The Squandered Computer

The Squandered Computer
Evaluating the Business Alignment of Information Technologies

by Paul A. Strassmann

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"In the near future somebody will write a book about how executives in the 1990's spent too much money on information technology because they were afraid to manage it properly. They put their trust in technological experts to deliver business value from I.T. investments."
- Editorial, Wall Street Journal, 12/20/96

This is that book.

Despite much talk about the cyber economy, information age, or the knowledge-based enterprise, as yet there are no generally accepted economic or financial principles to guide executives in spending money on computers.

The Squandered Computer offers a new perspective from which to interpret the economics of computerization. It explains the difference between promises and facts. It shows how misperceptions and negligence diminish the worth of perhaps the most potent tool, since the invention of fire, ever placed in the service of humanity.

#1 Bestseller in Information Management at Amazon.com.
Review by Michael Schrage, Harvard Business Review
Review by Lou Agosta, Computing Reviews
Review by Megan Santosus, CIO Magazine
Review by Dennis Eskow, Editor-in-Chief, Datamation
Review in Computer Finance.
Excerpted chapter in Cutter IT Journal: "What is Alignment?"
Excerpted chapter in Across The Board: "Outsourcing IT: Miracle Cure or Emetic?"
Excerpted chapter in Datamation: "Will big spending on computers guarantee profitability?"
Executive Summary
Table of Contents
Illustrations

#1 Bestseller
at Amazon.com!

Book cover

"It would be difficult to find an author with better credentials to speak about the applications of information technology in the workplace: Strassmann has served as chief information officer at General Foods, Kraft and Xerox corporations and as a senior Defense Department official. Despite or, rather, because of this extensive background, he has withering comments to make about the waste of computer resources in most industries. But the book has much more, including a chilling discussion of international information crime, which he believes national police and military forces cannot adequately counter."
- Foreign Affairs, Volume 77, March/April 1998

The Squandered Computer
Library of Congress Catalog 96-095315
ISBN 0-9620413-1-9
1997. hardcover, 426 pages, 66 illustrations.
Price: $24.50 + $5.50 for UPS shipping and handling (within continental US).

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Other books by Paul A. Strassmann:: Information Productivity; The Business Value of Computers; Information Payoff; The Politics of Information Management; An Irreverent Dictionary of Information Politics

Executive Summary of "The Squandered Computer"

1995 worldwide corporate spending for computers is about one trillion dollars. It exceeds total profits of 13,400 largest global firms.	1995 U.S. corporate spending for computers is about $500 billion. This exceeds the sum of 1995 corporate profits by $175 billion.	The U.S. with 4.6% of the world's population and 21.3% of the world's GNP operates about 50% of the world's computing power.
For 55% of U.S. firms the computer budget exceeds their economic value-added.	The "computer paradox" has not been repealed, contrary to claims. There is no demonstrable relationship between computer spending and corporate profits.	Despite a 67% growth in computer spending, overhead costs of U.S. firms grew faster than their growth in revenues or profits.
The "right" level of spending for computers reflects the bureaucratic characteristics of a firm, not revenue or profits.	The insistence of computer magazines and academics to relate computer spending to corporate revenues or government agency budgets is misleading and encourages overspending.	Claims that computers increased worker productivity are deceptive. The rise in revenue per employee is a reflection of increased outsourcing, not gains attributable to computerization.
There are no "best practices" prescriptions how to spend money on computerization. 31% of computer projects are canceled; 53% will over-run budget and schedules.	The government's policy to shift regulatory compliance paperwork to corporations creates a computer workload that has no payoff.	The most popular methods for justifying spending on computers propose unverifiable commitments.
Computer magazines have the tendency to popularize examples of excellence in computer usage that disregard financial results.	Outsourcing of computer services is most often another form of drastic downsizing.	The practice of outsourcing of computer services will increase as the costs of modernization of information technologies become prohibitive.
The inherent conflict of interest among parties to outsourcing contracts will give rise to independent technology assessment firms.	The cyclical investment pattern for computers is as much a reflection of shifts in organizational power as the result of technological innovation.	Each technology introduction cycle is characterized by increased spending and destruction of information assets.
The era of exuberant business spending for computers is coming to an end. Economics will prevail over electronics.

Selected Recommendations

The alignment of information technologies with business objectives must take place through changes in the financial planning and budgeting processes.	The need to manage outsourced technologies requires shifting the focus from technology operations to the conservation of information assets.
The prospective enormous costs for abandoning the recent expenditures for distributed systems calls for the adoption of practices to preserve software and training investments.	The need to protect information assets will mandate improved information security.

Table of Contents 4
Illustrations 13
Introduction 17
Outline of this Book 19
Follow-on Work 20
Acknowledgments 21
What to Expect 22
I. Alignment
- 1. The Context of Alignment 27
  - What is Alignment? 27
  - Why Evaluation Comes First 28
  - How to Realize the Alignment of I.T. and Business Plans 29
  - Alignment and this Book 33
- 2. Technology that Delivers Profits 36
  - Benefits of Computers 38
  - Making Comparisons 40
  - Intra-corporate Comparisons 42
  - What Is the right Information Technology Budget? 43
II. Facts
- 3. Spending and Profitability 48
  - Early Doubters 49
  - Amount of Spending 51
  - The International Dimension 53
  - Gathering of Evidence 56
  - The Tale of the Scatter Diagram 61
  - An Examination of Food Firms 62
  - An Examination of Banking Firms 64
  - Value of Computers 66
  - Not a Simple Relationship 67
- 4. Profits and Value 69
  - Computers and Economic Value-Added 70
  - Computers and Profits 72
- 5. Spending and Revenues 75
  - Revenue-related Ratios 75
  - Magazine Estimates 77
  - Findings About Revenue Ratios 80
  - Findings About per Capita Ratios 81
  - Relating Functional Spending to Revenues 82
  - Revenue Does not Equal Value-Added 84
  - Setting Targets for I.T. Spending 85
  - Relating I.T. to Revenues of Baldrige Award Firms 88
  - State Government Ratios 89
- 6. Spending and Overhead Costs 91
  - S.G.&A. as an Indicator 91
  - Overhead Costs 93
  - Hospital Case 94
- 7. Spending and Personnel 97
  - Spending and Personnel 101
  - Information Technology and Information Staff 103
  - Per Capita Spending in State Government 105
- 8. Investments in computers 108
  - Information Technology and Capital Investments 108
  - Problems with Inflation-adjusted Statistics 110
  - Significance of I.T. Investments 111
  - The Outcome of Investment Cycles 113
  - Economic Significance of I.T. Spending 115
III. Explanations
- 9. Computer Paradox Revisited 119
  - Examination of the Paradox 122
  - Findings for 1988-1994 124
- 10. Importance of I.T. Spending 128
  - Computer Spending as a Necessity 130
  - Doubts about the Productivity of Computers Persist 131
- 11. Exorcising the Computer Paradox 134
  - National Research Council Report 134
  - Making the Paradox Disappear 137
  - The Effects of a Changing Economic Structure 140
  - Problems with the Data 143
  - Revisions and Improvements 145
  - The Disclaimers 145
  - A Point of View 147
- 12. No Links with Spending 151
  - There is No Formula for How to Spend on I.T. 153
  - Spending Patterns Show a Wide Range 154
  - Telecommunications Omissions 155
  - Comparison of Characteristics 157
- 13. Stealth Spending 162
  - People Cost $85, PCs only 35¢ per Hour 162
  - The Effects of Stealth Spending 164
  - Futz Stories 167
  - The Disappearing Personal Computer 168
  - Unhinging 168
  - Learning as a Useful Futzing Experience 169
  - Business Prospects 170
- 14. Workload without Payoff 173
  - The Computer Paradox and Government Paperwork 174
  - Paperwork, the Hidden Tax 174
  - Implications for CIOs 176
IV. Justifications
- 15. In Search of Best Practices 181
  - Advantages of Best practice checklists 183
  - Balanced Scorecard 184
- 16. The Government's Ways 186
  - The Inconsistencies of the Baldrige Award 186
  - Perverse Ratings 189
  - Futility of Best Practices - the Federal Case 189
- 17. Economics over Technology 193
  - Substitute Measures of Effectiveness 194
  - Technical Superiority without Successes 195
- 18. Unverifiable Spending 198
  - Different Viewpoints 199
  - Genetics and Project Management 200
  - Methodology Examples 201
  - Information Economics Methods 205
  - The Options Model 208
- 19. Virtual Justifications 212
  - Analytical Hierarchy 212
  - Credibility and Risks 213
  - Rationalizations 215
- 20. Computer Profitability Claims 220
  - The 1995 CIO Magazine Enterprise Value Award 220
  - The 1996 CIO Magazine Enterprise Value Award 223
  - Checking for Plausibility 225
- 21. Opinion Polls 226
  - InformationWeek Excellence Awards 228
V. Outsourcing
- 22. Outsourcing 232
  - The Puzzle 233
  - The Search 234
  - The Discovery 234
  - Best Companies Do not Engage in Massive Outsourcing 236
  - Anorexia 237
  - A DuPont Postscript 238
- 23. Outsourcing Prospects 242
  - Is Outsourcing Effective? 243
  - Business Peformance after Outsourcing 244
  - I.T. Costs after Outsourcing 245
  - Savings from Outsourcing 246
  - Establishing a Baseline Prior to Outsourcing 248
  - A Perspective on Outsourcing 249
  - Testing an Outsourcing Decision 250
  - Good reasons for outsourcing 251
  - Where Outsourcing Will Prevail 253
  - Outsourcing and Systems Integration 255
  - Consequences of Outsourcing 256
  - New Services 258
- 24. Managing Outsourcing 261
  - Preservation of Core Competencies 266
  - Administration of Outsourcing 267
  - Outsourcing and Managerial Accountability 268
  - Preservation of Talent and Outsourcing 268
  - Outsourcing Rationale 269
VI. Causes and Consequences
- 25. A Historical Perspective 274
  - The Perils of Disintermediation 275
  - 1930-1957: The Machine Accounting Era 275
  - 1957-1963: The Mechanization Cycle 276
  - 1963-1969: The Data Center Cycle 277
  - 1969-1975: The Time Sharing Cycle 278
  - 1975-1981: The Minicomputer Cycle 279
  - 1981-1988: The Microcomputer Cycle 281
  - 1988-1995: The Client/Server Investment Cycle 284
  - Prospects 287
  - Misguided Utopians 298
- 26. Investment Politics 303
  - From Economics to Politics 304
  - Managing the Costs and Benefits 305
  - Research on Payoffs 307
  - Architectural and Political Solutions Must Align 308
- 27. Build and Junk Solutions 314
  - Systems Construction Practices 315
  - The Conservation Way 316
- 28. The Decay of Information Assets 319
  - The Decay of Applications Software 319
  - Balancing Operating against Innovating Needs 321
  - A CIO's Role in the Economy 322
- 29. The Economic Predicament 324
  - Immortality of Software 326
  - Prospects 328
  - The Most Likely Scenario 331
- 30. Pricing 334
  - Pricing Client/Server Networks 335
  - Outsourcing Client/Server Networks 337
  - Pricing Directions 341
  - Central vs. Local Computing 343
VII. Residual Value
- 31. Importance of Residual Value 347
  - Software Does not Wear Out 347
  - Software is Easily Reproduced 348
  - Replication of Software 349
  - The Wasteful Point of View 349
  - The Predicaments 350
- 32. Economic Value of Open Systems 356
  - What is Openness 356
  - Feasibility of Open Systems 359
  - The Economics of the Residual Value 359
- 33. Managing for Residual Value 364
  - Conservation of Value During Conversions 365
  - The Year 2000 Fix Demonstrates Poor Asset Custody 368
  - Financing Modernization 369
  - Short-Term Fixes 371
  - How to Get Support for Modernization 372
- 34. Modernization through Outsourcing 374
  - Shifting Power from the Corporate Information Staff 375
  - Inducements for Outsourcing 377
  - Merits of Outsourcing 378
- 35. Reaching out for Payoff 381
  - Maintenance Degrades all Payoffs 382
  - Design Architectures 383
  - You Get what You Plan For 384
- 36. Leadership for Value Creation 388
  - Failures in Leadership 389
  - Remedies 391
VIII. Evaluation Methods
- 37. The Expected Computer Budget 394
  - Explaining I.T. Spending 395
  - Understanding the I.T. budget 397
  - Saturation of Computer Use 402
- 38. Calculating Residual Value 406
  - Planning Horizons and Residual Value 407
  - Financial Analysis for Residual Value Calculation 409
  - Residual Value 409
  - How to Create a Greater Residual Value 411
  - Importance of Systems Engineering Tools 412
- 39. Valuation of Technology Assets 415
  - Valuation Method 416
  - Valuation of Equipment Assets 418
  - Valuation of Development Assets 421
  - Valuation of Purchased Software Assets 424
  - Combined Development and Software Spending 426
  - Valuation of Training Assets 428
  - Total Asset Valuation 431
  - I.T. Investment Cycles 432
- 40. The Mythical PC Cost 434
  - Talking about Large Sums 435
  - Learning about PC Costs 436
  - The Facts 437
  - Common Operating Environment 437
  - Causal Characteristics 439
  - Cost Management 440
  - Implications for CIOs 441
  - Cigarettes, Strong Coffee and Microsoft Windows 441
IX. New Agendas
- 41. Safeguarding Vulnerability 451
  - Dimensions of the Threat 452
  - Countering Threats 453
  - Funding Security through Cost Reduction 454
  - Exposures to Risk 455
  - Managing Risks 456
  - Privacy 457
  - An Admonition about Information Security 460
- 42. Planning Directions 463
  - Evaluation Before Visioneering 463
  - Flawed Assumptions 465
  - Planning Guidelines 466
  - Responsibilities for the Chief Information Officer 467
  - Organizing for Security 470
  - Information Security Responsibilities 471
- 43. Follow-up 474
  - Waiting for Agreement 474
  - Implementing Evaluation Metrics 475
  - Validation of Information Technology Investments 477
  - Setting Profit Expectations 478
Summing Up 479
Bibliography 483
Index 491
Sayings 505

Illustrations

Figure 1 - The context of this book 35
Figure 2 - How to evaluate information technology spending 39
Figure 3 - Above and below expected I.T. spending for look-alike firms 41
Figure 4 - Firm #1 is proposing a budget that is lower than expectations 41
Figure 5 - World-wide spending on information technologies 51
Figure 6 - The importance of U.S. computing power 53
Figure 7 - Information technology spending growth rates and share of GDP 54
Figure 8 - No correlation in spending on computers and profitability 61
Figure 9 - No correlation in spending and profitability in food industry 63
Figure 10 - No correlation in spending on computers and profitability in banking 65
Figure 11 - I.T. budget exceeds the Economic Value-Added for most firms 71
Figure 12 - Ratio of profits divided by information technology budgets 72
Figure 13 - Estimated I.T. budgets relate to sales. Actual I.T. budgets do not 79
Figure 14 - Distribution of annual budgets for I.T. 80
Figure 15 - Distribution of annual I.T. spending per employee 81
Figure 16 - Diversity in spending of information technology per employee 82
Figure 17 - Information technology as % of revenue shows a wide range of ratios 85
Figure 18 - Percentage of revenue calculations of required I.T. spending 87
Figure 19 - Distribution of I.T. as percent of revenue for Baldrige winners 89
Figure 20 - Information technology as % of total State spending in $millions 90
Figure 21 - Overhead expenses and I.T. spending for a wide range of firms 92
Figure 22 - Information workers are a predictor of I.T. expenses 98
Figure 23 - Information technology spending per information worker 100
Figure 24 - The information workforce generates much of the S.G.& A.Expense 101
Figure 25 - I.T. staff and I.T. budgets are linked 104
Figure 26 - Information technology staffs as a % of total employment 104
Figure 27 - Per capita information technology spending for States 105
Figure 28 - Trends in U.S. capital equipment spending 109
Figure 29 - Annual average percent increases in business sector labor productivity 120
Figure 30 - Growth rates in key indicators and information technology spending 124
Figure 31 - Capital Investments Concentrated on Information Workers 125
Figure 32 - Information technology spending as % ratio of selected indicators 128
Figure 33 - Per capita information technology spending 129
Figure 34 - Decline in the number of employees per million dollars of revenue 141
Figure 35 - Decline in the Economic Value-Added of U.S. industrial firms 142
Figure 36 - Decline in GDP and employment in the goods producing sector 142
Figure 37 - Distribution of information technology spending for excellent firms 154
Figure 38 - Distribution of development spending for excellent companies 155
Figure 39 - Distribution of telecommunications spending relative to I.T. budgets 157
Figure 40 - Distribution of stealth spending to perform I.T. related work 163
Figure 41 - Ratio of government compliance costs, taxes paid and profits 175
Figure 42 - Investment risk analysis using information economics methods 204
Figure 43 - Selections of projects based on analytical hierarchy 213
Figure 44 - InformationWeek best users of information technologies for 1994 229
Figure 45 - Economic value-added of outsourcing firms 235
Figure 46 - Employment for companies outsourcing information technology 236
Figure 47 - Economic Value-Added of GM for eight years after outsourcing 244
Figure 48 - Greater outsourcing does not tend to lower overall I.T. costs 270
Figure 49 - Installed base of personal computers 287
Figure 50 - Computers per one hundred people, 1995 288
Figure 51 - Gap between customer and developer widens with time 306
Figure 52 - Drug dose, survival rate and hospital stay 307
Figure 53 - Comparison of the value of long-term and short-term investments 317
Figure 54 - Five year costs of office computing, per seat 339
Figure 55 - Information workers create demand for terminals and microcomputers 403
Figure 56 - Calculating a project benefit/cost ratio 410
Figure 57 - Project benefit/cost ratio with a twelve-year residual value 410
Figure 58 - Asset changes for computer equipment 419
Figure 59 - Asset changes for applications development 423
Figure 60 - Asset changes for purchased software 425
Figure 61 - Cumulative software spending and cumulative software assets 427
Figure 62 - Ratio of software assets to software spending 427
Figure 63 - Spending for training and estimate of residual value 429
Figure 64 - Comparison of I.T. spending with the accumulation of I.T. assets 432
Figure 65 - Changes in I.T. asset accumulation 433
Figure 66 - Cost of ownership model for a personal computer 437
(c) Copyright 1997, Strassmann, Inc.
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