Twenty years of experience as a CIO trying to explain budget increases to corporate executives has taught me that our traditional means of evaluating productivity don't work. In this issue, you'll find criteria that do.
This year's listing of Computerworld Premier 100 companies was compiled based on my own Information Productivity(tm) Index.
Information Productivity(tm) measures and rewards the effectiveness of corporate management. It does not reward the more common metrics of information technology spending, such as computer budget, the value of installed equipment or other measures of brute force. That is because there is no demonstrable correlation between the financial performance of a firm and the amount it spends on information technologies. What matters is not how much you spend but how well you spend it in supporting business missions and contributing to productivity.
The old justification methods don't work because they rely on ratios that measure the efficiency of capital. These indicators have such names as return on assets, return on investment and return on equity. But in modern enterprises, capital doesn't mean as much as it used to. The performance of high technology and service businesses are influenced more by the quality of their management than by their assets.
Productivity is the ratio of output to input. Unfortunately, there's no place for management's output on an income statement. But there is a way to calculate it. If you subtract from after-tax profits the value of the shareholder's equity capital, what's left is the value of management.
Technology isn't productive in itself. But well-managed, superbly trained and motivated people -- with or without computers -- can show measurable gains in output.
Input of management is the cost of the coordination of an enterprise, frequently defined as either overhead or indirect costs.
These definitions of output and input reject conventional productivity measures. For example, revenue is not a measure of output because it includes value added by suppliers. Profits are not an acceptable measure of performance because they don't include compensation to shareholders. Costs--especially costs per employee--are misleading indicators of input because they include the value of purchases. The value of assets is irrelevant as a measure of input because leasing and outsourcing distort that statistic.
Recent improvements in financial reporting and the availability of detailed financial information have made it possible to calculate a reasonable return on management. For output, I use Stern, Stewart & Co.'s popular Economic Value-Added (EVA). If EVA is not available, output can be calculated by subtracting from operating profit after taxes the value of shareholder equity, multiplied by the cost of capital.
The costs of sales, general and administration (SG&A) are a reasonable approximation of management costs. Divide EVA by SG&A to get the Information Productivity(tm) Index.
The Computerworld Premier 100 rankings have been calculated using published 1993 financial results for the Fortune 1000. Because some firms show wide swings in year-to-year profits, our rankings also considered three-year averages. Firms that reported favorable operating profits after taxes but also large accounting write-offs, which made their shareholder equity negative, were eliminated from consideration.
Because Information Productivity(tm) relates to the numbers that are watched and understood by your board of directors, your top executives and your shareholders, this year's Computerworld Premier 100 rankings offer a sound basis from which to start discussions on how to do better next year.
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