Guest column: Paradox revisited

There are fabulously profitable companies with low per-capita spending on computerisation. Likewise, there are dismally unprofitable companies with high per-capita spending on computerisation. Why? Since 1985, I have published five books dealing with the "computer paradox", which states that there is no evidence that greater spending on computers will necessarily boost a company's productivity. With one exception, nobody has quarrelled with the data itself.

Nevertheless, the critics found it difficult to swallow the observations that the paradox persists. Their experiences told them otherwise. Computers were wonderful, and most of us couldn't function without them.

Recently, I received a message from one of the most respected computer scientists, now a retired CEO who frequently speaks at industry events. He wrote, "I refuse to believe that my former customers and my current audiences are fools and idiots. I wonder if IT investments correlate with something other than profits -- or something you are missing."

I don't believe that I am missing any facts. Since 1982, I have tried to find correlations with IT spending, including every conceivable variable such as revenue, assets, stock market prices and shareholder equity. So far, I can't report success, and nobody else (to my best knowledge) has found a positive relationship. Thus, the paradox remains a phenomenon, though it is also true that computers enable people to work faster, smarter and in ways that were never feasible before.

After looking at all the evidence, I have concluded that the computer paradox is here to stay. The best we can do is understand why.

The root cause of the computer paradox lies in the uses of computerisation as the weapon of choice in economic competition. The costs and effectiveness of information management, not the possession of physical capital, have become decisive in separating the winners from the losers. In these contests, everyone is buying comparable technologies, without economic justification.

The economic model is one of an arms race, where all parties must escalate their information competitiveness, thus largely nullifying one another. That results in winners as well as losers, as is the case in all warfare. It is the random distribution of profitability of both the winners and the losers, when plotted against estimated IT spending, that leads to the random pattern of no correlation between IT spending and corporate profits.

The progress in IT has exacerbated this randomness by making it possible to change the rules of economic warfare at an accelerating rate. The history of warfare offers lessons in why and how this can happen. The English archers defeated the French knights in armour. The German blitzkrieg bypassed France's Maginot Line. The prospects of "Star Wars" made masses of Soviet tanks and artillery irrelevant. In each of these cases, wealth-draining investments in military assets turned out to be liabilities as resources were wasted and abandoned. The defenders couldn't buy their way out of defeat by spending more money on what were the sources of their fundamental economic failures to begin with.

What is different now is that in the Information Age, winners can be dislodged in less than two typical technology cycles, or less than 14 years. That wasn't the case in the Industrial Age, when the rise and fall of companies took much longer because large capital investments and entrenched economic positions favoured the established businesses.

The uncritical assumption that just pouring more money into computer budgets will make it possible to keep up with an increasingly costly technology race is a prescription for failure. While the computer paradox persists, the best way of winning is to avoid overspending on obsolescent systems and to reduce operating costs. This makes more money available for innovation and rapid adaptation as the rules of economic warfare evolve.

* Paul Strassmann (paul@strassmann.com) recommends that IT executives learn more about guerrilla tactics where underresourced, but innovative strategies may still lead to victory.

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