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Investing by imperatives.

Leverage your three resources--capital, people, and information--with the right investments in information technology.

Ford is doing it. So is DuPont, Federal Express, Walmart, and other leading U.S. corporations.

What are they doing? They're flattening their organizational structure, organizing their business and decision-making processes along horizontal lines coincident with their economic alliances--suppliers, distributors, and, of course, consumers. They are becoming imperative-driven, frontline-oriented, information-based organizations.

These are the organizations in which information technology can make the greatest contribution. For these organizations, information is a resource that must be managed with as much care as they manage their capital. Information systems in these organizations have become an essential part of the corporate infrastructure.

But most North American companies are still organized as traditional, industrial-age hierarchical organizations, in which decisions are made at the top and flow down through middle management to the workers. As workers respond to directions they receive from up the ladder, operational data and performance information flow upward to high-level decision makers. Then a new set of commands and controls, based on the performance data, flows back down. This process repeats over and over again.

This organizational structure is too expensive--it requires a huge structural overhead--and too slow for a company that must compete in the global economy. Jack Quindlen, CFO of DuPont, recently restructured the company's financial function by cutting his corporate accounting staff by 50 percent and moving some of these accountants to DuPont's operating divisions. So, instead of controlling operations from their vertical posts, these accountants became part of the operating divisions. By doing this, Quindlen beefed up DuPont's frontline organization by putting the necessary financial skills to empower quicker, cheaper, on-the-spot decision making. At the same time, DuPont disbanded its corporate IS function and shoved its information technology investment down into operating units as well.

DuPont is becoming an imperative-driven, frontline-oriented organization, one that is aligned horizontally with its business processes and economic alliances rather than vertically, as are the traditional organizations. Being aligned horizontally, these organizations are fluid and responsive. Management's responsibility is to manage resources --people, capital, and information --and business processes to meet stakeholder expectations.

Your company can realize the full potential of investments in information technology only if you have such an organization. If you don't you will not realize the full benefit of your investment in information technology.

The problem is, as information systems become ubiquitous, people want more access to more information. Your information systems organization probably receives requests for IS investment from functional departments--finance, personnel, marketing, manufacturing, engineering--that still function in the traditional hierarchical mode. Although these departments see the need for IS investment, the payback in terms of value to the stakeholder will be minimal. (Stakeholders, by the way, are all of those people and groups of people who, because of their economic, social, and environmental needs, have a vested interest in the success of the organization.) It doesn't make sense, for example, to invest in budgeting systems that focus on functional, expense-based departments rather than on value-adding business processes.

The point is, of course, don't make any new IS investments that don't reflect the new way of doing business. Make sure that any investment adds value to your organization. If your personnel department wants a new human resource system, look at how the system would reward a new frontline, skill-based structure. Or if your finance department wants a new budgeting package, look at how this system enables and empowers your frontline organization to make value-based decisions with knowledge of process- and activity-based costs. Help lead your company to make the change.

CONFLICTING STAKE. HOLDER EXPECTATIONS

How can you determine which IS investments will add value to your stakeholders? To begin with, don't use just ROI. ROI requires a forecast of benefits and costs. In a quickly changing economy, these forecasts frequently are inaccurate. Product life cycles are shorter than ever, and projected benefits are often offset by changing rules of competition or regulatory action. Even projected costs are suspect.

Another problem with ROI is that it overlooks two very important resources: people and information. Building a new plant, for example, requires an investment in people, training, and the information required to run it as well as in the building itself and in the machinery.

Imperative-based management provides you and your organization with a methodology for making investment decisions that are more relevant in the present business climate than is a strict ROI approach. As the name implies, this methodology focuses on formulating business imperatives dictated by the expectations of your company's important stakeholders. By basing these imperatives on strategic directions and expressing them as actions the organization must take to achieve these objectives, management is better able to engineer business processes and to set priorities by establishing the relative business value of investments.

HOW TO CALCULATE RELATIVE BUSINESS VALUE

To determine the relative business value of an investment, you must first view your company from the broadest possible perspective. This requires defining your company's mission--the cohesive force that unifies the company's stakeholders. For example, NCR Corporation, under the leadership of Charles E. Exley, had a very clear mission statement. It was, simply, that NCR's mission is to create stakeholder value.

United Airlines, under the leadership of W.A. Patterson, had a four-point mission statement: to place the safety of the passenger first, regardless of the cost or effect on airline earnings; to attend to the welfare of the employees, from whom no complaint was too trivial to merit attention; to always be alert to the interests of the shareholders; and to recognize that the interests of the shareholders could not be disassociated from that of the public served or the employees.

After you've defined your mission, you need to define how your business creates value. All companies have activities related to marketing, operations, and financial management. But only one of these areas can be the company's driving force, the area most significant in creating value. A company such as Johnson Wax that creates value through brand-name promotion and positioning is a company with a products-offered driving force. Johnson Wax has its own research organization, production facilities, marketing, and financial management. But it creates most of its value added through its superior product marketing expertise.

In the case study that concludes this article, Acme Chemical Company, Inc., also has its own research organization, production facilities, marketing, and financial management. But, since ACCI can increase its sales only by having lower prices and higher quality than its competitors, its production capability is its driving force.

Then you examine how each stakeholder relationship influences and is influenced by the company and rate stakeholders according to their importance to your company. (More on the rating scale in the case study that follows.) Obviously, some are critical to the business, others are of lesser importance. Consensus across functional departments on these ratings is essential to creating unified actions within your company.

Then you describe the directions in which you want stakeholder relationships to move. Many of these directional statements probably already exist in planning documents as strategic directions, but they probably aren't related to the specific stakeholders. On the basis of these directions, you then establish measurements of how much a stakeholder relationship should move within a specific period of time.

Let's say, for example, you determine that the direction for customer relationships is to achieve 100 percent customer satisfaction. Let's assume that customer satisfaction in your company is 80 percent today. You could target a 10-percent improvement this year, 10 percent the next, until you achieve your goal.

It is in setting stakeholder direction that IS can add significant value. Let's use ABC Petroleum Refining and Marketing Company as an example. The average motorist wants to buy gasoline at the lowest cost. So, to sell more gasoline, ABC's stations must have the lowest prices. But in today's market, that could mean substantial losses for ABC.

Let's say that the additive in ABC's gasoline gives its customers 10 percent better mileage. So ABC launches a major advertising campaign to convince motorists that, by paying a couple of cents more per gallon for ABC's gasoline, they will actually save money. But the campaign has only a marginal impact.

Enter the IS technologists, who suggesting to marketing that they stop selling gasoline by the gallon, and sell it by the mile instead. This new method of selling gasoline will require a totally new set of metrics that is possible only through innovative use of technology. It will also require more information than ABC has now--information on driving habits, type of car, size of motor, car servicing records--all of which can be used to generate new sources of revenue--and all of which can be captured with new technology.

Finally, you will be able to establish your company's imperatives. These are the broad actions a company must undertake to change, improve, or add essential business processes that deliver value to key stakeholders. If, for example, your goal is to achieve 90-percent customer satisfaction by the end of 1992, implementing total quality management would strongly support the achievement of this measurement.

And so we come to investments. Investments that support imperatives have high business value. For example, investments made in TQM training and implementation have high business value because they support the TQM imperative, which in turn supports the measurement of customer satisfaction, which in turn has an impact on a critical stakeholder--the customer. Investments that don't support imperatives have low relative business values and can probably be eliminated with little or no downside effect.

In the following case study, ACCI's parent asked ACCI to invest in common systems so that all subsidiaries would have the same technology platform. As you will see, this investment has no value for ACCI. It doesn't support any ACCI imperative, and therefore ACCI will not underwrite it. If the AII corporate systems group wants it done, they will have to pay for it.

Even though this case study has been simplified for presentation here, you can see that the investments dealing with quality, safety, and environmental issues have the greatest relative business value.

ACCI's IS organization could--and should--have proposed IS investments to support the quality, safety, and environmental efforts. But they didn't. They missed a great opportunity. They also might have challenged the fact that ACCI management had no imperative to support the measurement of 20-percent return on capital employed. Was this because management was confident the company would achieve the goal--or was it because management simply didn't focus on it? Once again, the IS staff missed an opportunity to play a leadership role.

So the message for divisional IS organizations is to get involved with business imperatives with high relative business value. Don't just respond to requests from functional groups.

The message for corporate IS organizations is to learn about and support divisional business imperatives. The AII corporate IS mandate for common systems just reinforced the image of the corporate IS group as being out of touch with the business. This is why many companies are moving corporate IS groups into the operating divisions.

Imperative-based management works. It helps to establish clear business priorities while helping to build understanding and consensus in stakeholder relationships.
COPYRIGHT 1992 Financial Executives International
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Title Annotation:Special Report: Information Management; imperative-based management
Author:Vincent, David R.
Publication:Financial Executive
Date:Jul 1, 1992
Words:1865
Previous Article:Double-duty CFO.
Next Article:Reengineer your accounting, the IBM way.
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