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D4:   Assessment of Productivity, Technology and Knowledge Capital
    By Paul A. Strassmann
    93 Pages
    Date Published: 07/2000

    Online Price: $14.98

Summary

[ see also: Review by William Sheridan ]

Until recently almost all of the efforts on measuring effectiveness have been concentrated on assessing the productivity of every other occupation except that of the information workforce. It was up to the managers of information to evaluate those engaged in the production of goods and services - in delivering what is now recorded as cost-of-goods sold. The owners of firms have now come to realize that it is the management of information resources that makes the difference in the fortunes of a firm. The wages and salaries of those engaged in information management now consume over forty percent of all compensation expenses. With that realization comes the urgency to treat information management as if it were a critical resource to be analyzed for its lasting effects on overall corporate performance. It is the purpose of this report to show how that can be done by concentrating on measuring and assessing the productivity of information, the efficiency of information technology and the effective deployment of knowledge capital.

It is the objective of this work to illustrate how to calculate and analyze the Information Productivity ®, the Information Technology Efficiency and the Knowledge Capital® of the General Corporation.

  • Information Productivity Assessment shows how General Corporation can benchmark its productivity in comparison with its peers and competitors.

  • Information Technology Assessment shows how General Corporation can benchmark its information technology expenditures against comparable firms.

  • Knowledge Capital Assessment shows how General Corporation can assess its performance in accumulating its Knowledge Capital assets.

    The immediate readers for this report should be General Corporation planners and budget analysts who need improved quantitative methods for analyzing their organization's performance in terms that relate to business process improvement programs as well as to investments in information technologies. However, the principal customers are policy-making corporate executives who are increasingly asking questions about the effectiveness of their information management processes and technologies. The methods outlined in this text should be helpful not only as diagnostic measures for policy-level reviews, but also as ongoing practice for tracking the performance of the information-consuming elements of corporate expense.

    This example of a typical diagnostic report prepared by Strassmann, Inc. for its clients is one of the products that have origins in research begun in 1982 and is described in a number of books listed on www.infoeconomics.com. Additional insights can be gained from these publications for an improved understanding of about assumptions that back up the findings presented in these illustrative assessments.

    If it is the objective of information management to attain what I call "Information Superiority" then it follows that such a state can be reached only after completing every step in a well-defined sequence. One must start such a sequence by completing Information Productivity, Information Technology and Knowledge Capital "Assessments." Those will identify the fundamental issues that information management actions need to address. Only after such diagnostics are completed would it be prudent to proceed with what usually occupies most of the time of IT executives, namely, "Project Planning", "Process Improvement", "Resources Management" and finally every technologist's favorite the making of technology-related decisions. This only confirms a proven Scout saying: "If you do not know where you are, even a detailed map will not be of much use."

    Contents

    Introduction
    Alignment 9
    Why Assessment Comes First 9
    Information Productivity Assessment 11
    Choosing Look-Alike firms 11
    Measuring Information Productivity 14
    Ranking of Information Productivity 16
    Summary of Information Productivity Assessment 21
    Information Technology Assessment 23
    The Importance of Information Technology 23
    Critical Indicators 24
    Information Workforce Trends 31
    I.T. budget per employee 33
    Assessing Information Technology Spending 34
    I.T. Spending Assessment 35
    Information Technology Benchmarking 40
    Investment Priorities and Business Alignment 41
    Summary 43
    Knowledge Capital Assessment 45
    Source of Knowledge Capital 46
    I.T. and Knowledge Accumulation 47
    Knowledge Capital Valuation of Employees 47
    Summary 49
    Appendix A - Source Data 51
    Appendix B - Calculating Economic Value-added
    Determining Net Output
    Estimating Economic Value-Added
    Cost of Capital
    The Many Ways of Calculating EVA BR> EVA Ratios
    Appendix C- Measuring Information Productivity
    The Importance of Measuring Productivity
    A Skeptic's View
    Relevance of Productivity
    In Search of Evidence
    Evaluating Productivity Gains
    Problems with Existing Measures of Corporate Productivity 70
    Existing Measures of Productivity Faulty and Obsolete 71
    Information Management Costs Exceed Costs of Capital Ownership 72
    Measuring Information Productivity 74
    Determining Input 74
    Estimating Inputs 75
    Purpose of Information Productivity Analyses 76
    Appendix D- Measuring Knowledge Capital 77
    The Individual's Point of View 77
    The Corporate Point of View 79
    Calculating Knowledge Capital 80
    Valuation Attempts 81
    Market Pricing of Knowledge Capital 82
    Example of Knowledge Capital Valuation - Abbott Laboratories 82
    How to Grow Knowledge Capital 83
    Software as Knowledge Capital 85
    Insights 86
    Appendix E - Definitions 88

    Figures

    Figure 1 - Data Required for Calculating Information Productivity 13
    Figure 2 - Look-alike Firms Selected for Benchmarking 14
    Figure 3 - Latest Full Accounts for Selected Firms 15
    Figure 4 - Ranking of Look-alike firms by Information Productivity 19
    Figure 5 - Elements of the Information Productivity Calculations 20
    Figure - Benchmarking Comparisons - Information Management Ratios 21
    Figure 7 - Benchmarking Comparisons - Financial Ratios 22
    Figure 8 - Comparison of Information Productivity Trends 23
    Figure 9 - Data Collection for I.T. Assessments 27
    Figure 10 - Enormous Differences in I.T. Spending Patterns 28
    Figure 11 - Display of the Wide Range of I.T./Revenue Ratios 29
    Figure 12 - Display of the Range of I.T./ Information Management Ratios 32
    Figure 13 - Profile of Employment Structure of General Corporation 33
    Figure 14 - Changes in Critical Workforce Ratios - 1993-1997 34
    Figure 15 - Changes in Critical Workforce Ratios - 1997-2000 34
    Figure 1 - Changes in Critical Productivity and Cost Ratios - 1993-1998 35
    Figure 17 -I.T. Deflation Indexes - 1993-1998 36
    Figure 18 - Deflation-Adjusted I.T. Spending - 1993-1998 37
    Figure 19 - Comparison of Actual and Potential Costs - 1993-2000 37
    Figure 20 - Comparison of Key Financial Indicators and I.T. Spending 38
    Figure 21 - I.T. Access Devices and the Office Workforce 39
    Figure 22 - Adjusting the Nominal I.T. Budget to Full Corporate I.T. costs 40
    Figure 23 - Assessing IT Costs Available for Investments 41
    Figure 24 - Costs of Software Maintenance Exceed Costs of Development 41
    Figure 25 - Basis for Making Benchmarking Comparisons 42
    Figure 2 - Benchmark and Full I.T. Spending are Comparable 43
    Figure 27 - Cost of Goods Has a Strongly Negative Effect on Profits 44
    Figure 28 - Comparing Knowledge and Financial Capital 47
    Figure 29 - Comparing Market and Comprehensive Valuations 47
    Figure 30 - Assessing Leverage from Knowledge Capital 48
    Figure 31 - Estimate of Knowledge Capital Accumulation Efficiency 48
    Figure 32 - I.T. Capital Accumulation Efficiency Inadequate 49
    Figure 33 - Estimating Knowledge Capital per Employee 50
    Figure 34 - Returns on Capital or Valuation per Employee are Inadequate 50
    Figure A1 - Key Financial Statistics - Income and Balance Sheet 53
    Figure A2 - Financial Statistics - Elements of the I.T. Budget 53
    Figure A3 - Price per Share of GC 54
    Figure A4 - Market Valuation of GC Shares 54
    Figure A5 - Estimated Interest Rate 55
    Figure B1 - Interest Rates Actually Paid Unrelated to Market Volatility 59
    Figure B2 - Interest Rates Actually Paid by Industrial Corporations 60
    Figure B3 - Interest Rates Actually Paid by Financial and Services Corporations 60
    Figure B4 - 40% of Industrial Firms Deliver Negative Economic Value-Added 63
    Figure B5 - Economic Value-Added Is Less than Accounting Profits 65
    Figure B - Information Management Costs are a Large Multiple of EVA
    Figure C1 - Productivity growth reported by U.S. Bureau of Labor Statistics 70
    Figure C2 - Market Valuation Exceeds the Book Value 74
    Figure C3 - Information Management Costs Exceed Cost of Capital Ownership 75
    Figure D1 - Knowledge Capital Accumulating Faster than S.G.&A Expense 78


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