The It Productivity Paradox – Evidence from the Uk Retail Banking Industry

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THE IT PRODUCTIVITY PARADOX – EVIDENCE FROM THE UK RETAIL BANKING INDUSTRY

ABSTRACT

This article addresses causes of the so-called 'Information Technology Productivity Paradox' in the context of UK retail banks. It investigates why massive investments by retail banks in information technology are not being translated into significant productivity gains, given that successful implementation of new technology is particularly important in increasingly competitive banking environments.

Total Word Count 8113

INTRODUCTION

This article addresses the causes of the so-called 'Information Technology Productivity Paradox' in the context of the UK retail banking industry. It is argued that the importance of banking to the economy as a whole, and the position of the industry as the UK’s leading investor in information technology, make it a particularly suitable arena in which to study this phenomenon. Successful implementation of new technologies is particularly important in an increasingly competitive banking environment where the major players are also under threat from new market entrants. The pivotal position occupied by banks in society also means that lessons learned from the cases studied may have relevance in a wider context than is usually provided by research within one specific industry.

The article begins with a brief examination of recent changes in the UK retail banking industry. It then reviews the productivity paradox literature and draws upon a major recent empirical research project in the UK retail banking industry to address the question of why the massive investment by retail banks in information technology is not being translated into significant productivity gains. The research findings suggest that it is the way in which IT projects are managed which contributes to the maintenance of the IT productivity paradox by inhibiting organisational learning. The article concludes that even IT project successes will have a limited impact upon productivity at the organisational level because structural and managerial constraints ensure that the lessons learned are not communicated to other parts of the organisation.

BACKGROUND: THE FINANCIAL SERVICES INDUSTRY

The financial services industry is an important area for study as it plays a major role in the changing fortunes of the UK economy. After the banks have enjoyed many years operating within an informal cartel, progressive deregulation in the financial services industry and the availability of new technological opportunities have removed many of the traditional barriers to market entry. This has resulted in greatly increased levels of competition in the industry. For example, a company such as Microsoft could use its domination of world-wide computer networks to introduce new forms of money transmission. Telephone banking operations such as First Direct, unlike the major market players, can be very competitive because they are not tied by the costs of maintaining outdated (but still essential) systems and extensive branch networks. Tesco and Sainsbury are among the major retailers now offering banking services. Both have an extensive customer base and strong brand image. They can also offer their customers higher rates of interest than any traditional bank or building society. In response to these ongoing changes, the banking industry is undergoing significant structural adjustment. Recent merger and acquisition activity includes Lloyds of TSB and Cheltenham & Gloucester building society, Hong Kong and Shanghai Banking Corporation of Midland, and the merger of Halifax and Leeds building societies, to name but a few. Many building societies are also opting to lose their 'mutual' status, effectively turning themselves into banks and thereby allowing the provision of a full range of financial services.

The banks are the largest investors in new technology within a society that is rapidly becoming dominated by service...
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