Once early adopters in corporate computing and the Internet, U.S. companies are now falling behind global competitors in driving productivity and earnings growth from technology. This is because U.S. companies deploy most of their fresh capital to fortifying older systems while more companies in Europe and Asia invest in newer systems from the ground up.

Newer systems, during this second wave of Internet based innovations, will simply outperform refurbished ones for two reasons: technologies have improved substantially in five years, making them easier to implement, integrate and change; as a result, more business processes will be online, driving higher levels of productivity.

Though U.S. productivity has been strong, a closer examination reveals a disturbing trend. Employee growth has outpaced both revenue and profit growth in the S&P 500 between 2001 and 2005. Average revenue per employee gains lagged total revenue growth by 58 percent. Similarly, profits per employee achieved only 75 percent of total profit growth. In contrast, the companies in the S&P European 350 have kept revenue and profit growth above employee growth. Average revenues per employee for the European S&P 350 grew at 117 percent the rate of average revenue growth. Profits per employee similarly gained 118 percent of profit growth. In China, productivity growth is more than three times the rate of the U.S. and Europe.

Accenture’s global technology research of over 500 chief information officers shows stark differences in the stance executives are taking toward technology adoption in the U.S., Europe and China. When asked whether they want to be a leader in adopting technology or a late follower, only 6 percent of U.S. executives said they want to lead, compared to 15 percent in Europe and 19 percent in China. By contrast, 54 percent of U.S. companies said they would rather be a follower in adopting technology versus 44 percent in Europe and 27 percent in China.

Why have U.S. companies changed so dramatically from being adopters to followers? Some executives are still awaiting the returns promised from the first spending wave. Others remember the damage failed projects can have on a career. A project write-off is more likely to trigger a sacking than a steady erosion of profits per employee. Companies today are reluctant to build fresh new systems for the same reasons patients avoided heart surgery 30 years ago. Taking no action, with a 100 percent chance of gradual death, is far more palatable to taking a procedure that could deliver a 66 percent chance of sudden death. And that is what corporate chief information officers face as they, on average, only deliver 34 percent of their projects without complications – no cost or time overruns. Today, heart transplant procedures occur without complications 95 percent of the time, with bypass procedures achieving a 98 percent success rate. If systems projects were as predictable as heart surgery, far more capital would pour into technology.

While U.S. companies are licking their wounds, the Chinese are aggressively forward investing. Chinese investment in web services is a “leap-frogging” event similar to the Korean and Japanese adoption of mobile technologies. In our research, a full 70 percent of Chinese companies are committing a major part of their business to web services, compared to 48 percent for European companies and 42 percent for U.S. companies. As companies begin using these new standards for communicating with other systems, people and companies, they will not only decrease their manual business process costs to one tenth current levels, they will also be able to flexibly change features and services in substantially less time and for substantially less money.

U.S. companies may be spending more but they are not spending better. Spending on Sarbanes Oxley and M&A integration is consuming the lion’s share of discretionary capital. This has delayed crucial new projects and left aging systems to support aging processes. And the first automated processes are seldom the best. Many current business processes are the equivalent of filmed plays. A process which previously required a form now requires a screen, but the process itself may not have changed. The automated teller machine (ATM) is essentially a filmed play. ATM’s are a technology to give people paper money and deposit paper checks.

The best and largest service sector productivity gains are ahead of the U.S. economy. They will, however, come when companies replace, rather than window-dress their current applications. As information technology has become the dominant form of capital expenditure in the U.S., we fail to recognize one big difference between a computer system and a tractor. A tractor can, in fact, predictably age and depreciate over five years. By comparison, a computer system, which has no real moving parts, can become obsolete over night with one download of a competitor’s latest feature. Executives should take a more aggressive position in upgrading their technology portfolios. As with stock portfolios, cutting your losses and redeploying the capital to fresh investments is often a better strategy than thinking the stock owes you a return.