is no doubt about the dramatic degree of organizational restructuring and downsizing undertaken during these periods.

We’re not going to wade into the academic debate regarding fundamental economic forces.  However, we will posit that much of the restructuring and downsizing was enabled by technology – tremendous cost was removed in organizations as middle management was replaced with tools for analysis, processing, and communication, among many other capabilities.  This in turn drove productivity gains.

Therefore, when economists observe today that the SMACIT-driven digital revolution has failed to impact productivity significantly, we wonder if a new perspective on organizational dynamics is needed.

Perhaps legacy businesses are, for the large part, still adapting organizationally by way of the old models of efficiency and operational excellence, mostly in an incremental manner – this means redesigning processes, structures, jobs, and skills.  Some businesses are also grafting digital businesses onto established business operations or creating “digital native” organizations as skunkworks – placed at arms-length in the business units and not upsetting the traditional order.

What most legacy companies have not yet done is undertake a deep exploration of how they must fundamentally change across the enterprise in response to the new forces of internet era-based digital technology.  Technology no longer simply replaces work or provides better tools – technology becomes inextricably comingled with human activity, therefore shaping new behaviors.  This must be understood in the larger context of business and work design – not as a bolt-on but as a new way of thinking about work.

This technology offers much more than the prior era’s propositions of faster, cheaper, and more convenient.  For example, Uber has developed innovations in business models and social and mobile technologies that are profoundly different from the more focused operational innovations of web retailers at the beginning of the century.

Recent industry surveys, such as the 2017 CEO Challenge study from the Conference Board, demonstrate that CEOs and other executives recognize the economic imperative for such profound change.  However, businesses are not prioritizing “digital transformation” for the near-term (i.e., next two years).

Why is this the case, and what would change these conditions?  We feel the priority is not yet high for two reasons:

• Timing: Lack of consensus to act – Given a global environment of economic uncertainty and internal differences of opinion on the situation and best course of action, companies are hesitant to act, even under the pressure of digital native companies rapidly gaining market share.  Related to this is a lack of a demonstrated return on investment or business case for these initiatives.  It’s not that executives are denying the forthcoming impact of digital market forces; they are uncertain and not aligned as a team on the “what” and “why.”
• Approach: Lack of clarity on the path forward – Companies don’t have the logical models, analytic tools, or best practices needed to address comfortably the questions of what organizational changes they should make and how aggressively they should act.  What should they focus on?  What changes should be made? How do these changes ultimately affect performance?  No executive would take on such a risk, particularly without full consensus of the team.

Regarding consensus, barriers can be addressed by building shared perspectives on relevant technology and market forces and identifying high-impact, lower-risk actions; for example, in developing a focused set of organizational capabilities at the enterprise level tied directly to digital business strategy.  Examples of this include capabilities for creating and sharing knowledge and expertise and for defining and making actionable culture aligned with strategy.  Both would be defined explicitly in regards to enabling technologies designed with constituent users (e.g., employees) in mind.

Regarding the path forward, clarity on approach – the “how” – could help build consensus to act.  The primary difference between organizational change of the past and of today is in the change “levers.”  Traditional change addressed structure, process, job design, and skills.  Digital has affected this in several ways.  First, structure is less critical generally.  Staff managers and structured processes are less central to work planning because the team concept has emerged as a new focus of work design.  Skills are still critical – however, the philosophy of who owns an employee’s development and learning is shifting as companies expect employees to own their careers and  adapt quickly to changing business conditions.

So, what enables organizational capability in the digital age?  We believe that work practices and culture are the primary levers today.  Work practices represent the tangible, observable work at the intersection of formal work design and actual employee behaviors.  Work practices can be evaluated, designed, and supported in action.  This is where, for example, effective customer interactions occur – not through a static process flow chart or call script but through thoughtful human behaviors occurring within the context of good work design.  This is where work analysis should be applied in order to identify change opportunities and to design new “ways of work.”

Or course, organizational culture sits behind this dynamic as a critical “glue,” providing an implicit reservoir of guidance for all sorts of situations and driving alignment in employee behaviors as the company deals with continuous, disruptive change.

Together these factors, when intentionally designed, serve as the drivers of the new digital organization.  This is what is truly meant by “digital-first organizations” – where digital technology and digital behaviors are front and center in creating and executing the new work design.