In the past, the economic impact of IT has been subject to much debate. The productivity paradox was first proposed by Steven Roach, the chief economist at Morgan Stanley, who found that BLS data on investments in computers had a clear negative rather than a positive impact on productivity gains in several major industries. Roach's paradox appeared to be valid because quite a few service industries had negative productivity gains between 1977 and 1984.
Some tried to explain this paradox by noting that it was difficult for workers to adjust to computers. Others noted that few computer applications made significant improvements in the amount of work most workers could do. Still additional commentators felt that the paradox was a product of poor statistical measurement.
Because this paradox was driven by the negative productivity results for several service industries, one approach was to see if the service productivity figures were accurate. One study, by Joel Popkin and Company for IBM,(1) found that the BLS productivity statistics Roach used for several service sectors had important shortcomings. Most importantly, the BLS productivity data relied on output measures that did not truly reflect the changes in the nature of work in some service industries. If these are corrected in several important service industries, two things could be shown.
1. Many of nonservice industries had a positive relationship between investments in computers and productivity.
2. When different methods were used to estimate output for several service industries, their productivity growth, instead of being negative, was slightly positive.
To extend this work, I have added investments in communications to investments in computers (and office equipment). By adding communications equipment spending, a more accurate picture is created of the relationship between computer and communications technology (IT) and productivity. In addition, looking at the overall IT investment (for computers and communications) shows a positive relationship between such investment and productivity, although the fit is much less than tight.
Figure 1 presents the results of plotting spending on communications and computers as a percent of all spending on equipment against the annual productivity growth for two data sets that include industries covered by U.S. Department of Labor statistics for the years from 1977 to 1989. Both regression lines show a positive correlation between spending on communications and computers and productivity. Interestingly, however, the regression line for the data for the years 1985 to 1989 is higher than the 1977 to 1984 regression line when the ratio of spending on communications and computer equipment was less than 50 percent of total equipment spending. The regression line for the later years' data drops below the regression line for the earlier years when spending on communications and computer equipment is greater than 50 percent.
This suggests that industries that were spending smaller amounts on communications and computer equipment in the 1984 to 1989 period were achieving greater productivity gains than in the 1977 to 1984 period. The changes between the two periods suggest that industries that have invested lower amounts of their equipment spending in communications and computers are beginning to see a greater productivity payoff from such spending. This would lead one to assume that a recognition of this fact would result in greater spending on communications and computers, including spending on storage.
If this is true, one might expect to see an increase in future years not just in spending on communications and computing but in annual average productivity gains by industries that have not spent much on communications and computing equipment historically. This is reflected in the third line drawn on the graph, which is higher than the ones fitted to the data from the two previous periods, 1977 to 1984 and 1985 to 1989. This line depicts a projection for the likely productivity gains due to spending on communications and computing during the 1990 to 1995 period. It is drawn to reflect an assumption that firms that spend lower amounts on communications and computing will achieve significant gains in productivity over the 1990 to 1995 period.
POTENTIAL BENEFITS FROM NARROWBAND AND BROADBAND COMMUNICATIONS
In a later study,(2) I contrasted the different benefits that firms obtain from adopting narrowband communications (less than 1.5 megabits per second) with the gains from adopting faster, broadband communications (1.5 megabits per second or higher speeds). This work showed that while narrowband communications improve daily communications over public networks, broadband communications offer much greater functionality and benefits.
Broadband links, even at the modest bandwidths now being used by many firms, i.e., 2 megabits per second, permit more complex imaging information to be accessed and used, a major distinction from narrowband. Thus, banks can establish databases of images of forms such as mortgages, bonds, analysts' reports, and pictures, which need to be accessed to assure that there is timely maintenance of customers' accounts. In addition, manufacturing and service corporations can use broadband communications for a wide range of cost-saving functions. For instance, firms report that broadband communications offers them great savings through the use of videoconferencing and rapid access to large databases, as well as opportunities to reorganize their internal operations.
Narrowband is most effective for modest daily communications that transmit data electronically. For instance, Kodak's sales force uses computers to communicate from the field with supervisors and for sending information to clients. By using these narrowband links, Kodak's field sales force can more easily keep in touch with customers, increasing time spent with customers by 10 to 20 percent.(3) An additional benefit is that computer-based communications from the field often reduce commuting time for employees by 10 to 15 percent. These benefits are expected to increase once ISDN connections are more widely available.
Broadband has several benefits for corporate users. One benefit is the significant increase in "bandwidth on demand and a seamless mesh that integrates voice, video, and data on one high-capacity internetwork."(4) GM Hughes Electronics was the first subscriber to Sprint's ATM offering. It has a "huge appetite" for bandwidth and needs to maintain direct links between its operations in Virginia and in California. According to Sprint, its service should cost between 30 and 50 percent less than private T-3 backbones. Most of Hughes Electronics' research involves a great deal of data, images, and engineering drawings that need to be transmitted from one work site to another across the country. Having a high capacity connection saves considerable time and money, particularly if videoconferencing is added to the uses of the trial ATM network.
In addition to providing a large amount of bandwidth, broadband also enables companies to transmit complex images and drawings at high speeds. The speed and convenience of doing this more than pays for itself in productivity and profit increases. One of the first users of Bell Atlantic's SMDS services was Falcon Systems of Landover, MD. Falcon Microsystems, the largest vendor of Apple Computer equipment to the federal government, is using T-1 speed SMDS lines to transmit very large files from the prepress shop and desktop publisher to the printing facility. SMDS is used to connect the firm to its imaging service, which can transmit scanned images to Falcon so they can be included in its catalog. Falcon's completed artwork for a catalog is transmitted to its imaging firm over the SMDS network. The SMDS link permits Falcon to transmit large image files for its four-color computer catalogs to their imaging service. Falcon can then transmit the finished art for catalogs back to its imaging service for delivery to the printer. According to Falcon's Director of Creative Services, "The SMDS link saves three to four hours every day and saves hundreds of dollars each month in courier services."(5) As a result of the speed offered by the new network, Falcon is also able to move 150 megabits of image files directly from its computers to its image service firm in an hour. This compares to the hour that would have to be spent putting these files on disks, the two hours more it would take to send them by courier to the imaging service and the additional hour that the service would need to copy the disks onto its machines.
Broadband also permits far more efficient retrieval and handling of complex documents and images, such as forms and legal agreements that are part of the daily business of banks and brokerage houses. Banks use a large number of documents that are stored as digital images on a computer. They need to find these forms rapidly and to transmit them to customers or to other businesses. While this could be done at lower speeds overnight, the demand for this information requires that the forms be transmitted immediately. As a consequence, banks need the higher speed and bandwidth that broadband provides. Bank trust departments that hold securities for many customers are developing sophisticated document retrieval capabilities so that they can respond to inquiries more rapidly. Medium-sized banks expect that they are saving 5 percent on their communications costs today, but they expect to save at least another 5 percent by the time they are able to use computerized jukeboxes to store much larger numbers of documents.(6)
Broadband communications is also able to help product development in several ways. It can speed access to critical information, such as patent searches, and reduce the interference introduced into product development when inventors need to converse with product managers to understand the uniqueness of their products better. Broadband communications also makes it possible for work groups that are highly dispersed geographically to work almost as if they are at the same site. This improvement speeds interaction and the exchange of complex drawings and graphical information between workers.
For instance, one electronics firm needed to search patents at the U.S. Patent Office in Washington, DC, several times a year. As a result, research on new products was delayed by 30 to 50 percent because inventors and project managers needed to explain how the new invention differed from one patented by a competitor. Because of the cumbersome nature of the search process at slow speeds and the need to have numerous additional conversations between the inventors and patent managers, the firm only went after 20 percent of the patents it could have applied for. Once the company had a 1.5 megabit per second link to the Internet, inventors were able to do their own patent searches and to use keyword searches. This speeded up the searches by 40 percent and enabled the firm to track patent activity worldwide. Because fewer discussions had to take place between attorneys and inventors, the firm was able to double or triple the number of patents it applied for. Because it was able to bring these new products to market, it was able to increase revenues by as much as 20 to 30 percent and increase the firm's market share.
Examples of Consumer Benefits
Although consumers are less likely to benefit greatly from the deployment of broadband entertainment (video on demand), which has been delayed, they are likely to see important benefits from the use of advanced communications in consumer-oriented industries, such as health care. Health care represents a key area where broadband communications is being implemented more rapidly than in other sectors. The reason for this is the move to computer-based patient records and the need to do diagnoses from computer-based images. The most sophisticated communications networks have been installed in several Army and Air Force hospitals that are using high definition imaging systems to improve their delivery of care.
Research has shown that significant economies can be gained from the use of Picture Archive and Communications Systems (PACS), because they "will save referring physicians considerable time by eliminating their trips to and from the radiology department file room."(7) According to Saarinen et. al., referring physicians spend two weeks over the course of a year traveling to and from the radiology file room. If the time to make these trips could be recovered and was used to increase patient visits, the lost time would be worth between $3 million and $8 million dollars in annual billings to the University of Washington hospital, depending upon billable rates and patient demand for services. In addition, this research found that "the amount of time spent by clinical support staff to retrieve (radiological) films for referring physician's may be higher than the 20 percent or one-in-five rule."(8) Consequently, the value of PACS outside the radiology department of hospitals may be substantial.
Other research demonstrates that intensive care unit (ICU) physicians can continue with their care of patients because they can obtain x-rays from a workstation monitor. Thus, they are able to use digital films and the report transmitted with them by a radiologist before a radiologist does a more formal evaluation that could take much more time. This enabled physicians to view digital images of x-rays earlier and to compare films taken in the morning with those taken the night before. There is also some indication that physicians were able to perform clinical actions more rapidly because they could view digital images of x-rays earlier than films. In addition, physicians working in the ICU were less dependent upon radiologists when they could view digital images, using 40 percent of the images they received to proceed without any consultations with a radiologist. While a supervising physician in the ICU may have taken the place of a radiologist, this suggest that large savings in the demands placed on radiologists are possible with digital PACS.(9) Sridhar Seshadri and a group at the Radiology Department of the Hospital of the University of Pennsylvania have shown that the cost of establishing digital radiology departments that produce some traditional films is lower than traditional film-based departments. A fully digital radiology department would cost even less on an annual basis because of the labor savings and lower hardware and storage costs. This analysis does not include savings due to the more efficient use of physician or nurse time in the hospital.(10)
At Madigan Hospital in Seattle, important gains have already been achieved because of the introduction of advanced communications and computing. For instance, orthopedists, who had relied upon x-ray films, are using high resolution diagnostic monitors to evaluate and compare x-rays. The computer-based system permits these doctors to retrieve older x-rays that they can compare to new ones. The retrieval is simple, because the older, digitized image only needs to be called up from a server that stores months of previous films.
By using this system, clinicians have saved a significant amount of time they previously devoted to retrieving images. Because they can easily retrieve past and present records, doctors in the orthopedics department of Madigan are already saving about two hours a day and seeing more patients in less time than they had before. Pulmonologists and hematologists expect to see similar or greater gains in their efficiency. The clinical acceptance of the new system has been remarkable, with doctors training themselves to use the diagnostic workstations.
These illustrations from the health care industry provide only a few examples of the type of benefits that broadband communications are likely to have. Consumers are also likely to benefit from other industries that can serve them better through the use of broadband links, such as insurance companies that use broadband connections to transmit photos of car accidents from adjusters who evaluate damages in the field and write checks on the spot.
It is also likely that, with better access to the Internet and other on-line services, an entire range of new services will be available to consumers. The benefits of these services are difficult to quantify, given the early stage of such services. However, they are likely to reduce the time needed to find important information and to obtain goods and services. They are also likely to reduce the cost of goods and services by cutting out the costs of people who have acted as middlemen.
FOOTNOTES
1 Joel Popkin and Company, "The Impact of Measurement and Analytical Issues in Assessing Industrial Productivity and Its Relationship to Computer Investment," Washington, DC.
2 Robert Cohen, "An Evaluation of the Economic Impact of Narrowband and Broadband Communications," Economic Strategy Institute, Washington, DC, December 3, 1993.
3 Interview with Jim Briggs of Kodak, September 8, 1993.
4 Barry Phillips, "ATM: From Sea to Shining Sea," Data Communications, October 1993, pp. 127-128.
5 "Publisher Cuts Production Time with SMDS," SMDS Today.
6 Interview with Grant Caldwell, Bell Atlantic Account Executive for banking, September 13, 1993.
7 A.O. Saarinen et. al, "PACS Economics and the Referring Physician," SPIE Vol. 1234, Medical Imaging IV, PACS System Design and Evaluation (1990), p. 806.
8 Ibid., p. 815.
9 Debra De Simone et. al., "Effect of a Digital Imaging Network on Physician Behavior in an Intensive Care Unit," Radiology, 1988, vol. 169, pp. 41-44.
10 Sridhar Seshadri et. al., "Cost-Savings Associated with a Digital Radiology Department: A Preliminary Study," Department of Radiology, Hospital of the University of Pennsylvania, 1993.
Robert B. Cohen is an Adjunct Fellow, Economic Strategy Institute, Washington, DC.
COPYRIGHT 1995 The National Association for Business Economists
COPYRIGHT 2004 Gale Group
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