Big Data: The Management Revolution

Erik Brynjolfsson, the Director of the MIT Center for Digital Business, the Schussel Family Professor at the MIT Sloan School, and a Research Associate at the National Bureau of Economic Research was the last speaker in the Big Data Lecture Series – Fall 2012. In this talk he discussed, how the revolution in the big data measurement is creating a revolution in management.

He started his discussion with a research from the MIT Center for Digital Business on how data-driven decision-makers are outperforming their competitors and how this management revolution can accelerate innovation. The research tries to answer the following two questions:

1. Do more data-driven decision-making practices make firms more productive?

2. Do more data-driven decision-making firms pay their CEOs more than their average employees?

Using detailed survey data on the business practices and information technology investments of a set of large publicly traded firms, he presented the following analysis:

1. Data-driven decision-making practices (DDD) are correlated with a 4-6% increase in firms’ output and productivity, controlling for traditional inputs and IT investment.

2. IT and Data-driven decision-making practices (DDD) are both correlated with a significant increase in CEO pay even after controlling for the average worker’s wage and industry (IT and DDD may increase the value of central decision makers and “superstar” individual decision makers).

3. The relationship between data-driven decision-making and performance also appears in other performance measures such as asset utilization (output per total assets), return on equity(pretax income per equity), return on assets (pretax Income per total assets), and market value (market to book ratio).

While explaining the drivers of DDD, he presented two potential instruments:
1. Firm Age: Older firms have high inertia and cannot make organizational change

2. Consistency of Business Practices: Consistency of business practices across their branches let their firms gain a higher performance through data-driven decision-making.

And thus, firms with consistent business practices have more incentive to adopt DDD in the first place.

Citing his book “Race Against The Machine”, he presented the following summary:
1. Computers can now make decisions that used to be the domain of people only. The pace and scale of this encroachment into human skills is relatively recent and has profound economic implications.

2. Perhaps the most important of these is that while digital progress grows the overall economic pie, there is no economic law that everyone will benefit equally.