Commentary & Analysis
FREE: Keeping the Horse in Front of the Cart
Commentary By David Dodd November 4,
By WhatTheyThink Staff
Published: November 4, 2004
Commentary By David Dodd November 4, 2004 -- Graph Expo and Converting Expo 2004 was held last month at Chicago’s McCormick Place, and, once again, this perennial extravaganza provided a showcase for new graphic communications equipment and technologies. Many products that were first demonstrated at drupa made their North American debut at Graph Expo and Converting Expo 2004. For four days in October, equipment manufacturers, technology providers, and other industry experts extolled the benefits produced by more automated presses and bindery equipment, the latest digital printing equipment, and computer integrated workflows. Many industry vendors suggested (or, at least, implied) that new technologies will return the graphic communications industry to prosperity by enabling printers and converters to automate production, reduce costs, provide faster turnarounds, and improve quality. Few participants in the graphic communications industry will deny that technology has brought profound and far-reaching changes to the industry over the past two decades. When you consider digital prepress hardware and software, press automation technologies, digital printing technologies, and the expanding role of the Internet, it’s fair to say that technology has impacted virtually every aspect of the print production process. Despite its obvious importance, however, technology is not the cure-all for the problems and challenges facing graphic communications companies. As I have previously argued in this space (see “JDF Doesn’t Matter”), investment in new technologies will not automatically produce competitive advantage and superior financial performance. While conventional wisdom holds that technology investments lead to improved productivity, recent evidence suggests that even this long-standing belief may need to be modified. International management consulting firm McKinsey & Co. recently published the findings of a research project that studied the impact of investments in information technology on productivity. The McKinsey project studied 100 manufacturing companies located in France, Germany, the United Kingdom, and the United States, and focused on the period from 1994 to 2002. In essence, the McKinsey study supports the proposition that investments in information technology produce only minor improvements in productivity unless they are accompanied by sound management practices. McKinsey researchers rated 100 randomly selected manufacturing companies on a scale of 0 to 5 to measure how effectively they used three important management tools: lean manufacturing, performance management, and talent management. McKinsey defined lean manufacturing as methodologies and practices that reduce waste in the production process. Performance management was defined as the practice of setting clear goals and rewarding employees who reach those goals, and talent management was defined as practices designed to attract and develop high-caliber people. The study revealed that a one-point improvement on the 0 to 5 management practices scale was correlated with a 25 percent increase in overall company productivity. This productivity increase occurred regardless of where the company ranked on the management practices scale. In other words, well-managed companies benefited as much from improved management practices as companies that scored lower on the scale. As might be expected, the increased productivity led to an impressive improvement in financial performance. Specifically, a one-point improvement on the McKinsey management practices scale was correlated with a five-percentage-point increase in a company’s return on capital employed. During the research period, the average return on capital employed for all companies in the study was 12 percent. Therefore, companies that improved their score on the management practices scale by only one point increased their financial returns by 42 percent. The McKinsey study also revealed that information technology investments alone had much less impact on productivity than management practices. The top 25 percent of companies based on the level of information technology deployed were only 4 percent more productive than companies ranked in the bottom quartile, based on the same measure of IT deployment levels. This means that investments in information technology had only one-sixth of the impact on productivity as a one-point improvement on the management practices scale. More significantly, companies with higher levels of technology investments did not enjoy better financial results. The most significant finding of the McKinsey study is that companies gain the greatest benefits by combining technology investments with high quality management practices. The study revealed that increases in the level of technology deployment produced productivity increases of only 2 percent for companies scoring in the bottom quartile of management practices. On the other hand, companies with both improved management practices and increased technology investment realized as much as 20 percent higher productivity. The McKinsey study offers an important lesson for owners and managers of graphic communications companies. It does not prove or even suggest, as some might argue, that graphic communications firms should stop investing in new technologies. On the contrary, making wise technology investments has never been more important. What the McKinsey study does show is that first-rate management practices are essential to “unlock” productivity improvements from investments in technology. One critical key to maximizing the benefits gained from technology investments is to recognize that, in most situations, non-proprietary technology is an enabler of more efficient and effective management practices and business processes, not a separate and distinct provider of value. In today’s highly competitive marketplace, the most successful graphic communications companies will be those that implement best-in-class management practices and develop, deploy, and manage business processes that deliver unique and compelling value to customers. These companies will acquire and use appropriate technologies to enable and support these management practices and business processes. So, managers who want to gain the most from technology investments must remember not to put the cart (technology) in front of the horse (first-rate management practices and high value business processes).