The decomposition of Malmquist productivity index into technical change for technology innovation to improve production process, efficiency change for catch-up effort to utilize capacity, and
scale change for production volume to respond to market dynamics offers insightful overall implications for the IT services industry. Unlike the country-specific findings discussed in the preceding section, these industry-level implications are based on the overview of the breakdown of MPI into technical change, efficiency change, and scale change across all the 25 countries examined and hence they are descriptive in nature and at a high aggregate level.
First, our results suggest that unlike many other services industries, the IT services industry is highly innovative in introducing new services as outputs (i.e., product innovations) as well as new ways of producing and delivering these services (i.e., process innovations). These technological changes based on innovations have led to notable improvements in productivity. Innovations in the IT services industry differ in characteristics from those in other services and manufacturing sectors, as it is more geared towards co-development of IT applications to deliver services. Innovations in the IT services industry tend to follow the “reverse product cycle” (Barras, 1986) where an IT services firm adopts IT to improve the production process and seeks significant improvements in the quality and delivery of the IT services provided which then form the basis for entirely new subsequent IT services (Gallouj, 1998).
Given the reliance of the IT services industry on ICT for their innovation endeavors, governments should implement regulatory reforms to help reduce ICT costs, establish ICT standards, and allocate resources to ICT skill development through STEM (science, technology, engineering and math) education and training. Also, governments can be active in building and enhancing the IT infrastructures on which IT services are developed and delivered or in facilitating the development of new IT products and services in an innovative way. For example, more deregulation in the telecommunication industry to enable high-capacity broadband and mobile communications can help promote easier and quicker access to IT services provided by the IT services industry for both e-commerce and m-commerce activities.
At a higher level, IT services play a critical role in innovation networks that help disseminate innovations and technology use through the economy by facilitating innovation adoption of client firms and by serving as an important source of knowledge for them (Pilat, 2001). The utility of IT services depends greatly on close interaction between IT services providers and customers. In this case,
governments through regulatory reforms can provide incentives to help both providers and customers to adopt best practices in innovation and business management. They can design effective technology diffusion programs to promote firm-level capabilities of adopting new knowledge and technologies. They can also remove administrative and legislative barriers that hinder the emergence and growth of
innovative startup firms in the IT services industry.
The quality of IT services hinges on IT services workers’ expertise and skills in creativity, critical thinking, communication, and resourcefulness. These highly specialized skills are necessary for
harnessing the power of ICT for IT services provision. Workers’ tacit knowledge and experience with
customers are also essential to the development of new IT services products and processes. Effective use of human capital and the capacity for organizational learning are key factors that distinguish the best and most productive IT services firms from the rest. Thus, investment in human capital should be a priority on the government’s agenda for innovation initiatives to promote continuous training, updating of skills, and learning programs (Pilat, 2001). Governments should have a broad-based education policy that stresses the importance of lifelong cross-disciplinary learning to develop a common talent pool that can be tapped into for future innovations. Governments should also enhance training incentives like tax break for IT services firms to help improve the skills of existing IT services workers.
Next, our analysis shows that 15 lagging countries operate inefficiently over time. Due to the rapid advance of technology and innovations in the IT services industry, it is found difficult for laggards to catch up with leaders. Just as laggards are able to inch closer to best practice performers, the relentless push for the next wave of new products and processes again raises the bar of benchmarking. Being a follower in the IT services market not only relinquishes the right to make the rules for the game but it also subjects laggards to a possible outcome of being on the productivity-losing end of fierce competition. The implication from this observation on the relative ineffectiveness of catch-up efforts means that in the rapidly advancing industry of IT services, playing defense may not be the ideal strategy. The
decomposition of MPI suggests that continuous innovation and technical domain knowledge are more effectual means to become productive and competitive in the IT services market.
Finally, our results show that the IT services industry faces the challenge of effectively managing the fluctuations in client demands, which leads to an unfavorable effect reflected in the productivity measurement. On-demand utility and cloud computing paradigms shift the bargaining power from vendors to buyers and increase operational risks and competitive pressure for IT services providers. As these innovative IT services offer flexibility and bargaining power to clients, providers end up in the suboptimal production scale regions when overinvesting in capital, experiencing labor shortage, or organizing activities ineffectively. This negative effect of scale change turns out to be the primary inhibitor to the productivity performance of the IT services industry.
To address this issue, firms can develop and use more powerful demand forecasting tools with business intelligence capabilities to make better demand predictions and thus have a better planning horizon. This technology solution is again based on innovations and will be enabled and further enhanced by the amount of big data being automatically collected and parsed (Mayer-Schönberger and Cukier, 2013). Moreover, the industry as a whole should be willing to adapt the quality and mix of IT services to meet changing client needs of different market segments. This finer-grained menu of IT services offerings entails a strategic thinking of the long tail (Brynjolfsson et al., 2010). To develop absorptive and adaptive capacity, IT services firms have to be creative and think outside the box by, for example, forming
strategic alliances to develop common industry IT services standards that allow resources to be pooled and shared. Governments can also help by reducing trade barriers and hence make IT services more tradable across national borders. Global electronic commerce can open the door for global delivery of IT services. The globalization of IT services evidently will also increase the competition for providers and make productivity performance an even more critical success factor for them.
8. Conclusion
The services sector has historically been regarded as having slow productivity growth with a limited ability to innovate (Gallaher et al., 2006). Additionally, the sector has been characterized as providing low-paying jobs, adopting insufficient technology, and requiring low skill and little knowledge to perform the tasks. However, not every services industry fits this profile description. Taking a multi-theoretical perspective, we study total factor productivity growth in the IT services industry. Based on the theories of production, innovation and competition, we have employed DEA and Malmquist TFP index to investigate the productivity performance and competitiveness of IT services industries in 25 OECD countries over the modern e-commerce era of 1995 to 2007. Overall, these IT services industries enjoy decent productivity growth at an average annual rate of 1.9%, which is higher than most other services sectors. A further step is taken to decompose productivity index into three components that represent different aspects of performance: technological change (for innovation), efficiency change (for catch-up effort), and scale change (for demand fluctuations).
Our breakdown analysis finds that observed productivity growth is mainly driven by innovation-based technological progress made to the production processes in the IT services industry; efficiency change exerts a small negative effect; and the change in scale economies adversely affects productivity for a majority of the countries. Technology innovations introduced in the production processes, however, are strong enough to compensate for negative effects incurred by efficiency change and scale change.
Practical implications for IT services management are drawn from our results to provide suggestions for policy and strategy formulation.
Our study represents the first attempt to empirically analyze productivity growth, technical change, efficiency change, and scale change of IT services industries in a cross-country context. By addressing the four research questions raised in Section 1 to fill the void in the literature, we find that IT services industries in OECD countries show relatively high productivity growth; technology innovation is the primary source of productivity growth being measured, and the inhibitors are efficiency change and scale change; IT services industries are highly innovative and agile; and their productivity performance is greatly influenced by the changing demands of the IT services market due to novel services paradigms.
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Table 1. Description of New IT Services and Providers with Key Players
Term Description Key Players
Web Services A standardized way of integrating Web-based applications using the XML, SOAP, WSDL and UDDI open standards over
Web Services A standardized way of integrating Web-based applications using the XML, SOAP, WSDL and UDDI open standards over