The Business Value of Computers
An Executive's Guide

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The book addresses the practical needs of executives responsible for planning, budgeting and justifying information technology expenditures. It shows that there is no direct relation between spending on computers, profits or productivity. The book explains a new concept - Return-on-Management (tm) - as the measure of information productivity. It shows how information management is everybody's job. Written by a former chief information executive (1956-1978) and vice president of strategic planning (1978-1985) for three large multinational corporations. Author of the widely acclaimed Information Payoff.

"A New Bible for Management Information Systems. Guidebook for the CEO's and line managers. An eminently readable book."
-- Information Week

"Some surprising answers to familiar questions cast new light on investing profitably in computer hardware and software."
-- The Conference Board

"All those either transfixed or baffled by the powers and potential of computers would do well to heed Strassmann's advice."
-- Daily Telegraph

"Measuring managerial productivity is the key to knowing how to invest in information technology. Strassmann's new book sets out the results of his research in detail. "
-- The Financial Times

"Strips away obfuscation that have concealed the value of computers."
-- Financial Post

"A true path to the Holy Grail of business value."
-- Computer Weekly

"Covers more than just technology. In fact, it is a new business theory."
-- Automatisering Gids

"Should sit on the desk of every controller, MIS executive and CEO. It breaks new ground, gives fascinating examples and reads like a gripping whodunnit."
-- Executive Systems International

"Important start in the measurement of white-collar productivity that has long eluded most researchers."
-- Morgan Stanley Economic Perspectives

"Required reading for today's information executive."
-- DMR Consultants' Study

"New way to tell if technology is worth the cost."
-- American Banker

"Like a no-nonsense doctor, author debunks miracle claims about costly technology."
-- Digital Equipment Corporation's Enterprise Quarterly

Also available in Japanese translation.

Other books by Paul A. Strassmann:

Information Productivity

The Squandered Computer

Information Payoff

The Politics of Information Management

An Irreverent Dictionary of Information Politics

The Business Value of Computers
Table of Contents

Introduction

Chapter 1 - The First Attempts

Motivation Through Disaster

Search of Justification for Spending

The Questionnaire

Comparing Revenue-per-Employee

Inter-Divisional Comparisons

Over-achievers and Under-achievers

Comparing Unit Costs per Invoice

Comparing Information Technology-to-Revenue

Chapter 2 - Flexible Definitions

You Can Get What You Asked For

Shifting Data Input to Other Employees

Shifting Data Input to Customers

Shifting Programming Costs to Others

Information Centers

Departmental Computing

Interactive Terminals

Executive Information Systems

Classification of Information Technology

Business and Personal Equipment

Production Equipment

Chapter 3 - Making Comparisons

Controlling the Means of Control

The Food Industry Evaluation

Banking Industry Evaluations

Revenue-based Ratios and Business Structure

When IBM Speaks You Listen

The Most Effective Users of Information Systems

Computerworld 1988 Ratings

The Information Effectiveness Score

Spending per Employee

Employees per Workstation

Explanations

Other Measures of Effectiveness

Re-packaging Revenue-based Ratios

The Banking Case

Ranking Excellence

Chapter Summary

Chapter 4 - Towards Experimentation

Abandoning Revenue Ratios

Purchases are the Largest Cost Item

Purchases Vary Depending on Vertical Integration

Employee Compensation Levels Diverge

Production and Distribution Determine Assets

The Dominance of Overhead Costs

Testing Return-on-Equity

Restating Accounting Information

The PIMS Way

Chapter 5 - Return-on-Management

About Measurement

Measurement and Goal-Setting

Single vs. Multiple Goals for Information Technology

The Productivity of Information Systems

Physical Measures of Productivity

Lost Reliability in the Reporting of Physical Productivity

Omission of Management from Productivity Measurement

Financial Measures from the Industrial Era

The Project Authorization Bias

Post-Industrial Development

Individual Business and National Productivity

The Personal Point of View

The Shareholder's Point of View

The Society's Point of View

Measuring Management Productivity

Finding Management Value-Added

Adjusting for Purchases

Adjusting for Shareholder Value-Added

Adjusting for Business Costs

Management Productivity in Public Sector

Using the R-O-M Index to Evaluate Information Technology

Pilot Testing

Cross-sectional Analysis

Chapter Summary

Chapter 6 - Getting the Facts

The PIMS Approach

The Gaps in PIMS

Defining Information Technology

Data Collection

Where to Collect the Data?

The Manufacturing Data Sample

Geographical Origins

Size of Organizations

The Data Form

Gathering Competitive Information

Organizational Information

How to Differentiate Management from Operations?

Operations Flows

Management Flows

Distribution of Information Technology and Labor Costs

Chapter 7 - Research Findings

Identifying Over- and Under-Achievers

Comparing R-O-M with Other Measures

Profits and Management Costs

Management Value-Added and Management Productivity

Comparing R-O-M with ROA and ROE

Do Over-Achievers Spend More on Computers?

Overall Levels of Information Technology Spending

Employee Spending on Information Technology

Information Technology and Functional Spending

Information Technology and Assets

Information Technology and Organization Structure

Changes During MPIT Study

Changes in the Financial Structure

Changes in Information Technology Spending

External Influences and Management Productivity

The Effects of Taxes

Checking the Strategic Position

Chapter 8 - Strategic Investments

Planning for Strategic Advantages

Opinions

Dialectic Processes

Examples of Strategic Advantage

Engineering and production-innovation strategy: Atlas Door Company

Organizational innovation strategy: Toyota

Work integration strategy: Technical Publications

Design for survival strategy: McKesson Corporation

Overhead cost reduction strategy: Kao Corporation

Strengthening bonds with customers strategy: IBM's LINK

Lowering customer support costs strategy: Microsoft's Online Network

Capturing customer orders strategy: Akzo Coatings

Distribution of expert knowledge strategy: Du Pont

Retention of irreplaceable know-how strategy: Campbell Soup

Upgrading sales force skills strategy: Rhone-Poulenc

Speeding up the sales cycle strategy: Fidelity Union Life Insurance

Speeding up information strategy: Industrial Chemicals Company

Adding value to the sales call strategy: Genentech and Parke-Davis

Increasing customer satisfaction strategy: General Electric

Maintaining central control strategy: Mrs. Field's Cookies

Global production management strategy: Mattel

Decentralized gathering of intelligence strategy: Frito-Lay

Shop-floor autonomy strategy: Lockheed Corporation

Too Much of a Strategic Advantage?

Computers and Small Company Opportunities

Computers and Opportunities in Adult Education

Managing Strategic Opportunities

Identifying Strategic Opportunities

Avoiding Strategic Failure

Organizing for Strategic Opportunities

Chapter 9 - Risk Analysis

Current approaches

Risk Classification

Categorical Ranking of Risk

Payoff Computation Based on Vendor's Training Materials

Payoff Computation Based on Time Value of Money

Payoff Computation with Time Value Plus Residual Value

Payoff Computation With Explicit Risk Estimates

Payoffs Based on Risk-Free Estimates

The Classification of Risk

How to Explain Risks

Payoff From Vendor's Case - With Risk Analysis

Financial Simulation

Risk Analysis vs. Spread-Sheet Analysis

Including Residual Value

Analysis of "Low Operating Risk" Alternative

The High Risk Case

The Evaluation of Risks

People and Risk Management

Chapter 10 - Project Justification

An Investment Case Study

Conditions for Launching the Project

Unsatisfactory Business Plan

Strategic Direction

The Importance of Direction-setting

Launching the Project

The Cost Estimate

The Benefit Estimate

The Cash Estimate

Checking the Information Technology Proposal

The Risk Profile of the I.T. Investment

Managing the Benefits

The Shareholder Point of View

The Business Value of Computers

Employee Morale: The Ultimate Intangible

The Case of the STK Company

Alternative Approaches

Comparisons with Others

Separation Interviews

Studying Differences

Experimentation

Cashless Productivity Gains

The Farmer's Horses Method

The Time Savings Method

You Find Out What You Have Only After You Buy

Application to a CAD/CAM Case

Who Justifies Computers?

How Much to Spend on Project Justification

Chapter 11 - Cost Management

Installation Costs

Costs of Resource Sharing

Cost-Reduction

Productivity Reporting for Computing Services

Managing the Costs of Computing Services

Competitive Pricing of Computer Services

Activity Pricing for Computer Services

Facility Management

Why Competitive Pricing Will Prevail

Competitive Simulation

Chapter 12 - Supporting Analyses

Individual Productivity

Government Agency Case

Word Processing vs. Handwriting

Harris Corporation Case

Measuring Quality

Cost of Customer Losses

The Customer as a Franchise

Capitalizing Computer Investments

Valuation of Installed Software

Chapter 13 - People & Systems

From "Supply" to "Demand" Orientation

Systems Management is Everyone's Job

The Chief Information Officer

Reasons for Appointing a CIO

CIO - Commanding Impossible Operations

The Progression from CIO to CEO

Staffing the Information Systems Function

The Manager and the Technologist

Adapting the Culture

Computer Literacy

Transfiguration of Organizations

Counter-Productive Effects

Invasion of Personal Privacy

Monitoring Clerical Work

Spending on Ergonomics

Spending on Training and Guidance

Chapter 14 - Learning from Mistakes

Anticipate that all Cost Estimates will be Uncertain

Never Install Software without Adequate Testing

Systems Conversion at Bank of America

The Berserk Computer at United Education & Software

Make Sure Competition Does not Wipe out Gains

Automatic Teller Machines

Computerization of Clearing Banks

Similarities With an Arms Race

Make Only One Major Change at a Time

Anticipate Changes

Expect Operator Errors

A Big Error from Two Mistakes

The Case of Compounding Errors

Expect Uncritical Acceptance of Computer Results

Protect Against Computer-Controlled Damage

Do Not Count on Luck to Catch Your Mistakes

Make Sure That Testing Corresponds To The Risks

Watch Out for Cost Over-runs and Unworkable Systems

U.S. Patent Office Case - Part 1, Unrealistic Design

New Jersey Motor Vehicle Department

Internal Revenue Service

Manage Your Risks

The Bank of America Case

The AT&T Long Lines Case

Contracting Out Isn't a Substitute for Management

U.S. Patent Office Case - Part 2, Unrealistic Implementation

Keep Away from Grand Designs

The Houdaille Industries Case

Institutionalize Learning from Own Mistakes

Chapter 15 - Computer-based Communication

What is E-mail?

Current Status and Technology

The Opportunity Waiting for an Answer

Electronic Conferences

Electronic Mail as a Shared File System

Central Shared Files

Distributed Shared Files

From Individual to Group Productivity

Computer-aided Collaboration Meetings

Representation of Knowledge

Hypertext Software

Hypertext Applications

Knowledge-Sharing and Organizational Learning

Future Prospects

Metatext

Thought Control vs. Anarchy

New Forms for Knowledge-gaining

Chapter 16 - Opinions, Research and Cases

The Importance of Measuring

Opinions

General Surveys

Banking Executives

Accountants

Convincing Top Management

Research

MIT Sloan School

New York University

Claremont Business School

Cambridge University

Research Surveys

University of Pittsburgh

Index Group

The "Hawthorne Effect" and Computers

Chapter 17 - A Guide to Advice

Systems Assessment Indicators

Contribution to the Business

Resources

Business Alignment

Sampling Of Customer Opinions

Benefit Estimating Software

"Blockbuster" Projects

Faith and Visions

Loss Avoidance Anecdotes

A Good Story Does not Necessarily Equal Profits

Phenomenal Valuations

Over-attribution

Retrospective Valuation

The Attractions of Phenomenal Valuations

The Group Estimating Method

Critical Success Factors

Classification Frameworks

Descriptive Frameworks

Prescriptive Frameworks

Grid Positioning and Ranking

Decision Trees

Information Economics

Economic Impact Worksheet

Benefits Estimates

Risks and Intangibles

How Difficult is the P.B.T. Method to Perform?

Comprehensive Solutions

The ISIS Methodology

Concerns about Bias

Chapter 18 - Computers and Productivity

Productivity Computations

Productivity Indicators

National Productivity Base Period Indexing

Company Productivity Base Period Indexing

Productivity Calculations

Applying Value-Added Productivity

National Productivity Indicators

How Reliable are the Productivity Indicators?

Difficulties in Productivity Measurement

"White-collar" Productivity

A Micro-economic Point of View

Measurement Reforms

Revenue per Employee Comparisons

Value-Added Comparisons

Implications

Productivity Comparisons of U.S. vs. Japanese Firms

Revenue per Employee Comparisons

Conventional and Value-Added Comparisons

About Productivity Comparison Methods

Information Technology and US Productivity

The Effectiveness of Computer Capital in Manufacturing

The Effectiveness of Computer Capital in Services

Views About Productivity and Computers

Administrative Effects of Government

The Internal Revenue Service

The Social Security Administration

Food and Drug Administration

Pension Administration

Medical Care

Legislative Cost Generation

The Effects of Litigation

The Costs of Variety

Computers and the Business Cycle

Chapter 19 - Financial Guidelines

Realizing Business Value

How to Identify Opportunities

Cost Reduction

Cost displacement

Revenue Growth

Cost Avoidance

Performance Improvement

Risk Reduction

Relationship Redesign

Competitive Gains

Competitive Survival

How to Measure Results?

Direct Benefits

Indirect benefits

Inferred Benefits

How to Manage for Business Value?

Development Budgeting and Planning

Strategic Investments

On Justification

Systems Planning

Controlling Systems Design

Traditional Methods - Design First

Empirical Methods - Implement First

Executive Responsibilities

Make vs. Buy Decisions

Chapter 20 - A Policy Checklist

Policy Formulation

Role of Information Resources Management Policy

Scope of Information Resources Management

Information Resources Management Organization

Information Resources Policy and Execution

Information Technology Policy and Execution

Information Management Audit

Systems Design and Organization Structure

Information Systems Policy Guidance

Managing Planning

Information Technology and Business Plans

Planning Methods

Strategic Directions

Strategic Diagnosis

Planning Targets

Managing Information Systems Development

Information Systems Architecture

Common Information Systems

Communications Orientation

Data Entry

Managing Results

Investment Control Practices

Operating Control Methods

Pricing of Information Technology Services

Security and Safety

Managing People

Work Design

Applications Design

Executives' Technical Know-how

Management Training

Employee Training

Preservation of Technical Skills

Managing Relationships

Managing Projects

Proposal Justification

Managing Quality

Information Technology Policy Guidance

Adherence to Standards

Design Principles

Containing Technology Risks

Concluding Remarks

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