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OCR for page 165
Improving Decision Making About
Information Technology
Analyses at the macroeconomic, industry, firm, and activity levels have
attempted to assess the impact of using IT at those levels. At the enterprise
level a number of studies and articles have indicated (1) shortcomings in
how some companies have managed IT, particularly when they first began
investing in IT, and (2) a lack of correlation between the amount a company
invests in IT and its return on assets, returns to shareholders, or profits per
employee.
To understand more thoroughly why companies have had such variable
experience with their investments in IT, the committee asked experienced
executives a series of structured questions (see Appendix D). The questions
were intended to probe for any important problems executives had encoun-
tered in implementing IT systems, how they had attacked those problems,
and what issues remained. While often admitting previous and current-
management problems, many executives indicated they had made signifi-
cant improvements in their management practices and were currently modi-
fying their processes to achieve further effectiveness. This chapter summarizes
some of the interesting problems and solutions encountered.
Paul Strassmann, a former executive of the Xerox Corporation and di-
rector of defense information at the U.S. Department of Defense, analyzed
the inconsistent relationship between investment in IT and service firm
performance between 1977 and 1987 (Figure 5.1~. He concluded, "A com-
puter is only worth what it can fetch at an auction. IT has value only if
surrounded by appropriate policy, strategy, methods for measuring results,
165
OCR for page 166
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Cost of Computer Systems per Employee (dollars per year)
OCR for page 167
IMPROVING DECISION MAKING ABOUT INFORMATION TECHNOLOGY 167
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FIGURE 5.1 Investment in information technology and service performance: an
inconsistent relationship. SOURCE: Reproduced with permission from Strassmann,
Paul. 1990. The Business Value of Computers, Information Economics Press, New
Canaan, Conn., p. xviii. Copyright 1990 by Information Economics Press.
project controls, talented and committed people, sound organizational rela-
tionships, and well-designed information systems.... The productivity of
management is the decisive element in whether a computer helps or hurts."
The committee concurs in this assessment. Box 5.1 provides a further
illustration from software applications development. As Figure 5.1 sug-
gests, standard measures of output make it appear that some companies'
investments in IT have paid off well, whereas those of other companies
with comparable opportunities have not. More often than not, good man-
agement has made the difference. Generally problems with obtaining a
payoff from investment in IT, when they exist, lie not in the capacity of the
technology but in the planning and implementation of systems. Good man-
agement can overcome many technological deficiencies, while poor man-
agement can prevent returns from otherwise productive technologies. The
latter has often happened, for example, when corporate managers have left
decisions to technical experts who were not knowledgeable about the strate-
gic factors, operating variables, or organizational dynamics involved in imple-
mentation. A variety of studies (listed in Appendix A) have set forth many
of the common shortcomings in the management of IT.
OCR for page 168
68
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
BOX 5.1 The Impact of CASE Tools on Productivity
Experience drawn from software engineering highlights the tmpor-
tance of management. Con~puter-a~ded software engineering (CASE) tools
such as programming environments and debuggers were originally sold
and marketed as tools that could increase the productivity of program-
n~ers by an order of magnitude. However, a variety of studies indicate
that the use of CASE tools makes far less difference to programmer
productivity than does the choice of the particular individuals to Jo the
programming job; when CASE tools are not used, programmers are un-
product~ve, but the use of CASE tools Is not a guarantee that programs
mers will be productive. It turns QUt that when a programming project is
competently managed, the impact of CASE tools Is more easily observed.
SOURCE: Bill Curtis, Software Engineering Institute, Carnegie Mellon
University, Pittsburgh Pa.
COMMON PROBLEM AREAS IN THE MANAGEMENT OF
INFORMATION TECHNOLOGY
The following section addresses some of the identified problem areas in
the management of IT and summarizes observations about them made dur-
ing the committee's interviews.
Lack of Competition
One claim is that service companies have been protected by regulations
and geography from domestic and foreign competition more than their manu-
facturing counterparts.2 Hence they have not been forced to compete and
respond to changes as quickly. However, this explanation is incomplete.
Interviews verified that these two factors might have slowed potential changes
in regulated airlines, health care, banking, and communications companies.
Yet no professional service, retail, wholesale, entertainment, or interna-
tional banking company mentioned these factors as relevant. Still, there is
no question that more recent instances of restructuring in service industries
have coincided with increased deregulation, cross-border trade, foreign di-
rect trade, and depressed domestic markets.
These factors may help to explain previous slow responses to change in
some types of companies but as a full explanation seem inconsistent with
the facts that (l) U.S. service companies have consistently been among the
first to adopt new technologies, (2) other countries (particularly in Europe,
and Japan) have been even more sheltered in key service industries like
communications, transportation, distribution, and finance, and (3) U.S. ser
OCR for page 169
IMPROVING DECISION MAKING ABOUTINFORMATION TECHNOLOGY 169
vice companies' performance in most areas has compared very favorably
with that of the companies of other industrial countries. (See Chapter 1.)
Inadequate Planning and Follow-up
Inadequate planning and follow-up have undoubtedly been significant problems
in implementing IT projects for many service-sector firms. Although at the
time of the comm~ttee's interviews many respondents indicated that their pro-
cedures for planning deployments of IT were comparable to those used for
investments in other technology, they often candidly admitted that they had
experienced earlier problems. Early investments were often pursued to ac-
quire short-term savings in labor by merely automating existing practices-
rather than to generate longer-term gains or strategic potentials. Investments
in duplicative or incompatible programs sometimes occurred.
In many instances, the costs associated with development and ongoing
support required for major new information systems were underestimated.
This was especially true for the maintenance, the updating of software, and
the retraining costs associated with such systems. As was noted in Chapters
3 and 4, introduction of IT frequently leads to a variety of job changes that
may have far-reaching implications across an entire company. Often, the
nature and scale of these implications have not been fully explored as part
of planning for IT. As a result, job changes were made less smoothly, and
changes in performance evaluation and reward systems unnecessarily lagged
deployment of IT systems.
Some respondents cited problems of underestimating incremental usage
created by new systems that quickly exceeded acceptable utilization ratios
in data centers later leading to unexpected costs for further central pro-
cessing power. Unanticipated costs for support and additional computing
power increased both total investments and the bureaucracies to operate
data centers and thus lowered long-term returns. As Roger Ballou, presi-
dent, Travel Related Services Group (USA), American Express, noted,
One place an awful lot of people get into trouble is by not looking at the
fully loaded costs of technology investment. If you analyze the costs of
just bringing up the system and its ability to offset existing paper report-
ing, it can look very effective. But when you look at the full ramifications
in terms of CPU [central processing unit] utilization on an ongoing basis,
staffing support to provide help-desk functions for it, and so on, it can
change both the cost and seeming returns on the investment. We recently
built an on-line reporting system using existing software. We did have to
pay a few hundred thousand dollars for disk drives and things like that.
With programming, the total investment was probably several million. However,
the ongoing operating costs of this system are probably running at $300,000
to $500,000 a month. If you are not careful, you also keep using available
CPU time incrementally, and all at once you have to buy a large new
chunk of CPU capacity for the next project.
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70
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
Resistance and Inefficiencies in Work Practices
As noted in Chapter 3, the mere fact of access to desktop computing does
not necessarily improve the effectiveness with which knowledge workers (i.e.,
the individuals in an organization who are responsible for interpreting and
analyzing raw data and information and converting them to useful knowledge)
can pursue their jobs. In many cases, knowledge workers have used IT to do
more busy work without necessarily enhancing output spreadsheets can be
recalculated, presentations fine-tuned, or manuscripts revised more frequently
with little noticeable benefit. In a related realm, respondents often questioned
whether they had achieved sought-after communications benefits from more
powerful desktop tools. Many said they had not yet found effective ways to
stimulate or measure better communications through electronic mail or other
computer communications systems.
A serious challenge underestimated by several of the companies inter-
viewed comes from the long time that it takes to change traditional work
practices and corporate cultures. When personnel are uncomfortable with a
new work environment and lack clear direction, they often attempt to main-
tain their old procedures in parallel. Such employees often feel that their
basic skills and organizational worth are being undermined. Knowledge
workers, in particular, often seek new grounds to justify their presence and
search out other things to do as work is removed from their queue.
J. Raymond Caron, president of CIGNA Systems, illustrated these con-
cerns when he noted,
When we began to automate some of our agents' activities, we thought we
would have less work coming into our central offices for the underwriters
to do and there would be a shift in the workload. That didn't happen,
primarily because we underestimated the amount of work required to change
traditional underwriting practice. And without a design change in the
overall process, we didn't really achieve our goals. We now also have
hundreds of financial types who are wizards at spreadsheet work. You
have to ask the question, "How many times do you have to display this
kind of data and who cares?"
Corporate policies that consciously promote continuity in employment
and job security may work against achieving institutional changes, although
they do help address some of the employee concerns discussed in Chapter 4.
As Daniel Schutzer, vice president, Citibank, said,
As a nation we have had a population boom and a need for full employ-
ment. We have had a reluctance until recently to lay people off, in part
because we didn't have global competition until then. Now we're seeing a
terrific downsizing as a result of the technology introductions of the past
decade or two. This is a permanent restructuring. We'll never see those
jobs come back again.
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IMPROVING DECISION MAKING ABOUT INFORMATION TECHNOLOGY 171
Excessive Project Scope
For many years, IT vendors and popular journals overemphasized the
importance of large-scale "system solutions." Managers too often responded
by seeking to install mega-projects with high visibility. Such projects gen-
erally have multiple objectives that must be reconciled and integrated across
several divisions. Mega-projects tend to become very complex. And they
often take inordinate amounts of time, investment risk, and political com-
promises to bring into being. As a result, even companies with well-estab-
lished track records for innovative uses of IT have experienced difficulties
with large-scale IT projects as the examples of Federal Express (success-
ful with Cosmos II, unsuccessful with Zap-mail) and American Airlines
(successful with SABRE, unsuccessful with CONFIRM) testify. Citibank's
Schutzer underscored these difficulties:
When something becomes a big magnet project, everybody becomes fo-
cused on it. They throw in everything but the kitchen sink that they think
about but might or might not really need. The business people don't
necessarily know how easy or hard something is to do, and they are en-
couraged to be more elaborate by programmers or by technical project
engineers. Before you know it, you're designing for many more functions
than you can possibly deliver or need. The technical guys in an effort to
promote the project have usually given unrealistic schedules, which the
business people may believe because they don't know enough about the
technology, or delve deeply enough into the details. Then one of three
things happens: (1) Everything just gets so complicated it blows up, and
you get major business reverses. (2) People just get tired and kill it quiet-
ly. Or (3) you announce a premature success and switch the thing over
too soon without adequate testing. In any one of these scenarios, the result
is a disaster and the hero whose ego is on the line usually dies.
Respondents explained why such mega-projects had been major sources
of corporate IT investment inefficiency. First, because of their complex-
ity, such projects cost more in time and investment terms. Second, by the
time they were implemented, competitors might also have come out with
similar systems, often at lower costs because of cheaper technologies de-
veloped during the innovator's prolonged development time. Third, be-
cause of delays, large programs also ran a much higher risk of not being
matched to corporate or customer needs by the time they were imple-
mented. When queried, most respondents said they now broke large-scale
programs into a series of smaller projects and implemented these incre-
mentally. (For details, see section below, "Compressing Project Scope
and Payback Time.")
OCR for page 172
172
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
Technology-driven Investments in IT
Respondents reported that in earlier years, many purchases of IT were
technology- or vendor-driven, rather than being determined by business
needs or opportunities. At that time, many service firms had relatively little
experience with advanced technologies and often lacked the expertise to
articulate precisely their needs for IT or to challenge IT solutions proposed
by vendors. Because of rapid advances in equipment, vendors usually could
promise much greater technical capacity and flexibility at lower cost. Not
wanting to lose competitiveness, top managers in service enterprises might
agree to equipment purchases based on optimistic projections by lower-
level technology champions and vendors. Frequently, important support
systems like software, optical scanning, labeling, or materials-handling
systems were inadequate, making it difficult to use the computers' full
capabilities.
For example, many retail firms experienced major problems in using
electronic scanning systems as a source of data for marketing, profitability
analyses, customer micromarketing, and other service features at the cus-
tomer interface. Existing software was too expensive to implement on
mainframe computers; scanning equipment was not sufficiently accurate;
bar-coding labeling was not as comprehensive or readable as retail applica-
tions required. Only as needed subsystems became available-especially
vendor-generated labeling and decentralized microcomputing power was
full implementation possible.
Substantial improvements in IT, falling costs of IT, increasing customization
of IT to meet user needs, diffusion of IT expertise throughout the ranks of
senior management, and a much broader base of experience with IT have
increased user sophistication substantially in recent years.
Difficulties in Software Development
Given the widespread availability of IT hardware and "shrink-wrapped"
software, the only significant technological advantage that most innovators
can keep as proprietary is software developed in-house. As critical as
software is, however, software engineering is often very difficult to disci-
pline. For a variety of reasons, software developers are often reluctant to
take advantage of structured computer-assisted software engineering tools
or macro programs (like METHOD 1,2) that would help to ensure the accu-
racy, completeness, and speed of their work. Meaningful metrics for track-
ing the output of software development have been particularly difficult to
devise. Commonly used measures such as lines of code completed per day
generally do not reflect either the complexity of a problem or the quality of
the code, while function point systems are difficult to implement. As an
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IMPROVING DECISION MAKING ABOUTINFORMATION TECHNOLOGY 173
example of the problem, Jon d'Alessio, then staff vice president and chief
information officer, McKesson Corporation, stated,
We don't have any formal measures of our own internal systems develop-
ment productivity. We don't do function points or lines, or anything like
that. There has been a great reluctance to do it by our systems staff. We
have had major debates on what to measure, how to measure it. Basically,
in the past we have had a culture of very creative people who were artists
in building systems. We're trying to move it toward an engineering, disci-
plined approach. But artists don't like to be measured, and I'm not sure
the engineers do either.
Difficulties in software development and engineering are not unique to
the business community; software engineering remains a major challenge at
the research frontiers of computer science.3 The biggest problem today in
software development is the inability to produce software on a large scale.
Software development managers have treated software too much like an art
form whose process of creation cannot be improved through the application
of sound design and engineering principles. However, developments in the
1980s suggest that understanding of how to build large software systems
efficiently and well is improving, and companies are beginning to achieve
significant returns on investments devoted to software development. To
some extent, the knowledge being developed has been codified.4
Some companies like AT&T, Arthur Andersen, and Marriott have sys-
tematized particular aspects of software development. But respondents to
the committee's interviews said that new techniques and metrics for ensur-
ing quality and productivity in software development are still required. The
need for better standards and diffusion of software management capabilities
will intensify as user systems become larger and more interactive. These
may be the crucial bottlenecks to future IT progress.
CRITICAL ISSUES IN THE MANAGEMENT OF
INFORMATION TECHNOLOGY
Other issues critical to the management of IT were identified in the
committee's interviews and in its own deliberations. Many of the basic
themes are not new, but the emphasis needed within each has changed. The
most pervasive themes for improving the use of IT relate to (1) developing
genuine information and IT strategies focused on achieving competitive
advantage, (2) implementing cross-functional reengineering and restructur-
ing of processes and organizations, (3) actively involving users and custom-
ers throughout the processes of design and implementation of IT projects,
(4) developing customer-driven measures of quality, (5) compressing the
scope and payback time of projects, (6) improving postproject audits, (7)
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INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
carefully benchmarking processes and performance against those of outside
sources, and (8) installing performance-evaluation and reward systems that
are customer driven and that develop intellectual capital.
Information and IT Strategy Seeking Competitive Advantage
Most interviewed executives acknowledged the importance of having
an IT strategy. However, the committee found that a majority of the firms
contacted described their IT strategies as primarily components or exten-
sions of divisional strategies. For the most part, programs were evaluated
and prioritized as a part of divisional planning processes and subsequent
procedures for allocating capital. Information technologies were regarded
by a majority of the interviewed companies primarily as enablers for other
desired divisional or corporate goals (e.g., cost reduction, new-product de-
velopment, quality improvement). These companies' "IT strategies" were
more long-range plans for investment in and installation of IT than explicit
plans for integrating IT as part of a competitive positioning strategy. Some
companies also had a separate corporate platform integration strategy with
its own priorities. Further, some companies reported having a special infor-
mation systems committee at the corporate level to review and coordinate
individual strategic programs. Time horizons for IT plans varied consider-
ably, but 80 percent of respondents operated on either a 3- or 5-year time
horizon updated annually through capital budgets and specific operational
plans keyed in at 6-month to 1-year intervals. (See Question Box 1 in
Appendix D.)
CIGNA Systems provides an interesting summary example of such practices.
J. Raymond Caron noted,
We have eleven businesses within CIGNA, and we have a strategy for
each. Division by division is the way we put the plans together. In
essence each division first puts down its wants and needs. Then the divi-
sions prune this list by setting priorities in terms of capital availability and
payoff. They draw a line in terms of what they agree to do and what they
take off the table. In addition there is a corporate "platform integration"
strategy. This is a kind of umbrella for all twelve systems in terms of data
centers, computer platforms, communications, and applications. This largely
has to do with CIGNA-Link, which is our PC LAN communications inter-
connection facility for all our businesses worldwide. Decisions about those
are made at the corporate level, and we set overall guidance and direction
at that level. As each division puts its strategies, plans, and budgets to-
gether, it is incumbent upon them to use those directions. The central
infrastructure is budgeted and evaluated separately as a corporate invest-
ment, with a charge-back system based upon the amount of use that each
area makes of a service.
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IMPROVING DECISION MAKING ABOUTINFORMATION TECHNOLOGY 175
A long-term plan for investing in IT and installing IT is an important
beginning point, but a more strategic view (as has also been generated by
CIGNA) is desirable. Many interviewed companies said that they had hired
at top levels professionally trained IT managers familiar with the business.
But with only a few exceptions, neither top managers nor the new IT man-
agers described genuine information strategies that (1) would lead to dis-
tinctiveness or competitive preeminence for their companies or (2) provided
specific quantitative targets to ensure that the set objectives were met. The
committee believes that any information or IT plan is most likely to be
successful when it is part of a well-integrated strategic plan that contains
such elements. As applications of IT move from an emphasis on traditional
cost-cutting toward more strategic concerns, a well-defined strategic pro-
cess for integrating IT and customer needs becomes particularly important.
Edward Hanway, president of CIGNA Worldwide, described his company's
approach:
We are using a team-oriented approach and a lot of new software technolo-
gies that allow a "try it, test it, fix it" type of development effort as
opposed to our historic approach, which was a long, involved, planning
and document preparation process. We've been adamant in motivating
these multifunctional teams, pushing them to realize that the challenge is
not simply to save money. Efficiency is important, but the big issue is
how successful we are with a customer or in the market.
Another critical component of any comprehensive information and IT
strategy is engagement in that strategy by all levels of the organization.
The mere involvement of chief executive officers, chief operating officers,
and chief financial officers in developing the company's information strat-
egy is not sufficient; true understanding and commitment are essential. To
exploit the potential of IT in facilitating strategic change requires consistent
long-term support across all divisions. Only top management can provide
the patience, consistency, and reward structures that make it possible to
execute forward-looking strategies despite urgent operating pressures. These
are complex tasks requiring top-level finance, human resource, and operat-
ing champions to lead needed changes. For many companies, ensuring such
leadership may require making major changes in the selection and promo-
tion criteria used for top managers themselves.
Cross-Functional Reengineering and Reorganization
Successful installation of IT increasingly requires that both information
technologists and user groups look beyond their old functional boundaries.
Both applications-specific expertise and familiarity with the latest IT are
critical. Ensuring continuous integration between technologists and users
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INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
If we can't get user commitment, no matter how important the system is,
we won't do it. We try to do reengineering with each process change. But
it is not a complete reengineering before installing the technology. It's
almost an existential process. We reengineer it as we go along. One of the
things we discovered is that if we are really smart, we get the benefits we
say, but often it turns out that we don't get them from the places we
thought we would. If you have a situation where there is a clear general
idea of what the payoffs are and there are compelling economics, as you go
along you get more perfect knowledge of where the gains are and can
guide the process in those directions. Each reengineering iteration seems
to refine it. We use interfunctional teams to let us design within these
dynamics.
· Groupware technology facilitates collaboration. Collaboration among
technologists, users, and customers located in geographically separated sites
can be cumbersome and can make rapid changes and iterations difficult.
Moreover, maintaining multiple versions of a large development system can
become a logistics nightmare. Technology that provides computer support
for cooperative work, called "groupware," can reduce the impact of physi-
cal dispersion, as well as provide for managing a system with multiple
developers or multiple users. At Chase Manhattan, Craig Goldman, senior
vice president and chief information officer, reported,
Using Lotus Notes my developers, working with customers, can develop
applications in hours and days that once took months and years. These are
very user-friendly applications, with a high degree of rapid prototyping.
Now our customers can actually see the development taking place before
their eyes. What this has done is to make them believers that things can be
done. They have wound up spending more time than they ever would have
in the past working with the developers, interfacing with them, and actual-
ly developing the technology. We have come up with better input and
better ideas from the key people using the technology, and also better
products coming out the back end because there was greater involvement
on the part of customers. In some of our areas, this involvement extends to
surveys that go right out to our external customers.
Customer-driven Measures of Quality
One of the more important trends in managing IT is the attempt to
develop better metrics to measure and manage quality from the customer's
viewpoint. As in manufacturing, companies' financial measures of rev-
enues or returns may provide poor gauges of the quality of output, espe-
cially in the short run. Several respondent companies had developed elabo-
rate formal nonfinancial measures of service quality. The most straightforward
of these involved internal engineering metrics. Since service quality is
often produced in the same moment that the service is consumed, many
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IMPROVING DECISION MAKING ABOUT INFORMATION TECHNOLOGY 183
respondents had installed on-line (real-time) IT systems to ensure the deliv-
ery of crucial elements of quality that could not be achieved otherwise.
Thus when financial service representatives pull up the file on a new
product, they are constrained by numerous rules, limits, and procedures
built into the software-to ensure that all relevant data are checked and that
no impermissible commitments are made. The customer is served faster
and more accurately, yet the costs of internal processing and errors are
reduced. Fast-food operations' electronic systems ensure that inventories
do not go stale, staffing levels are maintained, cooking temperatures and
cycles are correct, customer bills are properly itemized and added, and so
on. Such systems allow relatively untrained people to perform tasks accu-
rately that they previously could have performed only imperfectly, if at all.
For more sophisticated professional activities, such as design or mainte-
nance operations, architectural management, legal work, accounting audits,
bioassays, real-estate evaluations, and investment banking, on-line IT sys-
tems have been implemented to ensure a thoroughness, consistency, and
quality never before possible.
However, despite their utility, engineering metrics and IT systems that
monitor the performance of internal operations can ensure only that internal
operations are proceeding as designed, not that those internal operations are
providing the customer with real value. Moreover, what the company re-
gards as higher-quality output (more customized service, or a faster re-
sponse) may not in fact be perceived by customers as more desirable, espe-
cially if they must pay more for it. Companies have often found upon
checking that customers cared far more about reliability in delivery or pleasant
personalities in contact people than about fast response times. They can
discover this only by interviewing customers.
As a result, sophisticated companies are beginning to pay substantial
attention to measures of quality that are customer-based. A surprising num-
ber (43 percent) of the companies interviewed by the committee had insti-
tuted such measures.7 Although companies try to collect as much data as
possible through automated means, a complete evaluation procedure should
also normally include some random visits, customer sampling, and personal
observations as assessment tools. These are especially important in under-
standing certain significant dimensions of point-of-contact service perfor-
mance like cheerfulness, creativeness, responsiveness, professionalism, or
other key characteristics of personal service.
Service companies in particular have taken a leadership role in develop-
ing customer-oriented measures of quality. Quality in services often re-
quires extensive interaction at the point of customer contact, is of prime
importance to the customer, and has a high potential impact on future sales.
As in manufacturing, there tends to be a strong positive correlation between
service quality and lower cost. The elimination of errors in producing a
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184
INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
service decreases the costs of coordination and rework, customer service
costs, and customer complaints (to say nothing of the unmeasured and pos-
sibly greater costs of losses of goodwill at the customer level). Two ex-
amples suggest the kinds of approaches companies take to improve levels of
customer service while decreasing costs:
· McKesson has defined 42 "customer satisfactors" that it surveys
externally and measures internally on a routine basis. A seven-page ques-
tionnaire goes to over 1000 customers every year, and updates are made
quarterly on a smaller set of factors considered to be the most important.
McKesson is now trying to link these "satisfactors" to its compensation-
incentive systems. At the strategic level, McKesson also emphasizes five
themes for competitiveness: customer-supplier satisfaction, people devel-
opment, market positioning, relative net delivered cost, and innovation. For
all of these factors, McKesson uses internal and external metrics to track its
own and competitors' positions as perceived by customers.
· MCI, in addition to using on-line measures of technical quality,
does in-depth customer surveys about twice a year and uses the results of
other customer questionnaires administered at a lower level of detail (10
questions) monthly. In addition it makes extensive use of focus groups and
other techniques to check its general image. Every customer with more
than approximately $30,000 a month in billings is surveyed in detail once a
year, either informally or through in-depth interviews. The in-depth inter-
views are done by an outside company. MCI does its own statistical analy-
sis of the surveys that come in from the samples for residential customers.
It also uses focus groups to get a more personalized feel for how those
customers are responding to particular services. MCI uses formal measures
of loss rates, geographically, by customer service center. In its business
communications division, MCI measures these quality factors by branch
office at 132 branches. It also measures loss rates by customer segment and
does an extensive employee satisfaction survey every 18 months, consider-
ing that to be an important factor in customer service.
Respondents reported on a number of other experiments aimed at mea-
suring service quality at the customer level. Nevertheless, interviews indi-
cated little direct use of customer-driven metrics in measuring the perfor-
mance of specific departments. There was an even greater gap in converting
such measures into performance incentives for contact groups. And at the
time of the interviews, no companies had converted either the results of
customer surveys of quality or data on customers' observations into useful
financial measures of service performance. These are important areas for
future management attention.
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IMPROVING DECISION MAKING ABOUT INFORMATION TECHNOLOGY 185
Compressing Project Scope and Payback Time
Increasingly, companies face the dichotomy that while they seek to
increase paybacks from IT through more strategic (usually more complex
and longer-range) programs, the life cycle of each generation of technology
is becoming shorter. To manage this anomaly, many interviewed compa-
nies said that they now proceed incrementally on large IT projects.
These companies said that they consciously seek to break such projects
down into smaller, more discrete segments each of which can (1) be justi-
fied individually and (2) be integrated incrementally into an agreed-upon
system architecture. The broad goals of the overall project and its general
costs and benefits are analyzed. Then the output and input characteristics
of each major module (and its needed interface standards) are established.
These are used to discipline all subsidiary project designs. Then the pro-
gram is broken down into definable smaller projects, each with finite timing
and payoffs. As early projects are successfully implemented, they help to
reduce the real and perceived risk on the total project. Early paybacks
lower the present value of the total investment. Initial feedback from early
projects can be used to guide those that come later in the sequence. Overall
project management is simplified and more focused. And there is less
political resistance to large-scale projects as early successes ease concerns.
To implement changes in large systems incrementally, companies indi-
cated that they often developed and tested individual modules on a small
scale or in a single operating division. As these projects proved their
viability, they might then be integrated for testing with other successful
. . .
.
projects on a local scale or be rolled out as discrete projects across various
divisions. As a result of such practices, companies could achieve faster
paybacks (by not having to wait for the entire program to be completed),
and risks were reduced.
Despite the rapid rate of improvement and turnover that abbreviates the
life cycle of much IT equipment, only a minority (30 percent) of the inter-
viewed companies said that they had a special "hurdle rate" for IT invest-
ments vis-a-vis other investments. (See Question Box 1 in Appendix D.)
Instead, they adjusted for the relatively quick obsolescence of IT equipment
by introducing faster depreciation rates into their calculations.
As a prioritizing device, some companies sought 6- to 9-month payoffs
on IT projects. Others noted that among successfully implemented projects,
the time to actual payoffs rarely exceeded 3 years. For example, Chase
Manhattan's Craig Goldman said, "In the data center arena, you have to pay
project investments back in the year you make the investment. We are
planning on reducing our absolute costs over the next 3 years, every year
while we enjoy a 25 percent volume growth; there's a program to support
it." At CIGNA Corporation, James Stewart, executive vice president and
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INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
chief financial officer, stated: "Increasingly we are shortening the planning
time frame. We are focused on shorter-term paybacks rather than building
galactic systems. The planning time frame has shortened from the tradi-
tional galactic 2 to 3 years down to 6 months."
Planning for payback within shorter periods helps manage technologi-
cal risks. Fast and effective implementation can also have strong strategic
significance. As McKesson's Jon d'Alessio said,
On the application side, you get the possibility of a competitive edge for a
while. But the lead time for your corporation is not very long; you clearly
don't get a sustainable edge because competitors can respond so quickly.
How efficiently you implement, how effectively you do it, and how quick-
ly and well you translate concepts into better customer service those are
the things that differentiate companies.
Many companies interviewed by the committee had further improved
control by (1) demanding that divisional systems follow corporate-wide
interface and software standards for compatibility and interoperability, (2)
employing corporate-level allocation and follow-up processes for interdivi-
sional strategic and infrastructure projects, and (3) using more systematic
preproject analyses and postproject audits than in earlier years.
Postproject Audits
The committee found that virtually all interviewed companies reported
using formal evaluation procedures for IT projects (which lent themselves
to such analyses) before investments were made. (See Question Box 2 in
Appendix D.) But postproject evaluations were less universally pursued.
A majority (64 to 68 percent) did attempt audits on certain types of projects,
notably cost-reduction and new-product programs. Audits for other types
of projects were less frequent. (See Question Box 3 in Appendix D.) Postproject
audits were often said to be erratic or spotty. This was of some concern to
both the committee and to many respondents, despite the fact that a large
majority of respondent companies that had undertaken overall assessments
claimed acceptable to high payoffs on their IT investments. Some examples
illustrate various viewpoints:
.
commented,
At the Travelers Companies, Larry Bacon, senior vice president,
Do we do postinvestment audits consistently across the board? No, it's
very spotty. Our decentralized style dictates that the divisions run their
own businesses. Some divisions do audits very rigorously; others don't.
On each project, however, we try to make sure that we do capture the
intended benefits.
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IMPROVING DECISION MAKING ABOUT INFORMATION TECHNOLOGY 187
.
At SuperValu, H.S. Smith, vice president, said,
We do cost-benefit analyses prior to the execution of each project. In the
past we haven't really been very religious about auditing after the fact.
We have audited our capital appropriations, but we don't capitalize soft-
ware, so we have not audited the results of that.
.
At Citibank, Daniel Schutzer said,
I think we are probably equally guilty with everyone else as far as keeping
records and checking how well we succeeded on projects and whether we
really did achieve expected benefits. We constantly check the milestones
for the development itself: whether we delivered in 2 years for the $5
million proposed or whether we slipped and overran. But we don't really
systematically ask: Is the project increasing revenue the way we thought?
Is it reducing costs or personnel? Sometimes, if there is an immediate
reduction of personnel, that measurement may be taken. But for some of
the other kinds of incidental benefits revenue increases, expense sav-
ings it's not clear to me that we do a good job of following up.
Many had installed more rigorous procedures in the last few years.
They thought that installing such procedures would undoubtedly force oper-
ating and information systems managers to concentrate more on specifying
and achieving planned gains, and that this presumably would improve fu-
ture measured performance gains from using IT. However, in the committee's
interviews very few companies mentioned going to the next high-payoff
step of systematically analyzing postproject audits to ascertain and catalog
those success or failure patterns that could assist in selecting and managing
future IT programs. There was little evidence that formal post hoc evalua-
tions were directly used to guide future capital or program budgeting allo-
cations. Further, such appraisals were seldom used to evaluate line manag-
ers' performance or to set metrics for incentive plans. All these seem
worthy considerations in improving future program management.
Benchmarking Against Specialized Outside Providers
Benchmarking examines how one's own performance of an activity
compares to that of others performing the same activity. Benchmarking
studies generally provide better information about business processes than
about specific costs. Definitions of data and what is included in various
cost categories vary widely among companies. These definitional problems
are compounded by all of the usual problems about measuring service out-
put. Consequently, comparisons of best-practice processes generally are
more productive. Companies can make significant gains (1) by evaluating
and modifying "best practices" observed externally and (2) by deploying
their own best practices more widely internally. In addition to improving
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INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
many processes directly, comparisons with outsiders can also send signals
to groups within the company being benchmarked that their performance
can be checked against that of outside service groups and that they must
keep up with competitive practices.
The committee found that benchmarking had generally been undertaken
only relatively recently. Most interviewed companies benchmarked prima-
rily against other competing peer firms. Only a few (less than 30 percent)
mentioned benchmarking against internal "best-in-class" activities in their
own firms or in noncompeting external firms. Fewer still benchmarked
against specialized external service providers like ADP Services, EDS, or
ServiceMaster which have widespread reputations for efficiency. Although
outsourcing of data centers has become a $7 billion to $10 billion industry
in the United States and Japan,8 few interviewed companies mentioned outsourcing
as a direct result of their benchmarking studies. More often they updated,
consolidated, or modified their internal processes themselves. A major
exception was MCI. Richard Liebhaber noted:
Where I get my view of 5- or 10-year technology is by visiting vendors.
People ask me how many development engineers I have working for MCI.
I say I have 19,000 but they don't work for me-they work for 74 ven-
dors. I view all those vendor engineering people as working for me. So,
we go out into their laboratories, find out what they are doing, and influ-
ence what they are doing.
A particularly useful type of benchmarking can result when groups of
companies voluntarily pool their own information and agree jointly to sponsor
a consulting firm to undertake a detailed study of comparative practices. Data
on relative performance are then fed back to individual firms. Each firm's
own data are specified for its internal use, but the identity of the remaining
participants is disguised by normalizing size (or other distinguishing features)
and identifying competing companies only as A, B. or C. For the companies
interviewed, such practices offered useful relative calibrations, although not
specific financial standards for service performance. For example,
.
.
CIGNA Corporation used outside consultants to compare unit costs
of its back office and data centers versus competitors' unit costs for such
services (in terms of tape drives, databases, CPUs, and so on). This engi-
neering cost-driven study did not address returns on investment or make
specific comparisons with specialized outsiders such as EDS.
· BankAmerica compared its IT performance against that of other
competitive institutions in terms of certain key measurements of effective-
ness on an anonymous basis. It also used noncompeting peer groups (such
as the member companies of the Research Board) for similar comparisons,
but it had not specifically evaluated its overall investments in IT with re-
spect to paybacks.
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IMPROVING DECISION MAKING ABOUT INFORMATION TECHNOLOGY 189
The following quotes summarize how some other successful companies
approached benchmarking:
At Chase Manhattan, Craig Goldman said,
We have done some very specific studies both internally and with the help
of external sources to peg us vis-a-vis competition in a number of key
areas. In one, we hired Nolan Norton. They took our data from five or six
major facilities and compared them to a cross-section of other companies.
There was a second study done by Price-Waterhouse that said on an indi-
vidual basis, each of those data centers were efficient and significantly
more cost-effective than if we outsourced them. Overall we found we are
close to being as efficient as we could get from an outsourcing contract
today. By doing further consolidations, we will be more efficient. In
addition, we hired Booz Allen to look at our major competitors and to give
us some comparative data both on efficiency levels and relative perfor-
mance trends. We have also made major strides in migrating to common
platforms and systems, looked around the network, and picked up the mod-
ules from each sector that made the most sense.
.
NationsBank's Patrick Campbell, senior vice president, Technol
ogy Planning, described that company's approach:
In Dallas, we have a very strong IT user community. For example we have
J.C. Penney's, Frito-Lay, American Airlines, Southwest Airlines, and so
on. We have begun dialogues with representatives of these firms in "user
communities" or "user groups." By exchanging information with noncom-
petitors, we can take pages out of their book just about every day and not
have to reinvent the wheel. This benchmarking group is very selective
about who can join. One of the rules is that the prospects need to be
Dallas-based so we have close proximity. Basically, participants must be
at the corporate office level and hold the position of senior technology
planner on the company team. None of the companies can compete direct-
ly with one another.
We also benchmark our internal operations against established out-
sourcing suppliers on a continuing basis. We do "best-in-class" analyses
of their processes as well. We try to position ourselves between the out-
side vendor community, like AT&T or IBM, and our customers. One of
the benchmarks to which we compare ourselves is the ability to provide IT
services to our internal and external users at a competitive price. In other
words, if AT&T can perform a service for 12 cents a minute, our gauge is
to be less than 12 cents per minute. If we can do that, we are basically in a
sound business position; we are not a net overhead cost the way many
organizations are.
Benchmarking has received widespread attention only in recent years.
Even so, the most common type of benchmarking appears to be a compari-
son of a firm's performance in a given activity to that of other peer compa
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INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
nies. Comparisons to specialized service providers, to smaller firms, and to
firms not in the same industry are much rarer. Since activities are relatively
generic (as noted in Chapter 4), it should not matter to the benchmarking
company whether the best-practice provider of a given activity is a peer
company or an external specialized service provider. Including specialized
external service providers in the comparison group can be especially useful,
because such companies make their living by concentrating on an activity
and providing it more efficiently or effectively than others.
Customer- and Knowledge-driven
Performance Evaluation and Reward Systems
A company's prosperity in the long run is intimately linked to the way
in which its reward structures are aligned with its corporate goals. The
committee discussed in depth the question of whether in corporations of the
future, the management of intellect (or intellectual processes) and the capi-
tal embodied in knowledge-based assets will be the primary bases on which
they compete. Even today, knowledge-based service activities such as re-
search, design, product or process development, buying, trading, marketing,
advertising, systems integration, software development, and logistics man-
agement contribute most of the value added in manufacturing enterprises.
Whole service industries like consulting, accounting, financial services, the
law, health care, entertainment, and many aspects of the communications
field also depend on the value added by intellectual processes.
The most valuable assets of firms in these industries typically lie in
their technological and professional know-how, their flexible response and
innovation structures, and their knowledge about customers and markets.
These assets reside in the minds of individual staff members, in software
programs, in information and management systems, and in the databases of
the companies. Indeed the management of intellectual capital may well be
a major factor in determining who survives and who does not in the coming
years. To quote Walter B. Wriston from The Twilight of Sovereignty, "In-
formation, in the words of Leon Martel, is 'rapidly replacing energy as
society's main transforming resource."'9
Some studies have suggested that the management-evaluation and in-
centive infrastructures of companies have not yet been adjusted to take full
advantage of the opportunities that the use of IT offers.~° The committee's
interviews support these contentions as they pertain to performance evalua-
tion and reward structures. If a firm's competitive edge rests on its knowl-
edge-based assets and its superior customer service, reward systems need to
be able to measure such assets, to recognize individuals and teams whose
work contributes to superior customer service, and to reward these people
accordingly (Box 5.3 gives an example).
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IMPROVING DECISION MAKING ABOUT INFORMATION TECHNOLOGY
BOX S.3 A Knowledge-based Reward System
In 1992, Salomon Brothers was planning to install an employee com-
pensation system based on the knowledge Cat people bring to their
Corm A new employee with no knowledge about the financial business
receives a certain level of base pay. Employees are organized into teams
that specialize in various products such as corporate bonds. To earn a
raise, the employee must complete an assignment can a certain set of
skills; as the employee masters a wider and wider Variety of skills through
progressively more difficult assignments, his or her compensation will
increase.
Saloman Brothers expects that employees trained under this new
arrangement will complete transactions more quickly. But it expects its
biggest payoffs front how dec~s~c~ns about new products and evaluations
of new businesses are made.
SOURCE: Gabor, Andrea. 1992. "After the Pay Revolution, Job Titles
Won't Matter,t' New York Times, May 17, Business Section, p. 5.
However, few respondents reported direct connections between (1) their
customer-based measures of performance and quality and the incentives
offered to those handling contacts with end customers (although many said
they were currently experimenting with such arrangements) or (2) improve-
ments in knowledge-based assets and rewards given to managers. It is
ironic that financial markets often reflect the value of intellectual assets
(through a company's "Q value," i.e., its market value versus the replace-
ment value of its physical assets) but that the company's own books and
performance-evaluation systems rarely do. The value of such assets does
not appear in published financial data or in the "asset" accounts used for
internal controls. The omission of such factors in performance evaluation
and reward systems could pose major long-term problems for service com-
panies competing in a customer-driven, information-intensive era.
SUMMARY AND CONCLUSIONS
Although a large percentage of interviewed companies felt they had
received adequate to high payoffs from using IT, there were a number of
areas in which the committee thought managers could seek greater perfor-
mance advantages. Principal among these were (1) developing and obtain-
ing top management commitment to genuine information and IT strategies
focused on gaining strategic advantage, (2) more extensive cross-functional
reengineering and reorganization of processes affected by IT, (3) expanded
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INFORMATION TECHNOLOGY IN THE SERVICE SOCIETY
user and customer involvement in all aspects of the design and implementa-
tion of IT projects, (4) improved customer-driven measures of quality in-
stalled and in use, (5) an increased focus on shorter-term payoffs for IT
investments within a long-term strategic framework, (6) better-developed
postproject audits, (7) more external benchmarking and increased consider-
ation of"best-practice" processes from outside specialist service groups,
and (8) expanded use of customer- and knowledge-driven performance mea-
surement and reward systems throughout the firm. Even the committee's
sample of sophisticated respondent companies often needed improvement in
these areas. Most of the problems respondents reported in achieving pay-
offs from investment in IT when such problems existed came not from
overinvesting in IT, but from management inadequacies in planning and
implementing IT systems. Both Chapters 3 and 5 have highlighted some of
the more interesting ways experienced managers have found to improve
their success in using IT's potentials. Nevertheless, there is room for fur-
ther improvement.
NOTES AND REFERENCES
1Strassmann, P. 1990. The Business Value of Computers, Information Economics Press,
New Canaan, Conn.
2Roach, S. 1989. "Pitfalls of a New Assembly Line: Can Services Learn from Manufac-
turing?," Morgan Stanley, New York. Also, Roach, Stephen S. 1991. "Services Under Siege:
The Restructuring Imperative," Harvard Business Review, September-October, pp. 82-91.
3Computer Science and Telecommunications Board, National Research Council. 1992.
Computing the Future, National Academy Press, Washington, D.C. Also, Computer Science
and Technology Board, National Research Council. 1989. Scaling Up: A Research Agenda
for Software Engineering, National Academy Press, Washington, D.C.
4Humphrey, Watts S. 1989. Managing the Software Development Process, Addison-
Wesley, Reading, Mass.
5In these cases, IT itself is not irrelevant. IT often provides a key element in the new process.
6A discussion of these organizational modes can be found in Quinn, James Brian, 1992,
Intelligent Enterprise, Free Press, New York, Chapters 4 and 5.
70ther studies indicate that many service institutions lack such formal feedback tech-
niques for measuring the quality of services. For example, one study found that 70 to 90
percent of all banks were in this category. See Giesler, E., and A. Rubenstein. 1988. "Mea-
surement of Efficiency and Effectiveness in the Selection, Usage, and Evaluation of Informa-
tion Technology in the Services Industries," Joint Meeting of Institute for Illinois and Industry
Information Council, August 31.
8The National Academy of Engineering is currently studying some important aspects of
outsourcing that will be discussed in a forthcoming National Academy of Engineering report,
Preparing a Global Economy: A New Mission for U.S. Technology.
9Wriston, Walter B. 1992. The Twilight of Sovereignty, Scribners, New York.
1OMcKensie, R., and R. Walton. 1988. "Implementation of Information Technology:
Human Resource Issues," MIT, Sloan School of Management, Management in the l990s Pro-
gram, Cambridge, Mass.
Representative terms from entire chapter:
improving decision
