The title "chief information officer" is pretentious says industry
pundit Paul Strassmann - at least until CIOs are important enough to be
sent to jail when they foul up.|
If you think of an executive committee as a family, then the head of finance is the annoying older brother, who is always telling you what to do. The head of IT, on the other hand, would be the bratty youngest child.
Often the executive most recently appointed to the committee, they may be seen and not heard and expected to heed the wisdom of their elders. Most annoyingly, finance may be given the final say in decisions that IT believes it should own.
But according to IT industry pundit Paul Strassmann, this is about to change, with IT directors being given an adult place at the table. And if you're tired of finance's patronising older brother advice, there is more good news. As the influence of IT directors increases, Strassmann predicts, that of finance will decline.
EVOLUTION OF THE CFOAccording to Strassmann, the head of finance has clout mainly because they have "fiduciary" duties. That is, CFOs have legal responsibility to ensure that a company cares responsibly for its financial assets and that financial records are correct. If they fail in this duty, the CFO can go to jail, often dragging the rest of a company's directors with them-enough incentive for boards to value a CFO's advice over that of other executives.
However, Strassmann believes that a new form of capital, "knowledge capital", (see boxout on p75) is becoming more critical to business than financials. While fiduciary duties will always exist, in the future caring for financial assets will be a less critical management task than caring for knowledge assets.
So if at present a CFO derives their political power from having the final word on financials, in the long-term their influence will be eclipsed by that of the person responsible for knowledge, the IT director.
Strassmann admits that this is speculation, and refuses to be drawn on a timeline for change, or to explain in detail how the IT director's role will change.
But at the same time, he feels that change is "inevitable". But given the conservatism of the financial world in making changes to corporate law, will it ever consider knowledge capital an important enough issue to force a rewrite of the rules?
Strassmann feels that even regulatory bodies that would like to ignore the issue will one day be forced to pay attention.
"When you look today at the valuations of corporations, you'll find that the knowledge capital of most US corporations is worth more than the financial capital. It's now in the US$10 trillion range. But if you looked only at traditional financial assets, you could buy all America at book value for US$3 trillion. Sooner of later, it will be in the interest of taxation authorities and investors, particularly, to ask how well knowledge assets are being protected," he says.
However, these US$3 trillion and US$10 trillion figures are Strassmann's own. While the financial world agrees in principle that there is value in knowledge, it is still arguing about how valuation should be determined.
The first step has been to put current accounting practices under examination in countries from the US to Scotland, but the reports being generated are not always good news for IT directors. The reason is that a range of non-financial assets being considered, many of which are not the responsibility of an IT director. Knowledge is on the agenda, but so too are customer goodwill, established brands, partnerships and other 'new economy' items. This raises the question: if brands turn out to be as critical as knowledge capital to the well-being of a company, does this mean that marketing directors should also be handed their own 'fiduciary-style' responsibility and greater influence than a CFO - or an IT director?
Regardless, the American Financial Accounting Standards Board (FASB) is cautious about ascribing value to non-financial assets. Its April 2001 report, Business and Financial Reporting, Challenges for the New Economy, says "commentary, analysis and description are vital components of any reporting system, but business ultimately demands a form of scorekeeping".
Non-financial assets are hard to quantify and measure consistently between companies, the report notes. The trick will be to find a way to "reach beyond those traditional metrics and capture information about perceived value drivers in the new economy-a company's workforce, customers, and ability to innovate". (A link to this report, and to its examination of new metrics under consideration, is available on MISweb.)
But regardless of whether standards bodies may be locked in committee for some years, there are signs that big corporates are actively considering non-financial reporting-a process that could put political pressure on slow-moving regulators.
Companies now include more 'narrative' in their annual reports, says Andersen. This is information that companies are not legally required to provide and often includes non-financial business metrics that directors feel are relevant in explaining expected performance.
According to Andersen's October 2000 survey, Corporate Reporting in the New Economy, narrative took up only 45 per cent of the space in the average annual report in 1996 but by 2000, this had jumped to 57 per cent.
HELPING YOURSELFIf political pressure from business will help the IT directors' case, can IT directors themselves also lobby regulators and business to speed up acceptance of knowledge capital?
Strassmann himself is a passionate advocate of the topic-in fact, he has been in that field so long that he holds the trademark for the phrase 'knowledge capital'. An ex-CIO who has run IT for the Pentagon, Xerox and Kraft, Strassmann still consults to the US Defence Department and teaches at the US military academy at West Point.
At turns charming when putting his ideas across and impatient when he believes they are not understood, he tours the world publicising a need for business to re-think its approach to capital and to valuation.
To answer the lobbying question, Strassmann says the IT directors should consider how the CFO role changed in the last century.
"Look at the evolution from the bookkeeper to the accountant to the CFO. Did the bookkeepers lobby for this? The answer is no. The political authorities, particularly when there were large fraudulent situations, said 'You'd better go and find somebody'," Strassmann says.
So is the solution for IT directors to make themselves into public scapegoats for problems with knowledge? He believes this is almost happening already.
The most obvious type of knowledge negligence, he says, is problems with information security.
"Financial capital is hard to steal. Factory buildings cannot be put on a truck," he says. "But knowledge capital has the unusual property that it can disappear. Sooner or later, it will be in the interest of taxation authorities and investors, particularly, to ask how well knowledge assets are being protected."
INCREASED RESPONSIBILITYIn fact, Strassmann argues that even today responsibility for information security is increasing the influence of IT directors within their companies. For example, a US presidential order has forced groups who are vulnerable to information warfare-including financial services, government, energy and other vital services-to form ISACs (Information Sharing and Analysis Centres).
Who attends the meetings? A CIO, says Strassmann, who is then making decisions for their entire company. The ISACs are a binding meeting, he explains, "because someone has to sign on behalf of the firm that 'We will comply with the following precautions'."
This is the type of gradual change in responsibility that IT directors should expect, he warns. "CFOs did not get anointed CFOs in 1934 when all this regulatory stuff came out. It was a progression. It accelerated. But you can quote me it is going to happen. We're questioning how and when."
The most critical change will be the IT department taking on its own fiduciary-style responsibilities.
"The CIO is today at the level of evolutionary development that the CFO was 100 years ago when the CFO was called a bookkeeper," he says.
"The title of chief information officer is pretentious to say the least, given the level of responsibility," Strassmann says. "What I want to put forward as an idea is that for the CIO to truly be a CIO he or she must have fiduciary responsibility. In other words they have to go to jail if something goes wrong."
PREPARE FOR CHANGEWhile Strassmann refuses to be drawn on a timeline for the creation of fiduciary-style responsibility for CIOs, he does offer advice on how to prepare for this change.
WEB LINKSLinks to Strassmann's six books, biography, consulting services and articles describing the benefits of knowledge capital, can be found at www.strassmann.com.
DEFINING KNOWLEDGE'S VALUEWhat is knowledge capital? Begin by considering the contribution that an employee makes to their company's ability to generate revenue-more experienced staff are arguably more effective producers, whether they create new ideas in a research & development department or goods for customers.
Problems arise, however, when companies want to claim this expertise or knowledge as an asset.
First, it is hard to value consistently between companies. A food retailer may consider the secret recipe for Kentucky Fried Chicken to be valuable knowledge capital where a bank with no interest in selling chicken will not.
Second, traditional accounting demands that assets can only be labelled as such if they are under the company's control. If staff take their expertise home with them when they leave the workplace each night, then it cannot be said to be controlled.
This is where IT directors enter. Strassmann says: "Ultimately, when you look at knowledge, it manifests itself through communication and this communication is increasingly electronic. You can have a guru sitting in a research laboratory but if the phone doesn't work, or the Web doesn't work, or his database has been destroyed and his experimental results compromised, you've blown it."