Commentaries

No, these positions are not comparable.

1. The Federal CIO position responsibilities are much
more extensive than any corporate CIO roles I know
of.

2. The oversight over the work of the Federal CIO
is carried out by many more organizations than
any corporate CIO is exposed to.

3. The sheer quantity of rules, regulations and laws
guiding the conduct of the office of a Federal CIO
cannot be even imagined by a corporate CIO.

4. The top compensation for a Federal CIO
is $155,000 (for a budget of $31B - which is
ten times the largest known corporate IT budget).

The compensation of corporate CIOs is shown
in the following sample from SEC filings:

Company Total Comp
Bellsouth $3,468,500
Cablevision $3,071,744
Northwest Airlines $3,058,612
Bank of New York $2,475,579
Safeco $2,307,371
Ross Stores $2,262,525
PNC Financial Services $2,161,029
ConAgra $1,941,106
National City $1,443,283
Franklin Resources $1,353,579
Kindred Healthcare $1,124,190
General Mills $1,114,842
US Bancorp $1,058,217
Edison International $1,052,582
Kroger $1,037,334
Humana $976,139
CenturyTel $940,300
UnumProvident $937,740
Winn-Dixie $937,269
Selective Insurance $895,983
Tech Data $874,500
RadioShack $789,844
J.C. Penney $746,099
Fifth Third Bancorp $635,481
MPS Group $628,938
Amazon.com $616,797
Compass Bancshares $604,695
Beazer Homes USA $604,549
Magellan Health $602,587
CarMax** (2005/2004) $532,185
Southwest Gas $526,694
Chiquita Brands $515,311
Mercury General $483,390
RPM International $462,677
Nash Finch $449,185
CH Robinson World $384,718
True Value $382,957
CSK Auto $349,598
NBTY $344,940
Bell Microproducts $333,439
Apollo Group $312,400
D & K Healthcare $294,426

The awesome capacity of Google to generate consumer-friendly applications has conceived what may become a threat to the cable delivery medium as we know it. It is .

Google Video makes it possible to type a search term - such as Iraq - and in 0.08 seconds generates a listing of 190 videos playable immediately. It also lists over 1000 of other videos that relate to Iraq. Anyone interested in Greenpeace, Honda or Apple I-Pods can instantly get a collection of videos covering each topic. More complex search terms are also allowed. For instance the search found 511 videos in 0.18 seconds.

Next to each video the viewer will find text summarizing the origin, contents, date and length of the video. This includes: Program and Episode names; Channel and Network of the original broadcast; Sample image for identification. A customer can then play the video, stop it or just show selected highlights. In effect Google becomes an infinite TIVO menu that is accessible from anyone's computer with a wideband Internet connection. It differs from TIVO in that Google also links a video to related articles, personalities or news. It differs from TIVO in that the storage capacity of the existing Google global network has the potential of growing into all-encompassing archive from where any viewers can pick and choose what they want and when they want it. Other features of this offering originate from Google's capacity to customize text to fit local needs. For instance, the service publishes when upcoming episodes will air from stations serving the customers' address.
So far the accessible TV programming is limited to an experimental offering. Only few channels are recorded. This includes broadcasts from ABC (KGO); ABC News Now; Animal Planet; Animal Planet; Discovery Channel; Discovery Channel; Discovery Health; Discovery Health; Fox News; Fox News; here!; KQED; KQED Encore; KQED HD; KQED Kids; KQED Life; KQED World; KRON; NBC (KNTV); The Learning Channel; The Weather Channel and the Travel Channel. Despite the limitations of a prototype environment what Google Video delivers is impressive. What we see is a demonstration of Google's way of innovation to start small and then expand rapidly as customers find a service of value and rapid improvements increase the chances of success. While the test is in process Google is proceeding with collecting and indexing of video content from every publicly available source.

To order a playback video a customer must first install a Google Video Viewer to make it possible to play videos from most computer "browser" software. Google will be increasingly asking for registration of users by means of proprietary software. Elaborate precautions have been taken to safeguard the privacy of the viewers.

Cable Operators may view Google Video as an experiment that will not make much of an impact on profits. However, overlooking the potential that Google is one of the few firms that has demonstrated the capacity to deliver billions of customized media is something that needs watching carefully. With steady quarterly growing rates of 34% for revenues and 68% for profits this imagination-driven and cash-rich company has their sight set on serving needs that current cable providers cannot satisfy.

# posted by Paul A. Strassmann @ 5:23 AM 1 comments   

From Senior Corporate Executive in Australia:

I wonder what you think about the study by the MicKinsey Global Institute that showed that offshoring creates wealth for the United States as well as for India, the country receiving the jobs.


For every dollar of corporate spending outsourced to India, the US economy captures more than three-quarters of the benefit and gains as much as $1.14 in return. Far from being a zero-sum game, offshoring creates mutual economic benefit.

COMMENTARY:
Free trade to take advantage of the global
division of labor has all the benefits described
in the MGI excellent paper.

There is a catch, however. The outsourcing
benefits can be captured only if the outsourcing
country can replace the outsourced labor with new
higher value-added (e.g. higher Knowledge Capital)
labor. If it can not (or will not) then outsourcing
will impoverish the country.

The best example of that is Germany and
particularly East Germany these days as well
as Italy. These countries were at one time export-based
powerful economies depending on imports to
balance their economies (2004 data):

US Imports / GDP 13.5%
France Imports / GDP 28.7%
Germany Imports / GDP 33.6%
Italy Imports / GDP 25.2%
UK Imports / GDP 26.6%

The UK (and the USA) has so far managed to create
new Knowledge Capital/worker. Germany and Italy
have not and are sinking economically. France has
been able to manage slightly better (not much) than
Germany and Italy largely on account of military
and electronics sales where it competes against
the USA in countries that favor France.

To sum up : The MGI paper is an excellent paper
but does not give a balanced story. The India
case is unique and certainly not
applicable to Australia. The paper is also self
serving because it supports a consultancy that
offers advice that consistently promotes greater world trade.

# posted by Paul A. Strassmann @ 10:42 AM 0 comments   

Evolutionary matrix
Originally uploaded by Paul Strassmann.

The best way of forecasting the future of technology is to analyze exisiting flaws and then proceeding with a scenario that is most likely to overcome the present hindrances to future progress,

As in prior cycles, at each successive stage of development, the next phase of I.T. investments will be propelled by widening the scope as well as reach of I.T. As in prior cycles, at each successive stage the response time for delivery of information services has accelerated.

In a recent conversation with the President of a major university he inquired about a plausible scenario describing university education in the future.

To define the problem I suggest the following parameters (you may fill in your own estimates):

1. Life expectancy of a graduating college student: 90 years+ (2005 – 2075);
2. Expected work life starting at the age 20 = 60 years
3. Half-life of a career due to obsolescence = 7 years (and decreasing)
4. Number of educational “major model upgrades” over a career = 8
5. Personal time/educational for a major upgrade = 1 person-year (1500 hrs)
6. % of time in life-time education = 8/60 * 1 person-year = 13 %
7. Life-time compensation ( in 2005 $s) = $65,000 * 60 = $3.9 million
8. Cost of personal time for life-time education = $3.9 million x 0.13 = $507,0000
9. Tuition for life-time education (State U, in 2005 $s) = $ 6,000 x 8 = $48,000

These estimates are roughly indicative of the economic ratios that reflect the total costs of lifetime education. However, the institutional setup of the university focuses on the efficiencies in delivering its services as reflected in the costs of the tuition. Tuition accounts for only 9.5% of the total costs by its “customers” (e.g. students).

For a university to address the totality of a student’s life cycle costs of education the university must also deal with the full costs of lifetime educational support. Without a shift from the scheduled classrooms (that consume man-hours of earning capacity) to a person’s flexible and totally discretionary time the costs would be excessive.

It is clear to me (having done on-line teaching) that just imitating on-line what professors do in classrooms is not a viable solution. The existing educational experiences (e.g. lessons delivered either in classrooms or in on-line imitations) can be characterized as industrial age batch processing that tends to seek economies of scale through production of standard educational products.

The challenge of providing educational “life support” for careers calls for a totally different approach – e.g. individualized customization where the university provides services that uniquely fit the rapidly changing needs of a particular individual. How to deliver such services calls for applying the evolving discipline of “knowledge management” – a subject that warrants a separate commentary.

Managers in organizations will tend to deliver operating results according to metrics that maximize their rewards. Depending on the economics different metrics may apply. Most commonly used metrics such as ROA (Return-on-Assets), ROE (Return-on-Equity), Gross Margin or Revenue per Employee offer different perspectives on operating results. They are useful, if applied in alignment with corporate strategies. They can be also destructive, if misapplied.

For instance, Xerox – a firm that reaped superior profits from metered copier installations - was wrecked by an over-emphasis on ROA. The sales force found it more profitable to sell-off the most profitable copiers to maximize their commissions. The key decision-makers “made their numbers”, without the ultimate benefit to the shareholders.
In another case Peat, Marwick & Mitchell – a firm that used to deliver high value professional services – was wrecked by an over-emphasis on billable man-hours to reward its partners. The partners then found it attractive to use low-margin and low-priced labor to make their numbers, without benefiting the shareholders.

The declared objective of corporations is to grow shareholder value faster than revenues. The shareholder value of a knowledge-based enterprise can be defined as:

Shareholder Value = Shareholder Equity + Knowledge Capital

• where Shareholder Equity = Balance Sheet Valuation (“Book Value”)
• and Shareholder Value = Black Scholes Market Value estimate.

The Black Scholes pricing method can only calculate the shareholder value for the entire firm. It lacks the capacity to calculate shareholder value generated by any of the approximately Business Units.

The EVA method for calculating Knowledge Capital has merit in applying shareholder valuations at the Business Unit levels and even at lower levels of an organization, such as in regional or product groupings. A comparison between the EVA method and the Black Scholes method shows only insignificant differences. Such an approximation should be acceptable in substituting a simple and easily understood method for the complexities of Black Scholes.

The EVA method depends on the proper valuation of the cost of shareholder capital. The following discloses the method that should be used to arrive at such a valuation.

Market Valuation of the Cost of Capital

The market valuation of a firm contains an implicit valuation of the cost of capital that is attributable to knowledge capital. A calculation of the value “i” (e.g. shareholder’s cost of capital) can be derived as follows:

If,
Knowledge Capital (KC) = Market Valuation (MV) – Equity (E)

and if KC is defined as the principal of a capital fund of which the Economic Value-Added (EVA) is the current yield, then KC will be simply:

KC = Economic Value-Added (EVA) / i

Since EVA is defined as current profit (P) minus an implied “rent” for the shareholder’s equity (E), then

Economic Value-Added (EVA) = Profit (P) – i * Equity

Thus yielding the following equations:

KC = (P – iE) / i = MV – Equity

Simplifying the above terms will then give us:

i = P / MV

Calculation of the Price of Risk Capital

An alternative approach to determination of the shareholder cost of capital is to derive that value from a calculation based on published prices of the interest banks charge for their most creditworthy customers, defined as the Prime Rate.
Accordingly, the value “i” (e.g. shareholder’s cost of capital) can be derived as follows:

i = Prime Rate + β * (Risk Capital – Prime Rate)

So that:

Risk Capital = (i – Prime Rate)/β - Prime Rate

Business Unit Rankings

The primary application of Shareholder Value Metrics will be to rank business units according their Knowledge Capital Effectiveness Index and the Information Productivity Index, defined as follows:

Knowledge Capital Effectiveness Index = Knowledge Capital / Employee Salaries

The advantage of this ratio is that it would filter out the effects of uncommonly high Revenue/Employee ratios that are produced by shifting work to subcontractors. It would also filter out any adverse effects of reliance on low-margin revenues.
Since Knowledge Capital of an organization is largely generated from well placed investments that show up either as SG&A (Sales, General & Administrative) or R&D costs, it is possible to compare the efficiency of the Business Units using the following productivity measure:

Information Productivity Index = Economic Value-Added / ( SG&A + R&D)

Data Requirements

To deliver the Shareholder Value rankings for individual Business units the following information is required:

1. Business Unit P&L. The individual P&Ls (annual and or quarterly) must sum up to the Corporate Total. All P&L entries not accounted for in the Business Units to be grouped as a “Corporate” entry. The P&L details should include direct SG&A costs and all allocations plus the full costs of the employee payroll. If the costs of Purchases (payments to suppliers included in the COGS – cost of goods – is available, that would be a welcome analytic addition.

2. Business Unit Balance Sheet. In case this is an approximation the primary emphasis should be placed on Current Assets (work in process and receivables) plus any adjustments made to retained earnings from write-offs or increases in reserves.

Where you invest in information technologies to endow a complex system with intelligence is perhaps the most important single decision to make when defining the “architecture” of how hardware, software and communications will work.

The winning architecture for telephony was conceived in the 1880’s. It offered voice communications with maximum economy by managing complexity. Voice was transmitted as an analogue signal through very intelligent and expensive central switches that remained ignorant of the contents of the messages. This made it possible to use very inexpensive and “dumb” terminal equipment. For the customer neither labor costs nor special skills were needed. The dominant phone company – a legalized monopoly - incurred all of the operating and capital costs. They reaped enormous profits without much risk because they could control the introduction of innovation. The customer ended paying “rent” of the service through mostly variable charges.

The telephony architecture reached its limits of growth when the cost of capital for extending the capabilities of the central switches for serving the rising complexity of demands for improved services became prohibitive. The previously successful telephony solution ran out of the economic as well as the technological capacity to earn profits.

SUMMARY OF THE PHONE ARCHITECTURE: 1. Vendor incurs huge capital costs, moderate operating costs. 2. Customer has no capital costs, zero operating costs. 3. Limits on of the architecture reached when further additions to the vendor’s capital costs are ineffective and not profitable.

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The winning architecture for computer mainframe-based systems was conceived in the 1960’s. It solved the problem of delivering computer services while mastering complexity with maximum efficiency. Digitized data was passed to incredibly smart and expensive central computers combined with expensive intelligent switches to handle communications. That made it possible to use relatively inexpensive “dumb” terminals to serve customers. Central computers were programmed to recognize the format of the data for passing to application software. It required only a moderate amount of training for a customer to use a computer terminal. Meanwhile corporations had to pay for a steadily increasing cadre of specialists to keep the systems operational. Vendors sold the computer equipment as capital goods and also charged for technical support. One computer firm emerged as a quasi-monopoly for a brief period. It reaped huge but risky profits because it was unable to completely control innovation.

The customer now incurred the entire cost of capital as well as all operating expenses. The total costs of computerization where largely fixed, with little variability except for a steady escalation in expenses to keep up with rising demands.

The mainframe computer architecture reached its limits of growth when the cost of capital for extending the capabilities of the central mainframe computes for serving the rising complexity and proliferation of demands for improved services by customers became prohibitive. The previously successful mainframe computer solution ran out of the economic as well as the technological capacity to increase the dominant vendor’s profits.

SUMMARY OF THE MAINFRAME COMPUTER ARCHITECTURE: 1. Vendor passes capital costs to customers while maintaining moderate operating costs. 2. Customer incurs rising capital costs and large operating costs. 3. Limits on of the architecture reached when further addition to the customer’s capital costs are ineffective and not profitable.

CONCLUSION: The choice of an "architecture of information" is primarily one of economics and only secondarily as enabled by changes in the prices of technolgy. The single most important design issue is in answering the question: Who pays? Successful (and temporarily sustainable information architectures) are the result of an unstable balance between what a customer can afford to manage and what the technology choices can deliver.