(FORTUNE Magazine) – LOOKING BACK, weren't we naive to think we had only to drop nearly $1 trillion of computer hardware into the slot, wait a little while for the machinery to clank and grind, and, presto, a big productivity boost would drop out like cold soda for parched lips? Technological revolutions like the one giving birth to America's new economy don't unfold like that, automatically or instantaneously. After more than a decade's anxious waiting -- and many missteps along the way -- we're only now beginning to see the payoff. Says MIT economist Erik Brynjolfsson, who recently published a computer productivity study: ''Information technology, as of 1994, is one of the big contributors to growth.'' To unlock an epochal technology's power, companies have learned that they must restructure themselves and how they work as they weave computers into their most basic processes. A technological revolution, in other words, is more than a merely technological matter: It entails an organizational transformation too. That's what U.S. business's recent frenzy of reengineering has been all about, as companies flatten and decentralize along a unifying nervous system of the new information technology. Examples: Before getting a big payback from its computers, Caterpillar had to radically redesign its work. One result: a factory that now produces twice as many truck engines with the same number of people. To achieve a big increase in sales, accounting giant Coopers & Lybrand needed to radically change the way it communicated internally. Now employees can use their PCs to swap crucial client information more efficiently. How these corporations and others use technology to transform their organizations and thus boost productivity is the story of the new economy, a tale that holds lessons for managers in any industry. At long last efforts to reorganize around computers, faxes, networks, and other info-tech tools have begun to show up in the national productivity statistics. Nonfarm business productivity, which rose on average at a wan 1% a year during the Eighties, has grown at a more wholesome 1.6% a year so far in the Nineties. It hit a whopping 5.1% annual rate during the second half of 1993. Manufacturing productivity, rising at an average 2.4% a year in the Eighties, surged 3.8% annually from 1991 through 1993. Productivity in the service industries, which are notoriously hard to measure but an increasingly dominant and huge part of the economy, grew at a 1.5% annual rate in the Nineties, after declining in the late Seventies and remaining flat during the Eighties, estimates Morgan Stanley chief economist Stephen Roach. Some individual service industries have shown much stronger productivity growth, as measured by the Bureau of Labor Statistics: Productivity jumped 5% in the telecommunications industry in both 1991 and 1992, for example, and rose even faster in rail transportation and in certain retail sectors. Whatever the absolute growth rate of U.S. productivity in both manufacturing and services, it has been sufficient to keep America No. 1 on this front, well ahead of Japan and Europe. TO UNDERSTAND vast economic transformations like the one we're living through, a little history comes in handy, because the way info tech may be driving productivity, at least in broad outline, has happened before. The saga of how American industry assimilated electricity after Thomas Edison introduced it to the world of business in the 1880s is especially instructive: The process took 40 years -- and yielded almost no big productivity gains until it was complete. Similarly, there's little evidence that computers contributed much to U.S. productivity over the first 40 years of their history. But now the payback on information technology seems poised for takeoff (see chart). When electricity was first introduced, captains of industry did nothing more than unhook their steam engines or water wheels and replace them with electric dynamos. ''From the point of view of the internal organization of the factory, nothing changed,'' says Paul David, the Stanford economist who has traced this history. But ever so slowly, over the course of decades, manufacturers began to harness the benefits of electricity. The flexibility and the economies proffered by ever-improving electric motor technology gradually allowed yesteryear's managers to reorganize their factories more efficiently. Also, rural electrification, as well as providing low-cost power, enabled companies to build new, better-configured plants on cheaper land outside the cities. All that didn't fall into place until the 1920s. And then manufacturing productivity, which had been puttering along at a sedate 0.3% to 0.5% annual growth rate since the 1890s, exploded. It roared along at over 5% a year throughout the Roaring Twenties, until the crash of 1929. Paul David ascribes three-quarters of that growth to electrification. ''That was the fulfillment of the potential of the dynamo,'' he says, ''but it took the reengineering and reconceptualization of manufacturing for it to happen.'' With this history in mind, David says, it makes no sense today to expect ''an immediate and tight linkage between the introduction of new technology and immediate productivity.'' First you have to clear away the existing structure, a tightly organized whole in which everything is so intricately adapted to everything else that demolition is tough. Then, says David, ''there is a co-evolution of the technology and the organizational structure, which is likely in the early stages to require a lot of experimentation and learning.''

That dual process, the laborious clearing away along with the slow, fitful reconstruction, is what was going on during the era of drooping productivity in the 1970s and 1980s. As new information systems went in and employees learned to use them -- very inefficiently at first -- the old systems kept on operating alongside until the new ones got up to speed. Meanwhile, the double costs smothered productivity. Mistakes occurred. New systems sometimes didn't work or didn't work well enough to make a difference. Even when everything went fine, companies were doing piecemeal rather than integrated automation, so that the uncomputerized bottlenecks kept the productivity benefits from flowing through to the entire operation. Don't forget the human factor either. In the face of the transformation to the new economy, managers have had a way of fighting hard to hold on to the information on which their power rested. Indeed, they long organized computer power to reinforce hierarchical, centrally controlled structures, restraining productivity rather than liberating it. Managerial resistance might have held off computerization's full benefit even longer had not the external economic environment changed radically. During the Great Inflation of the Seventies, managers had no incentive to tighten their operations. On the contrary: Paid according to the size of their fiefdoms, they could add employees wildly and pass along the costs to buyers, concealed in the fog of inflation. But competition sent that business culture the way of spats and bustles. Companies suddenly needed new efficiency to survive as the Federal Reserve Bank in 1980 started to curb inflation and stabilize the currency. The Fed's tightening lifted the inflationary smoke screen that had hidden gluttonous price increases, enabling tough, hungry foreign competitors to increase their presence in U.S. markets. And once the deregulation of the 1980s unshackled competition in the service industry, airlines, trucking, telecommunications, and financial service companies found they needed efficiency just as urgently as manufacturers did. ''So managers began to say, 'Gee, we have all these computers out here; we should be able to do more with less,' '' says Wayne Angell, Bear Stearns's chief economist. ''Until then, the economic incentive had not been applied.'' NOW, with competition the order of the day, company after company tells the same story of technological change combining with organizational change to yield higher productivity. A medical supply company, which chooses to remain nameless, provides an all too typical case study of how inert innovative technology remains until structural change breathes life into it. The company's plant introduced automation -- but without any result. Disappointed top managers investigated and discovered that workers and line managers were using the new machinery as if it were the old equipment, taking no advantage of its flexibility. They were using it to do long production runs that ended up swelling inventories, as before. Why? A closer look showed that the compensation scheme rewarded high output and minimal downtime. Even after management began to change that system, the culture stayed put. MIT's Brynjolfsson, who studied the factory, questioned the workers during the transition. Says he: ''They believed that being effective meant making sure the machine was always running, even if it meant building up inventories that weren't needed.'' What's more, they didn't like adjusting the machinery. ''The workers did not feel they were being paid to make decisions,'' Brynjolfsson found to his surprise. ''They were happy to daydream.'' In response, the company gathered a team of skilled, highly motivated assembly workers and line managers and set up a pilot program with a new machine in a corner of the factory. Once the team succeeded in working out an efficient new system for using the machinery, management was able to propagate it throughout the plant, with gratifying results. Caterpillar provides a much vaster and infinitely more complex companywide illustration of the same principle. Says Don Hamm, a division services manager: ''Until three years ago we were investing very heavily in information technology and getting very little out of it. We couldn't harvest the benefits until we reorganized and refocused the company.'' Now Caterpillar invests less and gets results, measured in high customer satisfaction, rising share of market, and 27% greater sales with 29% fewer employees than a dozen years ago. Before reorganization, computer spending had poured into building what Hamm calls ''functional monuments'' -- hulking systems with gee-whiz technology that made Caterpillar's information technology staff proud but added little to company profits. Only when the company changed from a functional organization (marketing, manufacturing, and so on) to business units (tractors, engines) did all that change. Once business unit managers acquired profit and loss responsibility, they wanted to make sure they got their money's worth out of IT. Now Caterpillar's computers supply business unit managers with information they need to make important decisions on issues like design alternatives for their tractors and engines, what sales strategies to undertake, and which suppliers are worth using again. Caterpillar also found that they could use IT to make their customers more productive, something that eventually leads to higher profits for everyone. For example, the company configures its best- selling 3406 engine differently for the various truck and boat manufacturers that buy it. Formerly, when ordering a custom engine, a truckmaker, say, had to specify Caterpillar's own part numbers for each component -- a No. X turbocharger, say, or a No. Y flywheel housing -- an error-prone and thus expensive and frustrating problem. Now, using a computer connected to a mainframe at Caterpillar's Peoria, Illinois, headquarters, customers can electronically order an engine with the desired specifications -- horsepower, torque rating -- in plain English. Caterpillar's computer then translates that ordinary language into the company's internal language of part numbers. Eventually, the trucker's electronic order ends up right on the factory floor. Workers read computer printouts to find out exactly what kind of engine to build. A computer-controlled monorail system and robots bring the assembler the engine, the necessary parts, and the computer-generated information about what to do, and he works at his own pace until he's satisfied the job is right. Even some of his tools have computer controls. Each electric wrench automatically checks that it has been used to tighten -- and to the correct torque -- the bolt it is designed to tighten. If not, the monorail freezes and an alarm buzzes. Overall result: Caterpillar now needs only one shift to turn out a volume of engines that would have required two shifts a mere two years ago. WHEN WE THINK of information technology's productivity-enhancing power, our first thought is of how computers have let business cut legions of clerks, warehousemen, middle managers, and other workers in the past decade. But now Morgan Stanley's Roach argues that a new stage is opening in which productivity enhancements come from using technology not to cut costs but rather to provide new tools to the core of the work force in the new economy, the army of higher-paid technical, professional, and managerial workers whose productivity computerization so far has scarcely touched. Take for example the miniature computers that respiratory therapists at the University of California at San Diego Medical Center now carry in their lab coat pockets. Instead of waiting at the nurses' station for patients' records or rushing to their department for instructions on what treatments to give which patients, therapists call up the information on their hand-held computers, which pluck the data by radio frequency from a central computer. Says Rick Ford, the hospital's assistant director of respiratory care: ''The access to information has maximized the time practitioners can spend at the bedside, where they're needed most.'' As therapists treat patients, they send back the information via wireless communication to the main computer, so that the supervisor knows how much work remains to be done and how many part-time therapists he'll need to help out during the shift that afternoon or the next morning. Staffing now is precisely tailored to workload. Another exciting new tool to enhance productivity is ''groupware,'' the best-known example of which is Notes, the software product that Lotus introduced in 1989 but that has caught on only in the past year or so. Notes, which contains elements of an E-mail system, a document management system, and an electronic bulletin board, allows large numbers of people to communicate among themselves, both within and among companies. Coopers & Lybrand, for example, which just bought 28,000 copies of Notes, is embedding the software into the fabric of how it does business. The C&L unit that, among other services, puts businesses in touch with sources of capital and provides bankruptcy consulting, uses Notes to automate its sales efforts and to nudge its professionals to go out and hustle for business. Using a PC, employees enter on Notes the sales calls they've made, the results, and future appointments. All 750 employees of the C&L unit can call up the information at any time, so managers can gauge how hard their subordinates are working -- hello, Big Brother? -- and how well they are succeeding. Employees can see -- with behavior-shaping clarity -- how their performance stacks up against their colleagues'. In the nine months the system has been running, sales are up over 20%. In another Notes application, C&L employees enter information about their own expertise and experience -- what industries, what companies, what issues they've handled, and for how long -- all constantly updated. So when an employee needs to find a colleague expert in insurance companies that serve, say, a Romanian airline, he or she need only fill in a few fields and click a mouse, and the appropriate names pop up. The ultimate hoped-for result is a subtle but utterly fundamental organizational change. Explains Don Shay, a C&L director: ''Instead of being Lone Rangers, we want to bring in the cavalry and act as a group.'' How much does all this matter? A new study of 65 Notes users by International Data Corp., a Framingham, Massachusetts, research firm, found that the average return on investment in the software -- a rough but serviceable proxy for productivity increase -- is 179%. Concluded the IDC researchers: ''Notes may be the elusive Holy Grail of white-collar productivity.'' Turning your organization topsy-turvy is never easy. In fact, it's a process that can be fraught with anxiety and uncertainty. The old ways of doing business disappear. Fewer people do more work. Those who survive must learn to master new information technologies like miniature computers and Lotus Notes, and then figure out how they fit into a new, more chaotic organizational structure. In the emerging order of the new economy, those managers who understand how to use info tech as a productivity booster will do more than ensure the success of their own careers. For productivity growth directly affects the national standard of living, and the way we play the game may well determine the extent to which America can remain the dominant economic superpower in the years ahead.

BOX: INSIGHTS

Technological revolutions do not unfold automatically or instantaneously.

To unlock technology's power, companies must restructure themselves before they can gain full benefit.

At long last, efforts to reorganize around info-tech tools have begun to show up in the national productivity statistics.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: MORGAN STANLEY CAPTION: PRODUCTIVITY GROWTH Manufacturing productivity (gear, right) took off, while service productivity in industries like health care (X-ray) improved, but more moderately.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCES: PAUL DAVID, WARREN DEVINE CAPTION: ELECTRICITY BOOSTED PRODUCTIVITY . . . For its first 40 years, electricity had little effect on manufacturing productivity, which barely increased at all. But by the 1920s, gains were up 5% a year.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCES: PAUL DAVID, WARREN DEVINE CAPTION: HOW SOON WILL COMPUTERS DO THE SAME? Since Univac's introduction in 1952, info tech has had little discernible impact on productivity. But experts see the technology as set to drive growth dramatically.