I hope you are having a nice summer. This is McKinsey week on Portals and KM as I look back at what is happening in new technology. The first two posts this week covered Accelerating the digitization of business processes and Reinventing IT to support digitization. In addition to meeting customer needs buy reinventing IT, companies also need to cover the topic of this third report, Measuring the full impact of digital capital. Otherwise how are you going to measure all that is happening?
McKinsey noted that about a year ago the US Bureau of Economic Analysis released, for the first time, GDP figures categorizing research and development as fixed investment. It joined software in a new category called intellectual-property products. In our knowledge-based economy, this is a sensible move that brings GDP accounting closer to economic reality. It is sometimes that the knowledge management people have been talking about for over twenty years. I am amazed but not surprised that it took so long to recognize this.
There is a broad mismatch between our digital economy and the way we account for it. The report notes that conventional accounting treats these most IT capabilities as expenses and not as company investments. This means that their funding isn’t reflected as capital. Since the amounts spent aren’t amortized, they take a large bite out of reported income. Spending on those capabilities sometimes should be treated as capital, though, since they can be long-lived. Viewing IT investments in the new digital world as assets rather than additional areas of spending requires a new set of management and financial lenses. It is time to move out of 19th century industrial revolution and into 21st century digital transformation.