Digital reinvention, business and the productivity paradox

Published on the 12/06/2018 | Written by Newsdesk

While the digital revolution can indeed improve productivity, we’re not there yet suggests new research from McKinsey…

“You can see the computer age everywhere but in the productivity statistics,” economist and big thinker Robert Solow once quipped.

The year was 1987 and Solow was referring to the strange discrepancy which had arisen between IT growth and measures of output at a national level: Despite rapid developments in the field of IT, one thing was not developing in kind: Productivity growth.

In fact, productivity growth across the whole of the U.S. economy – and particularly in sectors that had invested heavily in information technology – had slowed from a healthy three percent in the 1960s to just one percent by the 1980s. Computing capacity had increased a hundredfold and labour productivity growth was, somehow, on the decline.

Now researchers from McKinsey – senior fellow Mekala Krishnan, partner Jan Mischke and partner Jaana Remes – are wondering if the Productivity Paradox is raising its curiously counterintuitive head again.

“Today, with digitisation,” says a new report from the management consulting firm, “we are living in round two of the Solow Paradox”.

“Digitisation contains the promise of significant, productivity-boosting opportunities – but the benefits have not yet materialised at scale.”

The numbers back that assertion up. A recent report by the research company entitled How digital reinventors are pulling away from the pack, reveals that digitisation has not yet taken hold of industry to the degree that many of us might expect.

According to that survey, less than a third of core business operations are automated or digitized, and that less than a third of products and services are digitised.

It turns out that adoption of that shiny new business solution often isn’t as friction-free as expected and that transitioning from bricks and mortar set-up to the fabelled ‘digital-first’ business – well, that can get quite expensive.

“Today, we find that companies are allocating substantial time and resources to the innovation and adaptation of their businesses,” says the researchers. “In doing so, many are still trying to understand how to make the most of digital technologies, which often do not yet have a direct and immediate impact on output and productivity growth.”

Cloud tech, mobile, machine learning – these are the great white hopes of the productivity project. So where’s the data that shows productivity on the rise?

Simply put, for all our high hopes (and time, and resources) as of right now, digitisation itself isn’t actually stimulating productivity.

It’s the Solow Paradox, round two.

Back in the eighties, experts couldn’t agree on just why such a phenomenon existed, but ultimately, it didn’t matter: By the nineties productivity was indeed booming, thanks in part to the rise of the chain store giant and its tech-enabled supply chain and distribution efficiencies.

Now, Krishnan, Mischke and Remes think they may know why eighties productivity didn’t match eighties tech. Quite simply, good things – like the realisation of the productivity benefits of digitisation – take time.

“Digitisation contains the promise of significant, productivity-boosting opportunities – but the benefits have not yet materialised at scale,” say the researchers.

Take retail for example.

“In retail, while online sales are twice as productive as offline, they account for only about 10 percent of total sales today in the United States and Western Europe, according to data from Euromonitor International,” says the researchers.

“Transition costs abound in the realisation of productivity benefits, starting with the impact of declining foot traffic in traditional retail stores and malls. Behind the headlines about drone delivery and workerless distribution centers, retailers are working overtime to strike the right ‘Goldilocks’ balance between offline and online retail.”

That balance takes time to find, as old markets wither to make for new, and new tech-enabled offerings cannibalise yesterday’s golden geese.

And so it’s likely that we are, in fact, on the verge of seeing those productivity promises realised – but not right on the verge.

McKinsey’s latest research says that increases will be modest in the short term – but ultimately revolutionary.

“As financial crisis after effects recede and more companies adopt digital strategies and solutions, we expect productivity growth to recover,” reads the paper, Solving the productivity puzzle: The role of demand and the promise of digitisation.

“We calculate that the productivity-growth potential could be at least two percent per year across countries over the next decade.”

On paper that seem modest, but it’s a quadrupling of growth compared to the late nineties and the cheery forecast doesn’t end there.

“The potential for outsize gains could be even greater this time around because of the scale and network effects associated with digital technologies. That raises the stakes for today’s executives – but it’s also good news. The size of the prize means productivity rates won’t stay low forever. And as they rise, so will a new generation of leading companies.”

Read the McKinsey research documents How digital reinventors are pulling away from the pack and Solving the productivity puzzle: The role of demand and the promise of digitisation.


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