For Great IT, Focus on the Information, Not the Technology

October 19, 2005

The Baseline 500 quantifies not how well information systems work, but how well corporations manage information. The companies that thrive in the information age keep costs low, focus on the business first and motivate their teams.

It's not easy to stay in or at the top of the Baseline 500, the annual ranking of the 500 publicly traded companies that manage information best.

Just ask the 159 companies that dropped off the list from 2004 to 2005, or the six companies that were in last year's top 10 but didn't repeat this year, because their effectiveness wasn't what it used to be. Only four companies—Chesapeake Energy Corp. (No. 1), Apache Corp. (No. 4),

Eagle Materials (No. 6) and Valero LP (No. 8)—managed to again place among the list's leaders.

Bottom line: Maintaining high Information Productivity isn't easy, and it's very difficult to stay exceptional for a long time. Average is the norm.

"It's the law known as regression to the mean," says Paul Strassmann, a former technology executive at Xerox and Kraft Foods, who has created and trademarked the Information Value-Added and Information Productivity metrics. "Very few can sustain these elevated levels of Information Productivity. There's always churning."

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PAUL A. STRASSMANN

Paul created and trademarked the Information Value-Added and Information Productivity formulas behind the Baseline 500 rankings. His career in technology, which began in 1956, includes stints as a top information-technology executive at Xerox, General Foods, Kraft, the Department of Defense and NASA.

Strassmann is president of The Information Economics Press and senior adviser to Science Applications International Corp.; he is also Distinguished Professor of Information Sciences at George Mason University's School of Information Technology and Engineering.

He has written numerous articles and books on information management, including Information Payoff: The Transformation of Work in the Electronic Age (1985) and The Squandered Computer (1998).

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The Baseline 500 sets out to quantify not how well information systems work, but how well corporations manage information. The actual system can be pen and paper, word of mouth traveling down a hallway or a fancy enterprise planning setup. Why? Managing information includes far more than technology. It includes brainpower, good processes, insight and the ability to manage teams well. For instance, Berkshire Hathaway (No. 420) doesn't have a chief information officer, and chief executive Warren Buffett prefers scratch pads and pencils to databases and keyboards.

Strassmann believes information is the glue that holds together all the components of profit. So, the goal of the Baseline 500 is to measure the effectiveness of a company in the information age, as opposed to a manufacturing or agricultural age.

The rankings, culled from a database of 2,324 public companies, are based on two benchmarks: one that measures the value added to a company's economic performance by good information management, called Information Value-Added; and one that incorporates the costs involved with producing value-added, called Information Productivity.

Information Value-Added is profit minus the cost of capital invested by shareholders. Think about a few of the components of profit—labor, inventory and customers. Without critical information about those components, it's unlikely you'll have a profit. Given that fact, Information Value-Added derives from profits after taxes, tossing out preferred dividends, one-time charges and other adjustments. Then, profit is lowered to account for the returns owners expect on the invested net assets. When that expectation is exceeded, you get value-added.

Information Productivity takes the Information Value-Added figure and divides it by the costs of information transactions. These are the company's selling, administrative and general expenses, of which information-technology spending accounts for 10% to 35%. Information Productivity is the gauge Baseline 500 uses to rank the top 500 companies. The message: Managing information is your edge.

What you get after the number-crunching is the 500 most productive users of information among U.S. publicly traded firms (see "Do It Yourself," p. 60).

The quintessential Baseline 500 company does the following:

KEEPS COSTS IN CHECK. Wilmington Trust Corp. (No. 419) chief information officer Mike Chandler benchmarks his technology staffing levels against those of his peers to keep labor costs in check. Meanwhile, Ampex Corp. (No. 9) is the smallest company in the Baseline 500 with $102 million in sales, and has only two people focused on information technology. Both of them have other responsibilities.

Last year's No. 1, Washington REIT, fell out of the rankings entirely because its expenses soared. The company says that 2004 general and administrative expenses increased 17.5% to $6.19 million, up from $5.27 million, partially because of expenditures related to new financial reporting requirements of the Sarbanes-Oxley Act of 2002.

FOCUSES ON THE BUSINESS FIRST. Mitchell Gregory, chief information officer of Sonic (No. 65), a chain of burger joints, is responsible for market research, such as taste tests and telephone polls, in addition to technology. For Sonic, having one executive responsible for technology and market research ensures that

information management will lead to its primary goal—to cook up new burgers and sandwiches to juice sales.

KEEPS PROJECT TEAMS SMALL AND EMPLOYEES MOTIVATED. Chesapeake Energy CIO Cathy Tompkins encourages employees to make decisions and not overanalyze (see profile, p. 18). To comply with Sarbanes-Oxley, Chesapeake didn't budget any technology projects. Instead, internal auditors mapped out controls in Microsoft Access; then, the information-technology team translated that model to the company's Microsoft SQL Server databases to control companywide processes. Werner Vogels, chief technology officer at Amazon.com (No. 225; see profile, p. 32), has embraced Amazon's two-pizza rule for his project teams. If a team needs more than two pizzas for dinner, it's too big.

Of course, this year's Baseline 500 does contain a few constants. Energy companies still rank high, because they don't have to add any new management to take advantage of the rising prices of the black gold they sell. Gas prices at the pump in September topped $3, double that of a year ago.

And financial services firms keep ranking high because they do not deal in a substance or packaged good—their stock in trade is numbers. They can automate almost any cash, securities or even real-estate transaction to keep costs low and profits up.

Nevertheless, newcomers filled the Baseline 500, and more than half of them are small or midsize companies. Seven companies in the top 10 - KCS Energy (No. 2), Cimarex Energy (No. 3), Eagle Materials, Entertainment Properties Trust (No. 7), Valero LP, Ampex Corp. and Overseas Shipholding Group (No. 10) - have sales below $1 billion.

The Baseline 500 also provides a window into which industries are performing well - and producing returns for investors. Strassmann plotted the companies in the Baseline 500 against their stock market valuation minus shareholder equity as reported in their annual reports. The correlation between the net stock market valuations and Information Value-Added was a very high 86.3%.

Another discovery: Food companies are getting more productive. Aramark Corp. (No. 61), which provides services for universities, sports facilities and other venues, was the leading food purveyor in the rankings, followed by Sonic.

Technology companies are also getting better at managing their own. The 2004 rankings featured 20 hardware, software and services giants. This year, 30 technology firms made the list. SunCom Wireless Holdings (No. 32), Cincinnati Bell (No. 91), Peregrine Systems (No. 93) and Lucent Technologies (No. 105) were among the leaders. For Lucent, which is focusing on services instead of telecommunications equipment, Information Productivity of 95.3% is quite a turnabout considering that the company in 2002 lost $11.9 billion—an amount on par with that year's revenue. What changed? Lucent slimmed down, cutting operating expenses to $2.57 billion in 2004 from $8.5 billion in 2002. Lucent reported net income of $2 billion for 2004 on revenue of $9 billion.

But technology companies still aren't the best at managing information; not one cracked the top 20 for 2005.