The question, "What is value?" has plagued scholars as far back as the 14th century. Twenty-first century consultants like Paul Strassmann, of New Canaan, Conn., are applying basic economic concepts of value to their understanding of what makes IT pay.
In a nutshell, here's how Strassmann calculates value added. By delving into the innards of annual reports, Strassmann winnows down revenues. First he subtracts the cost of purchased goods, energy and services, as well as interest costs and taxes. Then he subtracts shareholder value added, operations costs and management costs. What's left over is management value added.
Strassmann calls the ratio of management value added to management costs "return on management," or R-O-M(TM) (not to be confused with read only memory).
Why is R-O-M important? Because return on equity, return on assets and every other traditional financial metric ever studied have failed to yield a positive correlation between business performance and IT investment, says Strassmann. And that gave rise to the productivity paradox; nobody could tell why some companies succeed, with IT investments yielding revenue growth, and other companies fail. R-O-M is the only statistic Strassmann tested that has shown a positive relationship to IT spending.
But doing value-added analysis on your company can be a bit like a painful visit to the doctor. If your company is ill, there may be tough medicine to swallow. Nonetheless, such Fortune 1000 companies as Coca-Cola, Harnischfeger Industries, AT&T and Quaker Oats are using EVA metrics now. And a few of them are even tying executive compensation to the data.
For more information, fax Strassmann at 203-966-5506, or E-mail to info@strassmann.com.