Executive Thought Leadership

A new study from MIT’s Center for eBusiness shows that firms with "digital cultures" get more out of their technology investments.

Studies in recent years have shown that companies that invest heavily in IT generally realize significantly higher productivity than those that do not. Cisco has long been a proponent and practitioner of Internet culture: adopting an organizational mindset and practices that enable the company to better leverage its technology investments and move, think, and change in Internet time. A new study of Internet organization, culture, and productivity from the MIT Sloan School Center for eBusiness examines companies that combine heavy IT investment with cultural behaviors designed to promote information sharing and distributed decision-making. Results indicate that this combination dramatically increases the productivity impact of their technology investments.

Key Productivity Findings

Conducted by the MIT Sloan School’s Erik Brynjolffson and the University of Pennsylvania Wharton School’s Lorin Hitt, and co-sponsored by Cisco, the study’s key findings support the growing consensus among business and technology leaders that productivity (specifically efficiency, speed, and cost performance) technology, and leadership are closely tied. Further, they are essential elements of business success in the 21st century. Among the study’s findings:

• The productivity payoff of corporate IT investments is significantly higher when a company also invests in “organizational capital,” that is, corporate processes and behaviors that encourage employees to take the fullest advantage of technology.
• Businesses realizing the highest payback from their investments in both technology and organizational capital share a common set of cultural characteristics—what the study’s organizers call the “digital organization”
• The companies making the most aggressive investments in organizational capital—such as good people, new business processes, and training—place that investment on a strategic par with their technology investments.

The Internet Culture

Not surprisingly, the behaviors of digital organizations are the same behaviors that characterize the current generation of successful, Internet-based businesses as well as older businesses that have put the Internet at the heart of their business operations. The top three:

• Open information access and communication such as unrestricted Internet access and the use of technology to support multidirectional communication
• Distributed decision making and empowerment of employees at all levels
• Strong, performance-based incentives linking pay and stock options to individual performance

Organizations that adopted these behaviors were found to be considerably more productive than those that did not. More important, firms that adopted these practices and invested more than the industry average in IT were disproportionately more productive than firms that executed one but not the other.

Take the example of Volkswagen, whose investment in virtual private networking (VPN) to improve secure access to its network for mobile workers and telecommuters dramatically reduced the company’s high 800-number telephone costs. The VPN reduced the price of Volkswagen’s remote connectivity by 88%. It also dramatically simplified the process of accessing the company’s data for remote workers and provided a secure environment that allowed employees to work more swiftly and effectively. By leveraging a significant technology investment to provide broad, instantaneous information access to this large group of workers—a key behavior of a digital organization—Volkswagen was able to improve its bottom line while allowing workers to be more productive. For more information on Volkswagen’s VPN implementation, see

Internet and IT

The study also found that highly productive companies are more likely to leverage a broad array of technologies, including the Internet. These organizations not only have higher percentages of Internet users, but their employees are more likely to use computers daily. In fact, the companies using traditional IT and the Internet more extensively scored higher on all measures of innovation than other companies in the study. This finding helps to explain, in part, why the productivity of many Internet-enabled companies has been so high. Many of these companies could not have survived or even existed without heavy investment in technology infrastructure, or without the power of the Internet. Dell Computer is a good example of a company that has used technology and the Internet to adapt its already successful business model to address changing customer expectations—in this case to offer customizable, self-service PC purchasing at competitive prices. In technology-savvy corporate cultures such as Dell’s, productivity and IT investment are irrevocably linked. Indeed, Brynjolffson and Hitt suggest that they are part of what they call a “virtuous cycle,” in which greater IT investment leads to higher productivity and vice versa.

Another leading firm, British Petroleum, demonstrated the power of the virtuous cycle simply by moving expense processing and other employee self-service initiatives online. The company saved $15 million and recouped its entire application investment in a single day.

Productivity Payoff

Not surprisingly, the study found that the companies experiencing the greatest productivity payoff from IT and the Internet also developed strong, well-defined and supported corporate cultures. Indeed, many new or adapted Internet-enabled businesses, with their emphasis on customer-facing activities, are more culture-conscious than other businesses and invest heavily in promoting their culture. In these companies, cultural fit is as essential a hiring criterion as technical expertise or appropriate experience. General Electric, a company renowned for its culture, has digitized as much of its business as possible, increasing its IT spending by 12% in 2001. Streamlining administrative functions such as travel arrangements and expense reimbursements on the Web enabled GE to cut costs by 30%.

The benefits of becoming a digital organization appear to extend well beyond standard measures of productivity. Companies that adopted the practices of a digital organization also experienced increased innovation as a result of their increased tendency to adopt leading-edge technologies. Their ability to foster open communication with customers also increased their innovation, as these customers supplied them with ideas for new products and services.

Employees also experienced significant benefits from working in digital organizations. The companies studied reported significantly higher compensation for employees at all levels of the pay scale. Many of these employees enjoy performance-based incentives and stock options. Voluntary employee turnover at digital organizations was also lower than at other companies, which suggests that empowered, informed employees who benefit directly from their good performance experience greater job satisfaction.

The study’s authors raise the question of why more companies don’t emulate the corporate behaviors that, when combined with above-average technology investment, offer a formula for business success. One answer is that the corporate behaviors described in the study are not well known or understood by many companies. And, as many business leaders have discovered, the sort of tectonic, cultural shift required to transform into a more open, employee-empowering business environment is more easily described than accomplished. The study’s authors concluded that such practices need to be adopted together as part of a complementary system. Moreover, adopting one practice, but not the others, may actually hurt a company’s productivity.

Formula for Success

Companies interested in making the shift should consider the following guidelines for developing an Internet culture:

• Develop a relentless customer focus.
• Where practical, buy technology instead of building it.
• Establish partnerships that contribute to your customer focus.
• Develop a strong internal partnership between business management and IT.
• Evangelize and market internally.

Not surprisingly, the study found that effective leadership was the most critical element in developing and supporting a productivity-building culture. By communicating strategic and financial goals throughout the organization, maintaining corporate focus, and demonstrating support for information sharing and distributed decision making, business leaders must lead the way to conducting business more effectively with innovative methods.