The Business Value of Computers
An Executive's Guide

by Paul A. Strassmann

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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


The Business Value of Computers
Library of Congress Catalog 88-80753
ISBN 0-9620413-2-7
1990. hardcover, 548 pages, 184 illustrations.
Price: $49.90 + $5.50 for UPS shipping and handling (within continental US).
Also available from Amazon.com

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

(c) Copyright 1997, Strassmann, Inc.

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