Information Age
December 2001

IT ECONOMIST: PAUL STRASSMANN

Information Age (IA): When you served as Director of Defense Information in the early 1990s, you presided over a $35 billion cost-cutting programme. Many chief information officers (CIOs) today have to cut costs on a much smaller scale. How do you go about identifying where to cut costs?

Paul Strassmann (PS): Before placing the IT budget on the chopping block, one must first identify and assess a firm's strategic strengths and weaknesses relative to competition. I have always found that one needs both to increase IT spending in some functions while simultaneously cutting costs in others. Cuts should take place wherever the total cost of ownership (TCO) of a business process is demonstrably excessive. There are a variety of techniques for making such a determination. I favour competitive benchmarking. For instance, if the TCO of making millions of small purchases is greater than $100 per transaction (as was the DoD case), the entire process is placed on the chopping list because the number should have been closer to $40 and possibly as low as $25.

IA: What kind of resistance can CIOs expect to face to when cost cutting? Given that most CIOs have not had to cut costs before, what advice can you give them?

PS: Cost cutting is a means for altering the established organisational power balance - by other means. It can be accomplished by brute force, stealth or by legitimate means. How an organisation regulates what I call the 'governance' of budgeting is an issue that determines whether the cuts will result in intramural 'civil wars' or in an orderly process for adjudicating business priorities. My best advice to a CIO is to devote a great deal of time making sure that the costcutting process is legitimate and that there is a well understood 'due process' for resolving differences as to what is important and what is not.

IA: In your experience, do most CIOs have the experience or the authority to do this? Or does another senior officer - the CEO or COO - usually have to drive this?

PS: The issue of appropriate authority to make decisions becomes the core of what I refer to as governance. Authority must be legitimised using established processes. In my case at the Department of Defense, this derived entirely from directives known as DMRDs (Defense Management Review Decisions), which had to be signed either by the Secretary of Defense or the Deputy Secretary of Defense. The DMRDs spelled out in detail specific authorities, including the process for making budget adjustments.

IA: People talk about certain technologies, such as customer relationship management (CRM), as having a strong return on investment (ROI) case, while other technologies are more often described as being 'necessary' or even as providing 'long term competitive edge'. In your experience, are there certain technologies that clearly pay for themselves, and others that are much less likely to?

PS: Technologies without strategic context are only toys. There are no 'miracle drugs' that can be safely prescribed for all maladies. CRM may be just what's needed in some cases, while it can create just the opposite effect in different situations.

IA: You have sometimes been portrayed as an adversary to the traditional CIO, because you advocate such tight budgetary control. But you actually seem to be arguing for more power and authority, so that he or she can drive strategy from the top.

PS: I have been a consistent advocate for the CIO to leverage the existing budgeting processes in order to legitimise what they propose to accomplish. I am all in favour of cajoling the reluctant bureaucrats with arguments about technological advantages. But every rational argument must also be backed - as a last resort - with the power of the purse, which is the source of all corporate power anyway.

IA: Is it possible to make large cuts without losing the competitive advantage that people expect from investing in information technology? Is it possible to measure this?

PS: There is no relationship whatsoever between IT spending and competitive superiority. Competitive edge is gained almost always by skillful focusing and balancing of all resources on what is critically decisive. One can measure this by assessing a firm's Economic Value-Added and, in the long run, by returns on shareholder equity. My position is that most US corporations have over-invested in IT and are long overdue to cut back on IT growth to restore sanity in information management.

IA: According to the Gartner Group, IT spending as a percentage of revenues will increase in every significant vertical sector between 2001 and 2005. At the moment, according to Gartner's calculations, that stands at 2.89% of revenues in Europe, and will rise to 4.07%. Is this a sign that Europe is repeating the mistakes of the US?

PS: This forecast is nonsense. All you have to do is to run the numbers to see if they pass the 'smell test'. Since EU revenues are expected to grow at least 4% per year (this includes an allowance for low inflation), projecting the IT spending from 2.89% to 4.07% suggests that corporate IT budgets would increase 65%. As the prices of information technologies are declining about 25% per annum, this implies that EU firms would be actually purchasing 400% more IT capacity!

How that can be accomplished profitably is questionable.

IA: Almost every software salesperson is now armed with casebooks and return on investment calculations. What is you opinion of these? How should organisations engage with them?

PS: Simply ask them to perform the identical calculations as they would apply to your specific situation, in a manner which is both verifiable and measurable.

IA: You have recently been talking about new analytic techniques that can be used in justifying IT investments. Can you explain how these techniques work?

PS: My approach is to focus entirely on the risk-adjusted discounted cash flow of a proposed investment strategy. The projected revenue, profit and market share gains should be then locked into the profit plan and into the executive bonus plan.

IA: Experience suggests that, even where rigorous ROI calculations are carried out, they are not followed up after an investment has been made. What systems can be put in place to help people to ensure that ROI is monitored?

PS: After an approved investment strategy is locked into the operating as well as into the long range plan, the monitoring of progress is then simply a matter of tracking operating variances against budget on a monthly and quarterly basis.

IA: There is a trend towards linking payment to suppliers, in part or whole, on the basis of the project meeting its business objectives. Have you experience of these?

PS: Yes, I favour the inclusion of escalating 'performance bonuses' for performance that exceeds the contracted targets.

IA: Surely there are so many variables that this is a recipe for a dispute. After all, there are usually at least three parties involved (customer, integrator and product supplier), each ready to blame the other for objectives not being met.

PS: Performance bonus contracts must be bilateral to avoid irresolvable three-sided disputes. Also, so far as I am concerned, the product supplier should not be entitled to performance bonuses. For product suppliers, conventional contracts, with warranties, should be sufficient.

IA: Some researchers have suggested that as much as 40% of IT spending is 'off-budget'. This seems a lot. Should CIOs worry about this?

PS: I have encountered the 40% 'stealth spending' factor several times. The spending then shows up in other administrative overhead accounts. This is why I have been advocating for years that if you really wish to have a CIO then viewing his role only as a custodian of the IT budget is a sham. A CIO must be accountable for information spending, regardless of where it appears.

Paul Strassmann is one of the true luminaries of global IT management. Over a career that spans five decades, he has led corporate information systems strategy at some of the world's largest and most prestigious organisations. In the 1960s, he was CIO of Kraft Foods; in the 1970s, he directed worldwide information systems at office systems giant Xerox; in the the 1990s, he took on the mammoth task of managing the US Department of Defense's $10 billion IT budget; and since then he has become a renowned and prolific lecturer, consultant, adviser and writer on information management, IT economics, 'information warfare', and productivity.

That broad experience has given him deep insight into the changing role of the CIO - especially when operating in a time of severe budgetary constraints. At the Department of Defense (DoD), in particular, Strassmann was made Director of Defense Information, responsible for organising and managing the corporate information management programme across the DoD, which included a $35 billion cost reduction and business re-engineering programme of the defence information infrastructure.

At Xerox, he crossed the traditional boundaries of the CIO. Aside from directing worldwide computer, telecommunications and administrative functions, Strassmann was part of the team that shaped Xerox's move beyond copiers and into general office automation systems. Pushing the CIOs skills base further, he took on responsibility for Xerox's strategic investments, acquisitions and product plans for the company's electronic business.

His experience has been distilled in scores of publications. His Information Payoff The Transformation of Work in the Electronic Age is now on its tenth edition, and other books - The Business Value of Computers, The Politics of Information Management and The Squandered Computer - focus on a recurring theme, and one that has never been more pertinent: ensuring IT delivers an acceptable return on investment.

Today as president of The Information Economics Press, he lectures at major universities and is called in as strategic advisor to scores of multinational companies. But perhaps Strassmann's standing can be summed in three phrases: 'Return-on Management', 'Information Productivity' and 'Knowledge Capital' - phrases on which he holds the US trademark.