Diet? What Diet?

by Paul A. Strassmann

Computerworld
September 3, 2001

One of consultants' and academics' favorite assumptions about the effects of computers is that they help reduce the size of corporate assets. Computer applications, they claim, reduce inventories, accelerate revenue collection, promote better capacity utilization, increase the reliability of just-in-time ordering of parts and speed up work in process. If you sift through all of the claims that were made by proponents of "enterprise systems," most of the measurable benefits were always attributed to a dramatic decline in the value of corporate assets rather than reductions in labor costs.

Ever since the infatuation with enterprise systems fizzled because of excessive costs, those same promises were transplanted to various forms of interenterprise systems, such as the highly touted expectations of benefits from e-commerce.

I've always been bothered by the persistence of the myth that computers are a surefire wonder diet to slim down corporate assets. But I had no way of independently verifying this claim. Anecdotal descriptions in computer magazines didn't help because they never delivered hard numbers, nor did they document what actually happened.

The latest compilation of more than 25,000 annual reports of every major, listed corporation in the world led me to study their latest financial data and share my findings with readers. My approach: Focus on the trends in the deployment of corporate assets during most of the past two decades, when companies were installing computers at a rapid rate. Corporations were placing the largest bets on the prospective payoffs from computers. When corporations invested in IT, asset reduction always led the parade of prospective tangible gains.

Here's evidence of what nearly two decades of exuberant spending has delivered.

Soaring Assets
A long-held, favorite assumption about computerization is that the more you have, the fewer corporate assets you need. But a look at corporate data suggests that the opposite has happened since 1982.

I compared the amounts of total corporate assets needed to support each dollar of corporate revenue. If the hypothesis of computerization as an asset-saver were to hold up, then the percentage of total assets to total revenue would decline. Consistent historical data for assets and revenues was available for 1,848 randomly chosen U.S. corporations with total assets in 1999 of $16.6 trillion and total revenues of $7.4 trillion. This sample represents most of the total corporate assets.

The steady gain in the percentage of assets necessary to support revenues caused U.S. firms to require an additional $7.1 trillion in assets in 1999, 75% more than what worked for them in 1982.

To check whether the U.S. experience was unique, I also examined similar numbers for the U.K. and the Netherlands, which are noted for their good experiences in applying IT. But even in those countries, there has been a steady increase in the assets required to support each dollar in revenue.

Implications: The past two decades saw the installation of increasingly complex and costly information management systems that promised reductions in most asset accounts. After examining the data in audited financial statements, I can only conclude that the expected contributions of computers can't be verified in the numbers.

The percentage of total assets to total revenue is a most telling indicator that will help CIOs validate the effectiveness of their IT projects. Given the increased pressure on CIOs in today's slowing economy to justify and then track the payoffs from IT investments, this metric will offer highly credible proof of superior performance because it can be linked directly to financial statements. From now on, what counts is what benefits shareholders. The prescription for that: Create a trim organization that can compete with fewer assets to support rising revenue.

Strassmann will be publishing corporate-level details of trends in economic indicators in future issues. Contact him at paul@strassmann.com.

Copyright 2001 by IDG Communications, Inc., 500 Old Connecticut Path, Framingham, MA 01701.
Reprinted by permission of Computerworld

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