Information Technology in the Service Society A Twenty-First Century Lever (1994) / Chapter Skim
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3 Impacts of Information Technology at the Enterprise Level
3 Impacts of Information Technology at the Enterprise Level
Pages 97-135
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From page 97... ...
held with about 80 senior managers in 46 major firms drawn from each of the major service industries transportation, communications, retailing, wholesale distribution, health care, financial services, and professional services. The interviews sought (1)
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From page 98... ...
Some conclusions follow. WHY FIRMS INVEST IN IT Executives generally invest in IT to increase expected profits, margins, or returns on capital.
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From page 99... ...
Amona the more important rational reasons for investing in IT that are . not picked up in aggregate databases are the following: Expanding market share or avoiding catastrophic losses.
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From page 100... ...
Specifically, Brynjolfsson and Hill analyzed output data and data on IT spending from 380 large firms that generate about $2 trillion in output annually, and found that increases in output at the firm level correlate strongly with IT expenditures, even if the macroeconomic data do not demonstrate increases in productivity across the national economy or in individual service industries. These data were taken from the 1987 to 1991 time frame.
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From page 101... ...
Although the study concluded that IT had had little impact on these ratios, it also noted that the company could never have increased its handling of health care claims from 250,000 per week to 1.3 million per week without using IT and acknowledged the fact that this business was very profitable. Backoffice automation in financial services, electronic point-of-sale systems in retail and wholesale trade, computer reservation systems in travel services, communications systems in all companies, and automatic flight control systems in aircraft for air transport are examples of large IT infrastructure systems without which individual companies could not compete today but for which specific financial impacts are difficult to calculate.
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From page 102... ...
If features cannot be evaluated directly in financial terms, many companies use other metrics such as improvements in response times, levels of customer satisfaction, market penetration, or company image. Several of the firms interviewed by the committee suggested that the only truly rigorous way of evaluating the payoff from investments in IT infrastructure would be to calculate the opportunity costs of not being in the business, that is, the losses that would have been incurred if the investment had not been made.
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From page 103... ...
When specific goals are set, processes are properly reengineered, organizational interfaces are redesigned, and new incentives are provided, performance gains from specific applications can be impressive. Cycle times can be cut from days or weeks to a few hours or minutes.
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But the measurable value of these improvements remains unclear when compared to the significant costs of having desktop computing available throughout an organization. · At CIGNA Corporation, James Stewart, executive vice president and chief financial officer, said, "I'm not yet convinced that dispersal and utilization of PC-based technology have proven to be efficient.
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From page 105... ...
are used to capture system knowledge, make meetings more efficient, and realize some of the communications benefits sought for PCs (Box 3.1~. The emergence of simpler network software, multimedia capabilities made possible by autosynchronous transfer technologies, and greater capacities for electronically connecting fixed and mobile workstations may increase the benefits derived from desktop computing.
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From page 106... ...
While no evaluations were made of direct payoffs or returns for such investments, they were carefully monitored and evaluated using benchmarks, performance metrics established on installation, and operations costs versus other alternatives. Cost Reduction Cost reduction is often a major goal of investing in IT.
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From page 107... ...
A prime example is MCI's Friends and Family program, which lowers costs for residential customers yet uses the network's otherwise excess capacity in nonbusiness hours. In the words of Richard Liebhaber at MCI: The decision to do Friends and Family was a combination of retention and market share: 62.8 percent of MCI's traffic was during the day; 33 percent of the traffic (in 1990)
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From page 108... ...
Yet most service companies encounter major problems in appraising the impacts of IT on service quality, and especially in measuring that impact in financial terms. This is true when two services are compared simultaneously or when a service output at one time is compared to an output at an earlier date.
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From page 109... ...
of the responding companies had established formal metrics to measure the quality of their service, these were almost always engineering metrics (such as system response times, percentages of time computers were available, and cycle times for operations) or data from customer surveys (expressing customers' views of the services of the company)
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From page 110... ...
They affect such things as quality of customer service, flexibility, break-even points, response times, and market image, which cannot be measured in simple financial terms and hence be picked up in macroeconomic data. Strategic changes almost always induce a competitive response whose timing, scope, and force are unpredictable.
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From page 111... ...
Classics among systems representing strategic investments are ECONOMOST and its successor systems at McKesson, Cosmos II at Federal Express, automated teller systems at Citicorp, and AANET at Arthur Andersen & Co. Other examples include Bank of America's COIN, Levi Strauss's Levi-Link, CHIPS (Clearinghouse for Interbank Payments system)
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It is an opportunity to improve the image, the feel, the touch of MCI. Intuitively, I would tell you it's going to provide market share, customer satisfaction, bottom line.
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The full impact of creating these new industries often will not be reflected as benefits for the originating firmest or to the original service industries they might supplant. There can often be substantial delays before macroeconomic data are restructured to reflect such new industries.
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161.0 1992 Business Week, January 18, 1993 Credit card charge volume 464.0 1991 Faulkner & Gray, 1993 "Securitized" home mortgages 100.0 1991 Business Week, July 20, 1992 Asset-backed securities 50.9 public 1992 The Bankers Magazine, 8.0 private May/June 1993 Transaction Volume New York Federal 150,000 over Fedwire transactions/minute 1990 Computerworld, April 22, 1991 Automated teller 600 million machines transactions/month 1991 American Banker, December 7, 1992
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From page 115... ...
The capacity of many companies to develop a knowledge-based competitive advantage depends largely on the level of detail to which they can break down their contact point data and then analyze, mix, and match these data in different ways (see Box 3.21. The company with the largest and most detailed information base can segment and target its marketing and customer service activities with a precision and unit cost that smaller com
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From page 116... ...
Computerized reservation systems provided import tent competitive advantages for individual companies, but they had major structural impacts on the entire industry when they began to carry flight and Are information far carriers ether than their owners. These more comprehensive data sets enabled much tighter integration of services provided by different companies (e.g., feeder airlines and national carriers, auxiliary services such as car rentals and hotels)
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Transactions with customers are the originating point for all work processes w~tl,~n an industry and the key to providing new and better customer services. petitors cannot match.
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From page 118... ...
In other instances, broad gauges such as changes in market share, total profitability, growth rates, overall sales, and returns on investment may be relevant to judging strategic impact. When a major strategic change results from a series of incremental decisions (as in the case of Bankers Trust)
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From page 119... ...
Because it is frequently impossible to measure the impacts of improvements in quality precisely in terms of sales or profit, firms often use engineering metrics like response times, error rates, or service availability times when evaluating investments in systems intended to improve quality. Similarly, the long-term effects of strategic flexibility, more refined data-handling capabilities, or more detail in databases may defy financial quantification.
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From page 120... ...
In some cases, so many intangibles are involved that management's judgment may be a better indicator than detailed metrics. Although many interviewed companies noted that it is often not possible to develop accurate quantitative or financial metrics to measure the potential or actual benefits of some strategic investments in IT, they tended to treat such decisions within the same framework used for other complex advanced-technology ventures.
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From page 121... ...
Engineering metrics often reflect more detailed aspects of an individual firm's work process (e.g., the number of individual transactions processed per employee in the banking industry, the number of claims processed per employee in the insurance industry, the time taken per customer service request in the telecommunications industry, the time before the arrival of desired merchandise in the retail trade industry; Box 3.3 gives additional examples) .~° Engineering metrics are very useful for diagnostic purposes and to compare the performance of one company to that of another (benchmarking)
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From page 122... ...
Data from engineering metrics on the true impacts of IT on many aspects of quality are available only at the enterprise level and are not captured at any higher level of aggregation. CROSS-CUTTING OBSERVATIONS REGARDING ALL USES OF INFORMATION TECHNOLOGY Despite the wide variety of IT uses described above, several observations seem to apply to all of them.
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These concerns were well captured by Marshall Carter, currently chairman and chief executive officer of State Street Bank and Trust Company, who said: The investment side of this poses problems. We have traditionally invest ed in technology on a 3- to 7-year cycle.
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(4) Financial services firms' demands for analysis of huge quantities of data have driven the design and purchase of massively parallel processors.
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Even a uniformly positive correlation between measures of physical output and profitability or revenues may be the result of other business practices or investments, or the result of a regulatory environment that assures operating companies a "reasonable" rate of return. For many firms (e.g., those in financial services, health care, medicine, law, accounting, design, software, or government services)
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From page 126... ...
Yet it is often along these qualitative dimensions that individual service firms compete with one another. In such cases, financial metrics such as gross revenues or profitability may be the only alternative, although even financial metrics have their limitations.
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From page 127... ...
forces many service producers to pass benefits through to others and often lowers rather than raises their prices while increasing their breakeven volume. Given that the benefits of IT-enabled innovations in services are not fully realized by the innovator, who does capture them?
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From page 128... ...
When a transaction's marginal benefit to a customer is high and its cost drops precipitously, transaction volumes are likely to increase; this has been especially true in financial services, banking, and communications. For interstate toll calls, volume has increased since deregulation at a rate of 10.6 percent a year, while prices have decreased at a rate of 7.1 percent a year.~9 New York Stock Exchange transactions have risen from a daily average of 10 million to 12 million shares in the early 1970s to an average of 183 million shares in the third quarter of 1992.2° Both of these service industries were deregulated during the 1980s, eliminating the monopoly profits of existing producers.
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From page 129... ...
On the other hand, the use of IT sometimes allows companies to pass costs through to customers as well especially in the form of personal labor or waiting times. For example, IT enables telephone customers to dial long-distance telephone calls themselves and enter their own accounting information (credit card numbers)
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From page 130... ...
However, while the costs of new procedures may well be incurred by treatment providers, none of these benefits may show up in their balance sheets or income statements. Actual outcomes may be uncertain for years, and prices established through d~agnostic-related-group compensation caps may prevent prices far medical services from rejecting the higher value added
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From page 131... ...
In this case, comparisons of a firm's productivity or performance in two different time periods may not be a true "applesto-apples" comparison. It may even be the case that performance metrics designed for the old business lag in reflecting changes at the enterprise evel.27 For example, in many large professional service organizations, tasks that used to be the very core of professional practices (e.g., doing audit checks in public accounting or preparing bubble charts for portfolio analyses in financial services or consulting firms)
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From page 132... ...
Thus, many of the difficulties in measuring the productivity and effectiveness of IT in services at the macroeconomic level have their origin at the enterprise level. Impacts of IT that may not show up in standard financial or data reports include maintaining market share in a relatively mature marketplace, avoiding catastrophic losses due to process failures, avoiding losses of market position or profits if a competitor adopts a new technology and the firm does not, increasing flexibility to respond to unknown future market or process changes, improving employee relations or the work environment, improving the quality of customer service, handling increasing complexity, and improving the scope and responsiveness of the firm's service outputs.
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From page 133... ...
establishing financial measures of the impact of intangible benefits (such as faster cycle times, greater reliability, or a broader selection of service products)
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21 -24. 18Bresnahan, 1986, "Measuring the Spillovers from Technical Advance: Mainframe Computers in Financial Services." 19Federal Communications Commission.
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1958. Technology in Automation, Harvard Business School Press, Boston, Mass.
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