Dialog
Paul Strassmann receives comments about his writings and lectures that can be found on www.strassmann.com. Some of these exchanges may be of interest to readers. Selected "dialogs" are published here without attribution to protect the privacy of individual commentators. To start a Dialog please e-mail your observations to paul@strassmann.com.
Monday, November 28, 2005
IT Metrics and Productivity Interview
The following is a transcript of Q&A exchanges between Paul and Michael Milutis, Editor of the IT Metrics and Productivity Journal published by Computer Aid, Inc. (CAI}:
CAI: Could you tell us a little about yourself, the path your career has taken, and how you got to where you are today?
STRASSMANN: I actually bumbled into computers purely by accident. In 1953, I was a graduate student at MIT, and I had to make a living, so I took a job as a consultant helping to study the traffic patterns of the New Jersey Turnpike (in those days, the New Jersey Turnpike was one of the largest generators of punch cards). At the completion of this project, I wound up writing the first dissertation on business uses of computers at MIT. That was in 1955. I’ve remained in computers ever since.
In 1962, I joined General Foods and got quickly promoted to Director of Information Systems, a position which at the time was equivalent to CIO. At the time, Kraft was having similar problems as General Foods, and I was just about the only living CIO those days doing complicated billing. Consequently, in 1964 I moved on to become the global CIO for Kraft.
In 1965, when IBM could not deliver 360’s, I was one of the few CIO’s or Directors who actually started buying Honeywell computers. This caused a tremendous uproar on the East Coast. IBM actually tried to get me fired. Luckily, the guy who tried to get me fired left IBM to become the Executive Vice President of Xerox. And when Xerox bought a computer company, he told the Board of Directors, “I know just the guy who knows how to kick IBM computers out.” The moral of the story, of course, is that you always do what’s right. After all, you never know how things are going to turn out.
So I became the Global CIO of Xerox. I started off in the Executive Committee of the company but when Xerox started generating astounding research at PARC, I became Vice President of Strategic Planning. I remained in that position until 1986 when I retired from Xerox.
During the course of my career, I had always served on a variety of government committees. Consequently, after leaving Xerox, I was called in to help evaluate the projected cost savings for the Department of Defense, in the anticipated event that the Soviet Union was to dissolve. When the Department of Defense and Mr. Dick Cheney, then Secretary of Defense, discovered that we were 70 billion dollars short of the dividend- the so-called Peace Dividend that Congress had declared we were to remove from the Department- I got hired as the DoD’s first CIO. At the time, the position was known as Director of Defense Information. I was charged with the task of removing 35 billion dollars worth of IT costs from DoD.
When the new administration came in, I retired from DoD. However, many of these same people who were in the Department of Defense moved over to NASA, and when they ran into trouble there they called me out of retirement, and so I spent a year at NASA as the acting CIO, patching things up until we could put a longer term CIO in place.
CAI: It’s quite an honor to have been called in to fix things at NASA. What was that like? How would you describe some of the challenges that NASA was facing at the time?
STRASSMANN: The amazing thing about NASA was that, on a budget of 15.5 billion dollars, the IT spending was 2.2 billion. This 2.2 billion was way over 15% of total spending. In fact, that’s just about the highest ratio you will find anywhere. So I wanted to go over very carefully where the money was going. Naturally, this puts you into conflict with a lot of entrenched bureaucracies, very deeply entrenched bureaucracies consisting mostly of experts on the subjects of computers. At NASA, everybody’s an expert.
CAI: What were some of the biggest challenges you faced as a CIO across all of these different organizations, including NASA?
STRASSMANN: I think the biggest challenge is getting IT positioned into the budgeting and planning process, directly positioning the CIO to be there at the table when management makes decisions on how to allocate resources.
Most CIO’s don’t sit around the table when decisions are made about where to spend money. They come in and make their presentations, and they wind up being perceived as just a cost center, not as an investment center. And very often an organization wouldn’t even know the full cost of their information resources or the lifecycle costs of their information resources. All of this makes the implementation of capital budgeting and strategic alignment very challenging.
CAI: Could you comment on some of the other challenges?
STRASSMANN: The managerial challenges can be quite formidable, too. For example, how do you bring a newly minted CIO into a position when, previously, there was no CIO? To further complicate things, the responsibilities of your new CIO will overlap with those of the CFO, who has traditionally occupied this role. I spent the first 30 years of my career basically extricating IT from the clutches of the CFO’s. And that is not a graceful separation.
CAI: Given all of the advances in methodologies and CMM tools we still have data pointing to the fact that software productivity has remained flat for the past 10 years. Do you have any thoughts about why that may be and why we've made such little progress?
STRASSMANN: I’ve looked at all sorts of numbers claiming to explain what has happened to software productivity, particularly lines of code metrics and function points metrics. Frankly, I do not find any of these statistics very viable or supportable, except for some very micro-level analyses conducted by Capers Jones.
I would say, though, that much of the waste in software development is related to management’s shifting objectives and the continual tearing up of code to meet these shifting objectives. I like to call this the junk-build-junk cycle. If you continue to junk and destroy and re-juggle and then re-integrate software, your productivity numbers are not going to look so good.
CAI: In light of this, how would you address the productivity problem?
STRASSMANN: My approach to increasing productivity is to focus on the infrastructure. This is actually the over-arching theme of everything that I’ve been pursuing for the past 30 years. Specifically, if you have an infrastructure that is robust, and are able to add applications on top of that infrastructure, you will be able to deploy, test, and upgrade applications very rapidly.
A robust infrastructure means that security, reliability, and recoverability are all solidly in place, on the infrastructure side. One should not muck these issues into an application. That’s where people get lost. I frequently see large organizations and government agencies struggling with horrendous projects that cost a fortune and that last for years and one of the biggest reasons for these problems is that they are always attempting to build their own unique infrastructure. What they end up with are escalating costs and escalating frustrations.
CAI: It is our observation that the management of many IT organizations can be characterized as anecdotal, as opposed to process oriented, metrics oriented, and benchmark oriented around an historical base. Did you deal with these types issues over the course of your career? What would be your advice here for fellow CIO’s confronting the same challenges?
STRASSMANN: I am going to be a contrarian now and tell you that nothing works as well as a good story. In fact, whenever I move into an organization, whether it’s as a CIO or as a consultant, the first thing I look for is something that will make a contribution. And that usually takes the form of an anecdotal story that people will enjoy. So I’m in favor of anecdotes.
Eventually, however, you will have to get to the numbers and to the benchmarking. That is the next thing you have to do and if you’re lucky the anecdotes will provide with you with the cover and the management support to do this successfully.
CAI: Given that corporations spend 2-3% of their annual budgets on IT, what should a CEO's expectations be regarding what he gets for his money? How can CEO's measure this discretely?
STRASSMANN: First of all, the percentage of annual revenue as a percentage of IT spending is in my opinion a totally bogus number. It should never be used. I can make that number come out any way I want, depending on how I do outsourcing. For example, two companies doing the same business can have totally different ratios, if only because one of the companies buys more of their materials from the outside whereas the other uses their own mines and their own labor.
Regarding a CEO’s expectation and how this should be measured discretely, this will vary depending on your competitive positioning. You must keep in mind that CEO’s are very concerned about competitive position. There’s always somebody gaining on you if you’re a leader and dropping out if you are a loser. So if you are at the bottom of competition in a business that is highly concentrated, your spending of IT is going to be limited to very demonstrable examples of cost savings. On the other hand, if you’re one of the top dogs, one of the top three or top two companies, then your IT spending should really be looked at in terms of how well it is deployed in order to maintain your lead position.
CAI: How much of the software component of the average corporate IT budget do you think gets wasted and how much of this waste could, in your opinion, be quickly recouped and saved through the proper use of best practices?
STRASSMANN: One of the most interesting ways of looking at the IT budget is to break it down into what is contributing value to the firm (e.g., marketing, development, and research) and what is simply supporting the infrastructure (e.g. the e-mail systems, the HR databases, the financial systems, etc.) What I find increasingly to be the case is that less and less IT money is available for value-added, competitively useful work and more and more is just being sucked into the infrastructure. There are companies that have hardly any new money available, except for keeping the existing applications alive and patching them, or upgrading them. Consequently, if you want to cut back on waste and recoup some savings right away, my advice is to get your infrastructure straightened out. That usually means outsourcing a big hunk of it.
CAI: Regarding outsourcing, or the offshore component of outsourcing, what do you think organizations should be doing to get this right? What kind of questions should they be asking themselves?
STRASSMANN: There is a time to outsource, and there is time not to. You just need to know the difference.
For instance, in cases involving the coding of very complex applications, I have frequently been impressed by the fact that many offshore operations, to overcome the cultural and linguistic problems they face, haven risen to maturity levels which are much higher than those found here in the states. When viewed from this perspective, sending your coding, testing, and validation offshore can make a lot of economic sense.
However, we’ve really got to look at the overall project costs. Coding is just a very small part of overall project costs. The big problem with projects today is systems integration. These costs, the system integration costs, can totally dominate overall project costs. And systems integration cannot be outsourced. For better or worse this has to be done organically, inside the organization.
CAI: It is frequently cited that 80% of IT spending is directed towards the running and maintenance of existing systems and infrastructure. Despite this, we still see all of the best thinking and publishing in our field- about metrics, about estimation, and about processes- being done in the area of new development as opposed to maintenance. Why is that the case given that so much more of the money is being spent on maintenance? Do you see this as an area of opportunity?
STRASSMANN: Well, you don’t get tenure by writing about maintenance. That’s just the way it is. If you want to be successful in this field, you write about development. The system is rigged against maintenance, against the bulk of the costs.
However, I have two books that deal with this issue rather exhaustively and that skip over the issue of development almost entirely. The first one is called The Business Value of Computers. The second one, my most recent book, is called The Squandered Computer.
CAI: Could you tell us about some of the other books you’ve written?
STRASSMANN: My favorite book is actually a cartoon book. After writing a couple of 500 page books, my son, a PhD from MIT, explained to me that nobody reads the damn things. He advised me to publish something with cartoons, something that everybody would understand. So I joined up with a cartoonist by the name of John Klostner and we put out a very funny book of computer cartoons- The Irreverent Dictionary of Information Politics.
Klostner was actually the illustrator for a much more serious book I wrote called The Politics of Information Management. This focused on information management as a political process, rather than a technological process.
CAI: Could you elaborate more on that?
STRASSMANN: If you’re a bureaucrat, and you want to secure your position, in the old days you just had to make sure that your name showed up on the organization chart and in procedure manuals. But nowadays, procedure manuals can be changed very rapidly. Code, on the other hand, can not. So why not develop or maintain an application in such a way that it effectively welds your position into code? Once code is in, it is very difficult to dislodge. This is where the politics of information management has its origin.
I should mention that, because of the demand for this book, I have actually posted it on Google. If you do a search on Politics of Information Management you will find that you can read it online. Google has scanned the entire book.
CAI: Regarding politics, we frequently hear that many CEO's inevitably come to distrust their software development groups. Why is this so inevitable? Why do IT departments tend to struggle so much with the executive communication process? Do you have any final advice for CIO's on how to best deal with these issues?
STRASSMANN: Talk money, don’t talk technology.
CAI: Well said. Getting back to maintenance, what questions should we be asking ourselves in order to re-apply development best practices over to the world of maintenance? What specific metrics would you advise organizations to track if they were focusing primarily on maintenance as opposed to new development?
STRASSMANN: I think one of the key metrics to track is how many times you build communication interfaces or file recovery routines. There’s actually a whole list of things that people build into their applications that can be tracked like this. For example, how many security filters do you put on individual networks? How much labor is being spent continually upgrading and putting in bridges and patches? How much money goes into this? You really have to trace the dollars, and then you have to do what’s called value engineering.
Value engineering is what people do in the auto business. You take an automobile, you take it apart, you lay it on the floor, and then you go over each part and ask, “Why do we have this part here?” This is how they discovered that automobiles could use the same carburetors and the same nuts and the same screws. At the time, each engineer had been designing their own material bill. And in the absence of common parts, the parts costs and the acquisition and procurement costs were horrendous.
This is the same discipline that has been used so successfully in materials and purchasing streamlining. It is understood and widely used in manufacturing and across many industries. However, with the exception of Google, the technique, to my knowledge, is not being applied to IT in any kind of consistent way.
CAI: Could you tell us a little about yourself, the path your career has taken, and how you got to where you are today?
STRASSMANN: I actually bumbled into computers purely by accident. In 1953, I was a graduate student at MIT, and I had to make a living, so I took a job as a consultant helping to study the traffic patterns of the New Jersey Turnpike (in those days, the New Jersey Turnpike was one of the largest generators of punch cards). At the completion of this project, I wound up writing the first dissertation on business uses of computers at MIT. That was in 1955. I’ve remained in computers ever since.
In 1962, I joined General Foods and got quickly promoted to Director of Information Systems, a position which at the time was equivalent to CIO. At the time, Kraft was having similar problems as General Foods, and I was just about the only living CIO those days doing complicated billing. Consequently, in 1964 I moved on to become the global CIO for Kraft.
In 1965, when IBM could not deliver 360’s, I was one of the few CIO’s or Directors who actually started buying Honeywell computers. This caused a tremendous uproar on the East Coast. IBM actually tried to get me fired. Luckily, the guy who tried to get me fired left IBM to become the Executive Vice President of Xerox. And when Xerox bought a computer company, he told the Board of Directors, “I know just the guy who knows how to kick IBM computers out.” The moral of the story, of course, is that you always do what’s right. After all, you never know how things are going to turn out.
So I became the Global CIO of Xerox. I started off in the Executive Committee of the company but when Xerox started generating astounding research at PARC, I became Vice President of Strategic Planning. I remained in that position until 1986 when I retired from Xerox.
During the course of my career, I had always served on a variety of government committees. Consequently, after leaving Xerox, I was called in to help evaluate the projected cost savings for the Department of Defense, in the anticipated event that the Soviet Union was to dissolve. When the Department of Defense and Mr. Dick Cheney, then Secretary of Defense, discovered that we were 70 billion dollars short of the dividend- the so-called Peace Dividend that Congress had declared we were to remove from the Department- I got hired as the DoD’s first CIO. At the time, the position was known as Director of Defense Information. I was charged with the task of removing 35 billion dollars worth of IT costs from DoD.
When the new administration came in, I retired from DoD. However, many of these same people who were in the Department of Defense moved over to NASA, and when they ran into trouble there they called me out of retirement, and so I spent a year at NASA as the acting CIO, patching things up until we could put a longer term CIO in place.
CAI: It’s quite an honor to have been called in to fix things at NASA. What was that like? How would you describe some of the challenges that NASA was facing at the time?
STRASSMANN: The amazing thing about NASA was that, on a budget of 15.5 billion dollars, the IT spending was 2.2 billion. This 2.2 billion was way over 15% of total spending. In fact, that’s just about the highest ratio you will find anywhere. So I wanted to go over very carefully where the money was going. Naturally, this puts you into conflict with a lot of entrenched bureaucracies, very deeply entrenched bureaucracies consisting mostly of experts on the subjects of computers. At NASA, everybody’s an expert.
CAI: What were some of the biggest challenges you faced as a CIO across all of these different organizations, including NASA?
STRASSMANN: I think the biggest challenge is getting IT positioned into the budgeting and planning process, directly positioning the CIO to be there at the table when management makes decisions on how to allocate resources.
Most CIO’s don’t sit around the table when decisions are made about where to spend money. They come in and make their presentations, and they wind up being perceived as just a cost center, not as an investment center. And very often an organization wouldn’t even know the full cost of their information resources or the lifecycle costs of their information resources. All of this makes the implementation of capital budgeting and strategic alignment very challenging.
CAI: Could you comment on some of the other challenges?
STRASSMANN: The managerial challenges can be quite formidable, too. For example, how do you bring a newly minted CIO into a position when, previously, there was no CIO? To further complicate things, the responsibilities of your new CIO will overlap with those of the CFO, who has traditionally occupied this role. I spent the first 30 years of my career basically extricating IT from the clutches of the CFO’s. And that is not a graceful separation.
CAI: Given all of the advances in methodologies and CMM tools we still have data pointing to the fact that software productivity has remained flat for the past 10 years. Do you have any thoughts about why that may be and why we've made such little progress?
STRASSMANN: I’ve looked at all sorts of numbers claiming to explain what has happened to software productivity, particularly lines of code metrics and function points metrics. Frankly, I do not find any of these statistics very viable or supportable, except for some very micro-level analyses conducted by Capers Jones.
I would say, though, that much of the waste in software development is related to management’s shifting objectives and the continual tearing up of code to meet these shifting objectives. I like to call this the junk-build-junk cycle. If you continue to junk and destroy and re-juggle and then re-integrate software, your productivity numbers are not going to look so good.
CAI: In light of this, how would you address the productivity problem?
STRASSMANN: My approach to increasing productivity is to focus on the infrastructure. This is actually the over-arching theme of everything that I’ve been pursuing for the past 30 years. Specifically, if you have an infrastructure that is robust, and are able to add applications on top of that infrastructure, you will be able to deploy, test, and upgrade applications very rapidly.
A robust infrastructure means that security, reliability, and recoverability are all solidly in place, on the infrastructure side. One should not muck these issues into an application. That’s where people get lost. I frequently see large organizations and government agencies struggling with horrendous projects that cost a fortune and that last for years and one of the biggest reasons for these problems is that they are always attempting to build their own unique infrastructure. What they end up with are escalating costs and escalating frustrations.
CAI: It is our observation that the management of many IT organizations can be characterized as anecdotal, as opposed to process oriented, metrics oriented, and benchmark oriented around an historical base. Did you deal with these types issues over the course of your career? What would be your advice here for fellow CIO’s confronting the same challenges?
STRASSMANN: I am going to be a contrarian now and tell you that nothing works as well as a good story. In fact, whenever I move into an organization, whether it’s as a CIO or as a consultant, the first thing I look for is something that will make a contribution. And that usually takes the form of an anecdotal story that people will enjoy. So I’m in favor of anecdotes.
Eventually, however, you will have to get to the numbers and to the benchmarking. That is the next thing you have to do and if you’re lucky the anecdotes will provide with you with the cover and the management support to do this successfully.
CAI: Given that corporations spend 2-3% of their annual budgets on IT, what should a CEO's expectations be regarding what he gets for his money? How can CEO's measure this discretely?
STRASSMANN: First of all, the percentage of annual revenue as a percentage of IT spending is in my opinion a totally bogus number. It should never be used. I can make that number come out any way I want, depending on how I do outsourcing. For example, two companies doing the same business can have totally different ratios, if only because one of the companies buys more of their materials from the outside whereas the other uses their own mines and their own labor.
Regarding a CEO’s expectation and how this should be measured discretely, this will vary depending on your competitive positioning. You must keep in mind that CEO’s are very concerned about competitive position. There’s always somebody gaining on you if you’re a leader and dropping out if you are a loser. So if you are at the bottom of competition in a business that is highly concentrated, your spending of IT is going to be limited to very demonstrable examples of cost savings. On the other hand, if you’re one of the top dogs, one of the top three or top two companies, then your IT spending should really be looked at in terms of how well it is deployed in order to maintain your lead position.
CAI: How much of the software component of the average corporate IT budget do you think gets wasted and how much of this waste could, in your opinion, be quickly recouped and saved through the proper use of best practices?
STRASSMANN: One of the most interesting ways of looking at the IT budget is to break it down into what is contributing value to the firm (e.g., marketing, development, and research) and what is simply supporting the infrastructure (e.g. the e-mail systems, the HR databases, the financial systems, etc.) What I find increasingly to be the case is that less and less IT money is available for value-added, competitively useful work and more and more is just being sucked into the infrastructure. There are companies that have hardly any new money available, except for keeping the existing applications alive and patching them, or upgrading them. Consequently, if you want to cut back on waste and recoup some savings right away, my advice is to get your infrastructure straightened out. That usually means outsourcing a big hunk of it.
CAI: Regarding outsourcing, or the offshore component of outsourcing, what do you think organizations should be doing to get this right? What kind of questions should they be asking themselves?
STRASSMANN: There is a time to outsource, and there is time not to. You just need to know the difference.
For instance, in cases involving the coding of very complex applications, I have frequently been impressed by the fact that many offshore operations, to overcome the cultural and linguistic problems they face, haven risen to maturity levels which are much higher than those found here in the states. When viewed from this perspective, sending your coding, testing, and validation offshore can make a lot of economic sense.
However, we’ve really got to look at the overall project costs. Coding is just a very small part of overall project costs. The big problem with projects today is systems integration. These costs, the system integration costs, can totally dominate overall project costs. And systems integration cannot be outsourced. For better or worse this has to be done organically, inside the organization.
CAI: It is frequently cited that 80% of IT spending is directed towards the running and maintenance of existing systems and infrastructure. Despite this, we still see all of the best thinking and publishing in our field- about metrics, about estimation, and about processes- being done in the area of new development as opposed to maintenance. Why is that the case given that so much more of the money is being spent on maintenance? Do you see this as an area of opportunity?
STRASSMANN: Well, you don’t get tenure by writing about maintenance. That’s just the way it is. If you want to be successful in this field, you write about development. The system is rigged against maintenance, against the bulk of the costs.
However, I have two books that deal with this issue rather exhaustively and that skip over the issue of development almost entirely. The first one is called The Business Value of Computers. The second one, my most recent book, is called The Squandered Computer.
CAI: Could you tell us about some of the other books you’ve written?
STRASSMANN: My favorite book is actually a cartoon book. After writing a couple of 500 page books, my son, a PhD from MIT, explained to me that nobody reads the damn things. He advised me to publish something with cartoons, something that everybody would understand. So I joined up with a cartoonist by the name of John Klostner and we put out a very funny book of computer cartoons- The Irreverent Dictionary of Information Politics.
Klostner was actually the illustrator for a much more serious book I wrote called The Politics of Information Management. This focused on information management as a political process, rather than a technological process.
CAI: Could you elaborate more on that?
STRASSMANN: If you’re a bureaucrat, and you want to secure your position, in the old days you just had to make sure that your name showed up on the organization chart and in procedure manuals. But nowadays, procedure manuals can be changed very rapidly. Code, on the other hand, can not. So why not develop or maintain an application in such a way that it effectively welds your position into code? Once code is in, it is very difficult to dislodge. This is where the politics of information management has its origin.
I should mention that, because of the demand for this book, I have actually posted it on Google. If you do a search on Politics of Information Management you will find that you can read it online. Google has scanned the entire book.
CAI: Regarding politics, we frequently hear that many CEO's inevitably come to distrust their software development groups. Why is this so inevitable? Why do IT departments tend to struggle so much with the executive communication process? Do you have any final advice for CIO's on how to best deal with these issues?
STRASSMANN: Talk money, don’t talk technology.
CAI: Well said. Getting back to maintenance, what questions should we be asking ourselves in order to re-apply development best practices over to the world of maintenance? What specific metrics would you advise organizations to track if they were focusing primarily on maintenance as opposed to new development?
STRASSMANN: I think one of the key metrics to track is how many times you build communication interfaces or file recovery routines. There’s actually a whole list of things that people build into their applications that can be tracked like this. For example, how many security filters do you put on individual networks? How much labor is being spent continually upgrading and putting in bridges and patches? How much money goes into this? You really have to trace the dollars, and then you have to do what’s called value engineering.
Value engineering is what people do in the auto business. You take an automobile, you take it apart, you lay it on the floor, and then you go over each part and ask, “Why do we have this part here?” This is how they discovered that automobiles could use the same carburetors and the same nuts and the same screws. At the time, each engineer had been designing their own material bill. And in the absence of common parts, the parts costs and the acquisition and procurement costs were horrendous.
This is the same discipline that has been used so successfully in materials and purchasing streamlining. It is understood and widely used in manufacturing and across many industries. However, with the exception of Google, the technique, to my knowledge, is not being applied to IT in any kind of consistent way.
Monday, October 24, 2005
Which technologies will be most critical to the IT industry in the coming year, and why?
Question from Editor of a computer magazine:
Which technologies will be most critical to the IT industry in the coming year, and why?
Response from PAS:
For the past 50 years organizations
acquired computers to fit essentially
identical architectures, whether these were provided
by IBM or Microsoft. Vendors sold information
technologies, but the costs of installing,
maintenance and risks were left with the customers.
Each major application required the construction of
customized support and communications infrastructures.
Software was licensed, whereas the rising
life-cycle costs for network operations and security
assurance were passed on to the operators
without warranties. As the number of applications grew the rising
labor costs for systems integration exceeded
the costs of technologies. Consequently implementation
schedules lengthened while systems reliability decreased.
What we have now is a computer-centric information
environment with diseconomies of scale, excessive
costs and risky reliability.
A network-centric information architecture,
such a now operating by Google, is in
every respect completely opposite from
the generally accepted systems engineering
practices at present. By taking a network-centric
approach Google has demonstrated the superiority
of scaleable economies while decreasing
costs and improving the quality of services.
Therefore, the technologies that will shift I.T.
investments to Google-like environment as a service will
increasingly be in demand by organizations that
seek lower I.T. costs while improving speed of
delivery and a capacity for rapid innovation.
Which technologies will be most critical to the IT industry in the coming year, and why?
Response from PAS:
For the past 50 years organizations
acquired computers to fit essentially
identical architectures, whether these were provided
by IBM or Microsoft. Vendors sold information
technologies, but the costs of installing,
maintenance and risks were left with the customers.
Each major application required the construction of
customized support and communications infrastructures.
Software was licensed, whereas the rising
life-cycle costs for network operations and security
assurance were passed on to the operators
without warranties. As the number of applications grew the rising
labor costs for systems integration exceeded
the costs of technologies. Consequently implementation
schedules lengthened while systems reliability decreased.
What we have now is a computer-centric information
environment with diseconomies of scale, excessive
costs and risky reliability.
A network-centric information architecture,
such a now operating by Google, is in
every respect completely opposite from
the generally accepted systems engineering
practices at present. By taking a network-centric
approach Google has demonstrated the superiority
of scaleable economies while decreasing
costs and improving the quality of services.
Therefore, the technologies that will shift I.T.
investments to Google-like environment as a service will
increasingly be in demand by organizations that
seek lower I.T. costs while improving speed of
delivery and a capacity for rapid innovation.
Thursday, September 08, 2005
How to caculate ROI and Effectiveness?
I have read with interest some of your articles and I have referenced some of your comments in an upcoming presentation I am doing for the Agile Business Conference in September.
I especially like the concept of "Moore's" law for hardware etc. But the question I am struggling with is "What should IT cost" In your "Cutter IT Journal" article on the Six Rules you state you mention that 58% of total budget is spent on "ongoing maintenace and operations" but yields a zero ROI and then go onto demonstrating ways of calculating ROI but there are no statements as to what is an acceptable ROI, cost reduction, or effectiveness etc.
Response from PAS:
Q: Calculating ROI?
A: In my book I devote several
chapters to such calculations (incidentally, a number of software
packages have used this approach). This calls for calculating
the NPV (Net Present Worth) of risk-adjusted discounted cash
flow in which the discount (e.g. interest rate) is set at
"prime rate" plus a risk premium (which is determined by
the demonstrable probability of success). In most cases
I would set such a premium at 10% or more, which would
yield the risk discount rate at about 14% (though in case
of enterprise systems, such as large integration projects, the rate
would be well over 20%). An acceptable ROI would
be then a positive risk adjusted NPV that exceeds
life cycle costs by a margin of at least 50%.
Q: Calculating effectiveness?
A: You need to calculate the difference between the
the firm's IP (Information Productivity) with and without
the proposed project. Such difference should be sufficient to
make the new IP comparable with the best
competitors. You can find all about IP in the
many articles (and a book) on my web pages.
I especially like the concept of "Moore's" law for hardware etc. But the question I am struggling with is "What should IT cost" In your "Cutter IT Journal" article on the Six Rules you state you mention that 58% of total budget is spent on "ongoing maintenace and operations" but yields a zero ROI and then go onto demonstrating ways of calculating ROI but there are no statements as to what is an acceptable ROI, cost reduction, or effectiveness etc.
Response from PAS:
Q: Calculating ROI?
A: In my book
chapters to such calculations (incidentally, a number of software
packages have used this approach). This calls for calculating
the NPV (Net Present Worth) of risk-adjusted discounted cash
flow in which the discount (e.g. interest rate) is set at
"prime rate" plus a risk premium (which is determined by
the demonstrable probability of success). In most cases
I would set such a premium at 10% or more, which would
yield the risk discount rate at about 14% (though in case
of enterprise systems, such as large integration projects, the rate
would be well over 20%). An acceptable ROI would
be then a positive risk adjusted NPV that exceeds
life cycle costs by a margin of at least 50%.
Q: Calculating effectiveness?
A: You need to calculate the difference between the
the firm's IP (Information Productivity) with and without
the proposed project. Such difference should be sufficient to
make the new IP comparable with the best
competitors. You can find all about IP in the
many articles (and a book) on my web pages.
Monday, July 18, 2005
What is the right amount to spend on an IT infrastructure?
From Vice President Technology, Insurance Company:
I wanted to express my appreciation for your May 2005 article in Baseline Magazine entitled "Taking a Bite Out of Overhead". I found the article informative and fact based. I am an executive responsible for infrastructure in a Fortune 1000 insurance company and have inherited a disproportional infrastructure to total IT budget when I accepted the post. I have been faithfully shrinking the infrastructure as a percent of the whole IT spend, but lack any good targets from peer companies for percent spend on infrastructure to total IT spend. Do you have any information you could share regarding this key metric for corporations other than 51% is "extraordinarily large" ? Thank you again for your excellent articles and bringing visibility to this important topic.
Response from PAS:
Your infrastructure costs should not exceed 1/3 of your
IT spending if you outsource much of your fixed
costs and substitute an infrastructure based on variable cost datacenter
capacity and transaction-based communications.
The trick is how to migrate from what you have
to where you need to be. That requires careful
transition planning. With your revenues at present close to
$1B and over 2000 employees that should
be doable in 2-3 years.
I wanted to express my appreciation for your May 2005 article in Baseline Magazine entitled "Taking a Bite Out of Overhead". I found the article informative and fact based. I am an executive responsible for infrastructure in a Fortune 1000 insurance company and have inherited a disproportional infrastructure to total IT budget when I accepted the post. I have been faithfully shrinking the infrastructure as a percent of the whole IT spend, but lack any good targets from peer companies for percent spend on infrastructure to total IT spend. Do you have any information you could share regarding this key metric for corporations other than 51% is "extraordinarily large" ? Thank you again for your excellent articles and bringing visibility to this important topic.
Response from PAS:
Your infrastructure costs should not exceed 1/3 of your
IT spending if you outsource much of your fixed
costs and substitute an infrastructure based on variable cost datacenter
capacity and transaction-based communications.
The trick is how to migrate from what you have
to where you need to be. That requires careful
transition planning. With your revenues at present close to
$1B and over 2000 employees that should
be doable in 2-3 years.
Wednesday, April 20, 2005
Does Outsourcing Deliver the Goods? - Baseline, March, 2005
From an auditor of a bank:
Mr Strassmann has an interesting article, but I have a question for him:
How do you analyses compare if you use a three- or five-year aggregate ROE?
I would be interested in seeing this pursued a little further. For
example, Wyeth may have been two years into a three year development, while
Johnson & Johnson released their last three year development in the first
month of their fiscal year. An ROE that took into account several years of
production would smooth out the numbers for companies that sometimes have
long turnover/R&D cycles. Any thoughts?
Reply from Paul Strassmann:
You are correct in suggesting that in the case of individual pharmaceutical firms one should
look for at least five-year ROE trends. I plan to do that when I will complete
my next book on the economics of I.T. where I will examine the economics of
firm that experience great volatility in earning.
But picking on this potential inadequacy alone does not invalidate altogether my conclusions
(by the way, the 5 year ROE of J&J is indeed superior to that of Wyeth.
The main point in comparing Wyeth vs. J&J was to show that a high wage cost
firm (J&J) outsourced less than a lower wage cost firm.
However, my article did not base its overall conclusions on the Wyeth vs. J&J
illustrative case at all. My findings reflected data from a random sample of 1,100
corporations, as reported by S&P. Such a large sample evens out the ups and downs
of individual firms and offers a statistically valid proof that lower outsourcing ratio
firms are indeed more profitable than firms with high outsourcing ratios.
It seems to me that when you embark on auditing a numerical analysis, you ought to also
consider the validity of the principal conclusions and not only
focus on a potential error in a single illustrative case.
Mr Strassmann has an interesting article, but I have a question for him:
How do you analyses compare if you use a three- or five-year aggregate ROE?
I would be interested in seeing this pursued a little further. For
example, Wyeth may have been two years into a three year development, while
Johnson & Johnson released their last three year development in the first
month of their fiscal year. An ROE that took into account several years of
production would smooth out the numbers for companies that sometimes have
long turnover/R&D cycles. Any thoughts?
Reply from Paul Strassmann:
You are correct in suggesting that in the case of individual pharmaceutical firms one should
look for at least five-year ROE trends. I plan to do that when I will complete
my next book on the economics of I.T. where I will examine the economics of
firm that experience great volatility in earning.
But picking on this potential inadequacy alone does not invalidate altogether my conclusions
(by the way, the 5 year ROE of J&J is indeed superior to that of Wyeth.
The main point in comparing Wyeth vs. J&J was to show that a high wage cost
firm (J&J) outsourced less than a lower wage cost firm.
However, my article did not base its overall conclusions on the Wyeth vs. J&J
illustrative case at all. My findings reflected data from a random sample of 1,100
corporations, as reported by S&P. Such a large sample evens out the ups and downs
of individual firms and offers a statistically valid proof that lower outsourcing ratio
firms are indeed more profitable than firms with high outsourcing ratios.
It seems to me that when you embark on auditing a numerical analysis, you ought to also
consider the validity of the principal conclusions and not only
focus on a potential error in a single illustrative case.
Wednesday, April 13, 2005
CFO Envy Persists Among CIOs
Comment from Senior VP and CIO:
I came upon your article The Cost of Short-Term CIOs while searching for information on CIO turnover. Do you have any additional data sources reflecting CIO turnover, particularly in any particular company size (like F100, F500, small business). I am presenting at a conference in May, and want to draw a contrast between the "short term" nature of CIOs compared to the seeming longevity of the CFO, and I am looking for data to back up my thesis.
As you know, there is a persistent tug of war between the CIO and CFO. Many CIOs report to the CFO, and there is a fair amount of resentment in the IT community for this relationship. In my opinion, a strong, collaborative relationship with the CFO is critical to both the CIO's survival, and to the ability to put durable multi-year programs in place. Working against the situation is my belief that generally, the CFO's tenure vastly outlasts the CIO's.
Strassmann Response:
1. CFO turnover rates are roughly comparable and since S-OX much greater than
turnover rates of CIOs. CFO turnover rates averaged 20%, as compared with
my findings of 24.2% for CIOs (see ttp://www.afponline.org/pub/res/news/ns_20041019_cd.html,
http://www.cfo.com/article.cfm/2991236/c_3046496?f=insidecfo. If you "google" on you will get over 10,000 good references on this topic.
2. CFO envy is persistent among the CIOs because the CFO scope extends to oversight over 100% of revenue-making expenses, whereas the CIO is usually limited to only what is defined as "I.T." - costs that are vanishing through outsourcing and decentralization.
I am not sure that the above will make you happy, but these are the facts. A competent CIO
will learn how to deal with this situation by extending the reach to oversight
over information security (not a CFO competence) and to the safeguarding of Knowledge
Capital (avoided by CFOs). You may also wish to look up my article on this topic
"Why CIOs Should Want to Go to Jail" (http://www.strassmann.com/pubs/gotojail.html).
I came upon your article The Cost of Short-Term CIOs while searching for information on CIO turnover. Do you have any additional data sources reflecting CIO turnover, particularly in any particular company size (like F100, F500, small business). I am presenting at a conference in May, and want to draw a contrast between the "short term" nature of CIOs compared to the seeming longevity of the CFO, and I am looking for data to back up my thesis.
As you know, there is a persistent tug of war between the CIO and CFO. Many CIOs report to the CFO, and there is a fair amount of resentment in the IT community for this relationship. In my opinion, a strong, collaborative relationship with the CFO is critical to both the CIO's survival, and to the ability to put durable multi-year programs in place. Working against the situation is my belief that generally, the CFO's tenure vastly outlasts the CIO's.
Strassmann Response:
1. CFO turnover rates are roughly comparable and since S-OX much greater than
turnover rates of CIOs. CFO turnover rates averaged 20%, as compared with
my findings of 24.2% for CIOs (see ttp://www.afponline.org/pub/res/news/ns_20041019_cd.html,
http://www.cfo.com/article.cfm/2991236/c_3046496?f=insidecfo. If you "google" on
2. CFO envy is persistent among the CIOs because the CFO scope extends to oversight over 100% of revenue-making expenses, whereas the CIO is usually limited to only what is defined as "I.T." - costs that are vanishing through outsourcing and decentralization.
I am not sure that the above will make you happy, but these are the facts. A competent CIO
will learn how to deal with this situation by extending the reach to oversight
over information security (not a CFO competence) and to the safeguarding of Knowledge
Capital (avoided by CFOs). You may also wish to look up my article on this topic
"Why CIOs Should Want to Go to Jail" (http://www.strassmann.com/pubs/gotojail.html).
Friday, March 11, 2005
A boat will keep sinking if the pumping is slower than the leaking
From CIO of small insurance firm
It strikes me that perhaps there are several possible reasons for the overhead cost ratios to rise despite increased investments in I.T.
1. The systems were ill conceived and could never deliver the benefits promised.
2. CIOs sold management on the idea that the new systems or capabilities would reduce the costs of business processes. Two years later the new systems were performing as specified. The labor savings were real, but as is often the case, never captured.
3. The systems delivered the benefits promised, and the cost savings or added revenue were realized. However, other parts of the overhead cost structure expanded meanwhile more than offsetting the bottom line benefits.
If I had to guess, I would guess all of the above with the greatest weight on number three. Even though IT has not reduced overhead costs, I think it has probably made the situation better rather than worse. However, CIOs and vendors should stop touting that more I.T. spending can save the ship when, if fact, they should be casting ballast overboard. As you infer, I.T. spending will never compensate for inept management.
Response from Strassmann:
You are right that the evidence I have accumulated gives more credence to your reason #3 that to any other effect. Why this is so is quite subtle and I will be writing about it sometimes this summer. What has happened in the US is that we have suffered from a wage-scale upward creep as secretaries became administrators, administrators became managers and all of that required an enormous expansion in the number of exceptionally well compensated executives and consultants.
The other effect - perhaps the most rapidly gaining - is the remarkable gain that has been made by women. As the female workforce participation expanded their upward progression in compensation (all in transaction management jobs!) has accelerated.
To sum up: Whatever savings we have may have made through I.T. has been reinvested in added compensation to people constituting overhead costs.
It strikes me that perhaps there are several possible reasons for the overhead cost ratios to rise despite increased investments in I.T.
1. The systems were ill conceived and could never deliver the benefits promised.
2. CIOs sold management on the idea that the new systems or capabilities would reduce the costs of business processes. Two years later the new systems were performing as specified. The labor savings were real, but as is often the case, never captured.
3. The systems delivered the benefits promised, and the cost savings or added revenue were realized. However, other parts of the overhead cost structure expanded meanwhile more than offsetting the bottom line benefits.
If I had to guess, I would guess all of the above with the greatest weight on number three. Even though IT has not reduced overhead costs, I think it has probably made the situation better rather than worse. However, CIOs and vendors should stop touting that more I.T. spending can save the ship when, if fact, they should be casting ballast overboard. As you infer, I.T. spending will never compensate for inept management.
Response from Strassmann:
You are right that the evidence I have accumulated gives more credence to your reason #3 that to any other effect. Why this is so is quite subtle and I will be writing about it sometimes this summer. What has happened in the US is that we have suffered from a wage-scale upward creep as secretaries became administrators, administrators became managers and all of that required an enormous expansion in the number of exceptionally well compensated executives and consultants.
The other effect - perhaps the most rapidly gaining - is the remarkable gain that has been made by women. As the female workforce participation expanded their upward progression in compensation (all in transaction management jobs!) has accelerated.
To sum up: Whatever savings we have may have made through I.T. has been reinvested in added compensation to people constituting overhead costs.
“Running” from Microsoft Must First Prove $ Advantages
Comment from Partner of a consulting firm
Just read your Computer World article. Respectfully, I think you were not sobering enough with your assessment. The MS operating systems have and continue to be poorly designed, and consequently have gotten to the point of putting a large portion of the world's computers at risk. The answer is Linux. Apple has made the switch, and the rest of us in the industry need to be moving in that direction as quickly as is practical. No one needs to give up Excel or Word - we will end up getting that kind of functionality from Linux tools. The real message is that Microsoft has never solved any of their core functional problems within their OS, and have reached such a bloated, unmanageable state that they (and we) are on the brink of disaster, as exampled in your article. Aside from their ridiculous new licensing policies, MS continues to do things which violate common sense and all software engineering principals (such as bolting their IIS product into their Windows 2003 kernel in order to improve performance). Had I written the article, I would have stressed a bit more urgently to "run, do not walk, to move away your company's dependence on Microsoft".
Response from Strassmann:
Many thanks for your observations. I do not think that I can responsibly advise most of my clients to "run, do not walk" from Microsoft. I am enough of a realist that an immediate large scale exodus could result in more risks than what most organizations can tolerate. For most business, and certainly for most government organizations, it may take careful planning and different architectures before one can safely transfer heavily embedded Microsoft assets. You could help by generating more verifiable cases where large savings have been actually delivered by abandoning Microsoft.
Just read your Computer World article. Respectfully, I think you were not sobering enough with your assessment. The MS operating systems have and continue to be poorly designed, and consequently have gotten to the point of putting a large portion of the world's computers at risk. The answer is Linux. Apple has made the switch, and the rest of us in the industry need to be moving in that direction as quickly as is practical. No one needs to give up Excel or Word - we will end up getting that kind of functionality from Linux tools. The real message is that Microsoft has never solved any of their core functional problems within their OS, and have reached such a bloated, unmanageable state that they (and we) are on the brink of disaster, as exampled in your article. Aside from their ridiculous new licensing policies, MS continues to do things which violate common sense and all software engineering principals (such as bolting their IIS product into their Windows 2003 kernel in order to improve performance). Had I written the article, I would have stressed a bit more urgently to "run, do not walk, to move away your company's dependence on Microsoft".
Response from Strassmann:
Many thanks for your observations. I do not think that I can responsibly advise most of my clients to "run, do not walk" from Microsoft. I am enough of a realist that an immediate large scale exodus could result in more risks than what most organizations can tolerate. For most business, and certainly for most government organizations, it may take careful planning and different architectures before one can safely transfer heavily embedded Microsoft assets. You could help by generating more verifiable cases where large savings have been actually delivered by abandoning Microsoft.
It is the CFO Who Should Justify I.T. Spending, not the CIO
Comment from a Chief Technical Officer of a major corporationn
I just read your Computerworld piece "Measuring Information Work Productivity" and I am somewhat puzzled. Enough so to overcome my reluctance to waste your valuable time, by asking the following naive questions. Why is it the CIO's responsibility to justify IT spending? As I understand it - from the position of one who has reached 55 without ever having any management responsibility whatsoever - IT investments either benefit companies, or they do not. If not, why don't the companies cease to spend money on IT? Surely, to ask this is to see the answers: they can't, because their operations would fall apart. Isn't it a bit like asking your lungs, "What is the ROI of breathing?" or your stomach "What is the ROI of having breakfast?" You say that it is customer IT executives, not vendors, who must establish the value of IT. I feel inclined to take this reasoning one step further, and say that the CEO and his direct reports should assume the responsibility. They know perfectly well that, without IT, they are dead. Isn't it unwise to delegate such a vital task to the CIO, who is often not even one of the "inner circle"? In a nutshell, I am suggesting that the problem you discuss in your article is an accounting problem, and as such the CIO should hand it back to the CFO and his staff. Then perhaps the CIO could concentrate on the more mundane, and perhaps more beneficial task of creating better IT systems and keeping them working.
Response from Strassmann:
1. It has been customary for the CEO to hand over the responsibilities for advice and consent on specialized matters, such as involving finance, marketing, personnel, purchasing, audit etc. to qualified specialists.
2. Calculating the profit and productivity impacts of investments in I.T. is not an accounting exercise. If you have a chance to examine one of my many E-publications on www.strassmann.com you will find that I.T. is increasingly connected to a firm's competitive survival.
3. I.T. investments affect matters of technical risk, security, business effects and the complexity of bureaucratic processes. CFO's expertise is in matters of finance, not in experience with the impacts of information technologies.
If CIOs (Chief Information Officers) are to earn their keep they must assist top management of a firm in successfully piloting through the unprecedented difficulties associated with the transformation of an organization to an information-based enterprise.
I just read your Computerworld piece "Measuring Information Work Productivity" and I am somewhat puzzled. Enough so to overcome my reluctance to waste your valuable time, by asking the following naive questions. Why is it the CIO's responsibility to justify IT spending? As I understand it - from the position of one who has reached 55 without ever having any management responsibility whatsoever - IT investments either benefit companies, or they do not. If not, why don't the companies cease to spend money on IT? Surely, to ask this is to see the answers: they can't, because their operations would fall apart. Isn't it a bit like asking your lungs, "What is the ROI of breathing?" or your stomach "What is the ROI of having breakfast?" You say that it is customer IT executives, not vendors, who must establish the value of IT. I feel inclined to take this reasoning one step further, and say that the CEO and his direct reports should assume the responsibility. They know perfectly well that, without IT, they are dead. Isn't it unwise to delegate such a vital task to the CIO, who is often not even one of the "inner circle"? In a nutshell, I am suggesting that the problem you discuss in your article is an accounting problem, and as such the CIO should hand it back to the CFO and his staff. Then perhaps the CIO could concentrate on the more mundane, and perhaps more beneficial task of creating better IT systems and keeping them working.
Response from Strassmann:
1. It has been customary for the CEO to hand over the responsibilities for advice and consent on specialized matters, such as involving finance, marketing, personnel, purchasing, audit etc. to qualified specialists.
2. Calculating the profit and productivity impacts of investments in I.T. is not an accounting exercise. If you have a chance to examine one of my many E-publications on www.strassmann.com you will find that I.T. is increasingly connected to a firm's competitive survival.
3. I.T. investments affect matters of technical risk, security, business effects and the complexity of bureaucratic processes. CFO's expertise is in matters of finance, not in experience with the impacts of information technologies.
If CIOs (Chief Information Officers) are to earn their keep they must assist top management of a firm in successfully piloting through the unprecedented difficulties associated with the transformation of an organization to an information-based enterprise.
