framework. He proposed that countries that develop more tightly coupled relationships would have competitive advantages over countries that do not. Establishing effective standards for a more tightly coupled environment requires some understanding of who the referee is, and one cannot have tight standards without a referee. In closing, he returned to the issue of measurement and how investments in business processes are reported in the accounts of companies. There must be a better understanding of where money is going even if it is clarified only in footnotes.
A questioner asked whether Dr. Raduchel’s point was that some functions are not measured while others are improperly measured. Dr. Raduchel said that creating a new enterprise resource environment system, for example, is accounted for as increases in overhead spending, which is required by the Financial Accounting Standards Board (FASB), and shows up as G&A expenses. In corporate reports $100 million spent on parties for company employees looks the same as $100 million spent inventing new business processes to make the company more efficient. He described this as a major issue in trying to understand how much money a company spends on such projects and what the outcome is. In current reporting there is no way to tell whether a project fails or succeeds. Yet there are very different approaches in ways a company is required to capitalize and write it off if it did not succeed. Companies would not like the revised approach because they would not want to report the failure. Dr. Raduchel said that the technology is the initial driver to create new processes, but design of the new processes matters even more than the driver. Unless we have the right accounting it is difficult to measure productivity and to answer some of the questions posed today.
Lawrence Slifman of the Federal Reserve Board supported Dr. Raduchel’s encouragement of the FASB to look closely at capitalizing rather than expensing a variety of information-technology-related, but not physical, investments made by firms. He suggested that the National Academies should play a role in highlighting the importance of this point, perhaps with representatives of the FASB.
Dr. Gomory of the Sloan Foundation agreed that the rate of technology advances was “not the name of the game” today. Whether technology continues to progress at the same rate or faster is not as important as the ability to absorb it and the cost of re-doing the business organization to take advantage of it.
He pointed out that to a considerable extent nobody knows how a business works. It’s a little bit like a human being; we see them running around and standing and talking without knowing how they digest anything. Yet we don’t sit