Digital Publications
from The Information Economics Press
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D4: |
Assessment of Productivity, Technology and Knowledge Capital |
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By Paul A. Strassmann
93 Pages
Date Published: 07/2000 |
Online Price: $14.98 |
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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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