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The cost of not investing in new technology.

At FEI's last Information Management Issues Conference, held in Chicago, attendees explored the emerging CFO/CIO alliance. One of the conference panelists, Mark Freund, CEO from the Interconnect Network Consulting Group, discussed how he believes executives can work together to implement strategic, not just tactical, solutions to information problems. His comments, as well as those of other contributors to the discussion, have been adapted into the following article.

Enzo Ferrari, father to one of the greatest automobile manufacturers of all time, was once asked the question: what single factor most separates Ferrari from all of its competition? He thought for a moment and replied, "Our competitors build race cars to help promote the sales of their production vehicles. At Ferrari, we build production vehicles so we can race."

I believe we must similarly invert our traditional perspectives toward information systems and their associated cost structures if we are to seriously participate in the increasingly competitive global markets of the 1990s. Specifically, we must ask: what technologies are truly strategic for success? How should we view their cost structures and their value? And, most important, how can these technologies be directly applied to our individual organizations, considering our existing information systems investments?

In the process of addressing these questions, note that most implementations of information technology have been initiated from a tactical perspective. We tend to use information systems to automate a process we already have in place.

However, to become competitive, we must deploy information systems technology as a strategic weapon. This technology, especially networking, is an enabler; it will allow you to fundamentally re-architect the process itself and effectively re-engineer the corporation.

For example, we automate a simple task or process in a tactical fashion when we give a power tool to a craftsman to use to put in screws, instead of doing it by hand. The result is that we may be able to increase that worker's production capacity from two screws a minute to five screws a minute. That represents a finite, constant increase in productivity. Therefore, it is important to note that this will never result in more than a linear return on investment over time.

Now let's consider automating this highly simplified manufacturing process from a strategic perspective. instead of applying automation to the individual task, we now allow it to be integrated into the entire business methodology. We now can rethink how we manufacture if we possess technology to integrate the sales, material/resource management, manufacturing, and accounting functions of the business. This application of technology enables us to re-engineer the corporation and will typically help us realize a non-linear and potentially exponential return on investment.

What have you been doing? Now you might ask yourselves, "Isn't this what we've been doing over the past 10 to 15 years or more? And, if we haven't been, what specific technology will enable us to get where we need to be? And at what cost?"

Historically, most information systems have been implemented by function: accounting systems in accounting, manufacturing systems in manufacturing, sales systems in sales, and so forth. And, because we have been applications driven (and properly so), it is not unusual to find that these functional systems are often optimized on a wide array of heterogeneous computing platforms, often from a nearly equal number of heterogeneous vendors.

The result is that our organizations tend to have a large investment in hierarchically oriented, host-based computer systems. But the real dollar investment is not so much represented by the mainframes and their applications as it is by the data that is stored on them.

Computer networking offers the potential to provide a single window to the enterprise for executives and their line management. Applications that reside on a network computing platform can reach down and grab this corporate data from any one or all of your company's existing corporate mainframes. That means that you now have the potential to gather data that transcends the entire enterprise and gives you a single view-not snapshots of the organization by business function, but a wide-angle landscape that also enables you to better quantify the interdependencies among those functional groups.

The most important misconception about network computing technology is that it is a substitute for your current mainframe and mini-computer systems. It's not-it is an augmentation.

The corporations that are deploying this new technology are finding that they can preserve as much as 70 to 85 percent of their current information systems investment, while simultaneously making an incremental investment in an enterprise-wide network computing platform that will subsequently enable them to take a more strategic information systems perspective.

The key is not to worry about the technology itself. Rather, consider how it can be applied to your organization. What can it give you? What is its value? More important, how can it make you more competitive in your own industry here at home, as well as in the rapidly emerging global marketplace with the japanese, Koreans, Europeans, and others?

Fast feedback

Look at how other companies are beginning to benefit from this new approach to information technology. One large, international petroleum firm had production and refining facilities distributed across the globe, with its American headquarters located in southern Texas.

While much of the actual rod-pump production occurred outside of Texas, all of the company's mainframe computers were located in a single information systems facility at headquarters.

At each of the typical production sites, the engineers took a daily journey out to each of the rod pumps in their designated production fields. They entered specific production data into their hand-held Hewlett Packard computers for each pump they visited. At the end of the day, they would drive in their pick-up trucks to the central production field office, where they would line up behind one personal computer. They uploaded the information from each hand-held computer into this production PC. Then an operator would copy this information onto a diskette and carry it to four other PCs in the production office. These PCs tracked such tasks as team generation, dehydration, and repair and maintenance. The company maintained these individual machines for each functional task.

But the situation was even more convoluted because each foreman (for production, steam, etc.) printed the day's data collection on a spreadsheet and handed it to terminal operators, who spent eight hours a day typing this information into machines that offered wide-area links to the corporate mainframes in Texas.

The bottom line? Anywhere from 40 to 72 hours would pass between the time the engineers gathered the data from the rod pumps and they received a report that told them how each pump was performing. in other words, they might not find out that a particular pump was leaking or well below normal production levels until three days after its inspection.

The company's goal here was to augment the centrally located mainframes with distributed computer networks at the production sites that could support these reporting and analysis applications in the field.

The result: oil-field analysis was performed virtually in "real time,' the corporate headquarters still got its field information uploaded nightly, and the financial executives were astounded by the ROI.

In hard dollar terms, the entire cost of system design, hardware/ software acquisition, and system implementation paid for itself in the savings from reduced operating costs in less than three months. So, what would it have cost the company not to do this? Well, in hard dollar terms, it would have cost quite a bit.

However, this episode represents only the tactical solution. From a strategic perspective, this new network computing method added value above what the company was doing before. Management realized that it could now, in real time, look at the commodities price of petroleum on the Exchange that day and determine whether or not it was costing the firm more to produce the steam than the incremental amount of oil it would get as a result of the injection of that steam, based upon the price of oil that day.

Management could now control production on a well-by-well basis and thereby increase the company's profit margins, increase its responsiveness to market demands, and therefore enhance its competitive position.

Again, the pure operational cost savings provided a substantial gain for the company; however, it still was linear. The changes in which the production algorithm was altered provided the company with a partial re-engineering and resulted in non-linear ROI.

It's not the technology...

To ensure success with the information systems strategy inside your corporation, it is critical that you as executive management become increasingly involved with the development of the IS vision. The key is to understand the benefits of this new networking technology, not the technology itself, then to apply it to your individual corporate charter, weaving it into the corporate fabric-not sewing it on like buttons, as has been done with many information systems in the past.

Your company's investment really resides in its data. You as management will see a larger ROI if you can successfully leverage this information property, instead of continuing to invest precious dollars in more computer systems that will collect additional data that will rarely, if ever, be used.

The vision of leveraging this information property is best demonstrated by a system with which many of you are familiar. American Airlines developed an information databank called the SABRE system over a decade ago. In premise, it was an enormous database that the company used for daily operations. It provided American Airlines with a seat inventory. It showed crew availability. It maintained flight scheduling. In essence, it was central to the daily, internal operations of the company.

Management developed the idea that it could leverage its existing information database and extend it outward in a way that would make the company much more competitive. what it did, in fact, was distribute this computing power to individuals who were the company's sales and marketing force-the travel agents. The system provided the travel agents with their own workstations. On those workstations, SABRE provided the agents with a mechanism that automated the reservation process, instead of the traditional method of booking flights out of a printed catalogue and over the telephone. Furthermore, it allowed them to book many of the other airlines' flights, in addition to American's.

So American provided a tool for travel agents that became invaluable. It changed the way they did business. The brilliance in the idea was that, each time an agent looked at a particular flight time for a customer, American Airlines' flights came up first. The firm dramatically increased its market share and improved its competitiveness by using this information property in a new and unique fashion.

Go where no man bas gone To achieve the gains that these and other companies are beginning to attain, we as executive management must shape a convergent vision between the corporation's executive team and its information systems organization.

Network computing is an enabling technology. It provides the corporation with the means to tie the past with the future. It also redistributes and effectively utilizes a significant percentage of the existing IS investment.

We need to look at how our information property can leverage our position, and we need to develop methods to quantify that in a way that lets us focus on achieving non-linear and potentially exponential gains-where we can do things that we could never do before without the technology.

Many people ask what the implementation costs are in dollars and cents for all this new technology. I think we have to look at the investment differently as we flatten and restructure our organizations to meet the competitive demands of the 1990s. We have to ask, what is it going to cost to not implement the technology?

The quantitative approach isn't always best

FOs and others with control over investment dollars often have a difficult time measuring the value of an investment before the fact but seem to have perfect knowledge after the fact. Take my firm, R. W. Beck and Associates, an engineering consulting company. Our clients are public utilities. Because most of our work ends up as reports or consultations of some sort, I'd say we are in the information business.

Given the fact that our proposals are among our most important reports, you may be surprised to hear that a few years ago we concluded that our proposal preparation process was less than effective. Everything seemed to be done on a rush basis. Ours was a labor-intensive process with high production costs made necessary by our low investment in high technology. We kept telling ourselves we couldn't afford the investment. Unfortunately, without a more sophisticated way to prepare proposals, the work we showed to prospective clients wasn't always as thorough as it might have been. We felt this had a negative impact on our business. But what could we do?

After considerable discussion, we invested in desktop publishing. While this was a high initial investment, it resulted in lower production costs. Our graphics department was able to be more productive. Projects that were never before practical to attempt could now be designed, typeset, and printed more economically.

The decision wasn't easy. Our detailed economic analysis suggested that the proposition was a break-even investment, and management couldn't get very excited about trading dollars. The missing economic link was our initial inability to quantify the soft" benefits associated with significant changes in technology. The benefits became more obvious as people applied the new technology in creative ways. As it turned out, they were more significant than the "hard" benefits, which were initially easier to measure.

Expanding the vision of potential benefits and developing some means of identifying and measuring these soft benefits is a threshold issue that companies need to address. At my firm, instinct drove us to make the investment and get on with the technology program. Our instinct proved right.

Digging with a smaller shovel

Aldus is a software company. We invest people, not dollar And our people-intensive business invests in new products or a service. We look at the number of people who must be moved from one area and reinvested in another. As a result, we have to measure the value of our investments s differently. For instance, customer service is very important to us, and our communications and data base technology must support this.

Sure, you can use ROI analyses to monitor your technology investment. But you can't be right all of the time because some of the costs will go up. That's why at Aldus we use a semiannual checkpoint to verify that over time our net operating costs as a percent of revenue are declining according to the objectives we've set. It is more important that operating costs decline over time than it is to debate the ROI of an occasional-use PC.

Our situation reminds me of the productivity debates of 100 years ago. Frederick Taylor told the coal mine operators that a man could shovel more coal in a day if he used a smaller shovel. No one believed him because everyone had been using a huge shovel. Taylor just applied a different measure than the norm-somewhat like trying to implement a PC 10 or 15 years ago.

Consider the "soft" benefits

I'm interested in the fundamental conceptual aspects of why it is so difficult to measure the "value of information." It's a slippery subject, because you can't point to the outputs of most companies and identify information as a recognizable component. For instance, where is the "inforrnation' in a Ford Taurus coming off the production line-?

Nevertheless, information and knowledge are factors of production along with capital, labor, and materials. The benefits of an investment in information or an information system resemble some of the intangible benefits of an investment in computer integrated manufacturing. That is, you get more than you would by simply substituting one production technology for another, where each gets you to the same point. instead, you implement a technology that creates flexibility-it lets your firm deliver a product with different attributes as a prompt, flexible response to demand.

Thus, to justify an investment in computer integrated technology, you need to consider the soft benefits, including the improvement in your strategic position because of improvements in quality, flexibility, and timeliness.

Also, it's important to consider the value of information technology as a communications device. Ideas seem to emerge more quickly and more crisply when people are tied together through information technology, such as an integrated desktop publishing system.

In short, investing in flexibility-improving technology, while not failsafe, enlarges your opportunity set. As Henry Ford put it: if you need a new machine and you don't buy it, you pay for it without getting it.
COPYRIGHT 1990 Financial Executives International
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Title Annotation:includes related articles; computer networking for management information systems
Author:Freund, Mark I.
Publication:Financial Executive
Date:Nov 1, 1990
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