There's an old trick I used when I was a CIO. Whenever I had to explain to my boss why I needed to increase the IT budget, I showed a long list of new government reporting requirements: accounting, personnel, environmental safety, Equal Opportunity administrators, warehousing and health care. That list always grew. There were years when I could explain that more than 20% of my requests for more money offered no other payoff than the avoidance of penalties or even jail sentences.
So I've always suspected that one of the likely explanations of the "computer paradox" - defined as rising computer expenditures without any evidence of rising productivity - was spending that generated no additional value, such as responding to government requirements.
Despite all the government initiatives claiming to cut business-reporting burdens, more than 200,000 extra pages of laws, regulations and administrative instructions from Washington, state capitals, counties and municipalities every years according to Forbes magazine. The result: new workloads.
Federal paperwork compliance costs ranging from $2,267 to $6,726 a year per employee, depending on a firm's size and industry classification, according to economics professor Thomas D. Hopkins in his November 1995 report to the U.S. Small Business Administration, ``Profiles of Regulatory Costs.'' Using Hopkins' estimates, I've been able to compare compliance costs with statistics to which a corporate CIO can relate.
Taxpaying corporations spent an estimated $98 billion in federal paperwork in 1994, so Washington could collect $175 billion in taxes. Without the paperwork, corporate pre-tax profits could have been 20% higher. Some firms incurred as much as $10 of compliance paperwork for every dollar of taxes paid. Such high ratios are the consequence of a disproportionate burden of paperwork on smaller companies who have to fill out the same forms as giant corporations.
Companies that didn't pay any taxes incurred an estimated total compliance cost of $6.3 billion. Without the paperwork their pre-tax losses would have been cut by a quarter. One hundred and eleven companies not paying taxes would have reported pre-tax income instead of pre-tax losses.
To what extent did the federal paperwork compliance cost explain corporate overhead? One measure is the number reported as Sales, General & Administrative (S.G.& A) expense. For the taxpaying corporations, the compliance costs accounted for 9.8% of their S.G.& A., exceeding total expenses for research and development in almost every instance.
All together, 55% of 3,477 major U.S. firms spent more on paperwork to comply with federal regulations than they paid in taxes in 1994, amounting to a 59% tax surcharge.
My database includes information about more than 600 corporate IT budgets and how they relate to corporate overhead. A dollar's worth of corporate administrative costs consumes anywhere from 15 to 25 cents of computer expenses. That suggests that about $30 billion of computer processing is required just for reporting to the federal government for the 600 major corporations. This amounts to about 10% of all IT budgets: computer time for work that creates no economic-value added.
I have no data on comparable expenses for state and local governments, but processing their demands is likely to represent a noticeable addition on top of federal requirements.
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