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Interview with Paul Strassmann
By Tom Iggulden
MIS Australia Magazine, June 1999

Case study first published in MIS Aust Jul 1999

In the firing line

Paul Strassmann has been studying information productivity for 30 years. He meshes that experience with a passion for history to form a compelling view of IT managers' responsibilities in modern business. By Tom Iggulden

It's not often you meet figures in the IT business who are truly inspirational. Oh yes, there are gurus aplenty, and certainly a wide and interesting range of opinions. IT managers, in fact, are almost always strategic thinkers with an uncanny knack of seeing around corners, figuratively speaking.
Paul Strassmann, as well as having these qualities, is inspirational. A leading exponent of the Economic Value-Added (EVA) model of information productivity, Strassmann is a big-picture thinker. His passion for history puts the information age in context, and his opinions on the responsibility of the IT manager are backed up with the weight of history.
Strassmann was the keynote speaker at the recent MIS MindShare Annual Retreat, where he presented his research into the productivity of information in US corporations. His background combines experience in information management with strong economic skills.
Strassmann began his career in IT management with Xerox Corporation in 1969, and was involved in the seminal Palo Alto Research Centre (PARC). He worked with Xerox in various information management capacities. It was during this time he began his life's work on information productivity and economics.
His focus during this time was on return on management (ROM), developing influential indicators on information productivity and knowledge capital.
Strassmann began publishing books on the subject in the early 1980s, beginning with Risk and Technological Innovation, before he left to begin consulting. During this time he chaired a White House committee on productivity. His work soon attracted the attention of some of America's biggest corporations, including General Electric, General Motors, Shell Oil, AT&T and IBM, among others, for whom he provided consultancy services.
Strassmann was also the first director of information at the US Department of Defence, where he was in charge of a US$35 billion cost reduction program. He left this post in 1993 and since then has been advising governments and corporations across the globe, including the Australian Defence Forces.
Much of your work touches on the contribution that IT can make in terms of the general economy and the wealth of a nation. How did you come to the view that IT could contribute to society in such a way?
Well, much of this is to do with the philosophy of how societies advance and dealing with the fundamental issue of historical forces. Mankind has a long history of probing to advance itself and to create liberty for people, and the ability to live in freedom.
My hobby is really the history of the world. In fact, I did the museum for Xerox's world headquarters on the history of communications covering 10,000 years. What I've come to recognise is that the evolution of a broad historical trend has always been based on mankind being able to capitalise on skills.
Whether that means chipping a stone, so that it then becomes a piece of capital, or whether it comes from an irrigation system, a steam engine and so forth, the progression of mankind has always been associated with mankind's tools. In fact according to some philosophical views, man is a tool-making animal. And you always see that there is a limitation of growth.
But you can only extract so much productivity out of raw materials and machine tools. And after a while you end up having as many refrigerators as possible. I became fascinated about 30 years ago with the whole notion of what is the next wave of mankind. In the last 50 years most of the developed countries have pretty much caught up with America in terms of income per capita. Everyone seems to stagnate at about $40,000 to $50,000 per capita.
I started looking at what limitations mankind has to overcome. And what basically happened was that as we started really developing a capability of almost unlimited supply of goods, the discounter that started kicking in was the overhead, or what I call social coordination costs. Starting in 1976, when I was able to look at the global Xerox Corporation, and I was able to look at 89 countries, I had total data about what copying equipment they sold, how many employees they had and so on ... total information.
I started to become very much concerned about the future of Xerox. Because it became quite obvious that Xerox, in terms of manufacturing these machines that spewed out more paper, was coming to a limit.
And this is where I started. In the early 1970s some of us started developing the concepts, which in those days we called the office of the future, but my writing rejected those terms. We started really looking at information-based society.
I started looking at the cost of coordination. What came out of this work was that if we don't solve the problem of coordination cost, then what are the economies that we get out of materials? They are going to be choked by the increased complexity and the increased cost of so-called middlemen.
In order to achieve the global distribution and optimisation of materials they have to start looking at a global society, global connectivity. Middlemen and warehouses and the like were just not going to work. And so I basically postulated in my first book that most developed countries can overcome the limitation of $40,000 to $50,000 in real income per capita and move to what may be perhaps as much as $250,000 real income per capita, in a fairly rapid way. [To do that] we have to try and find a way to overcome what is called market transfer costs.
You're talking about creating wealth in a society?
I'm talking about society, but wealth is created in corporations. Corporations are the engine of wealth creation. If you want to solve the societal problems, you have to look at the engines of wealth creation.
In terms of the individual CIO, how does he or she look past the day-to-day?
Well, are you cutting stones and building a wall, or building a cathedral? What I am beseeching these people to do - because they are enjoying a privileged position - is to start realising that if all they're doing is putting together rock piles, particularly brittle rock piles, then they're just going to invite doubt.
You mentioned in your keynote the danger of having generalists moving into the IT role.
Yeah, and the reason is again lessons from history. Competence is very important. If you want to build a civilisation based on information, then you must have people who really understand the dynamics and the risks. These MBA wonders, who sort of get flushed in and out as sort of custodians, are dangerous.
Let me tell you the story about the demise of the Spanish Empire, which used to be the most powerful empire in the world because they had all the gold. The fundamental flaw that the Spanish Empire made was that you could only hold a position as a general or as a captain of a warship if you came from a noble family. The Brits just took any pirate who knew how to run a ship. And guess who won the game?
The Brits?
The Brits. Without the gold, without anything except eking out a living.
So it was an economic victory as well as a social one?
That's right. So these grandees who enter parliament ... they just believe the latest buzzwords they read in the newspapers. You can't run things that way. I mean if you want to run a warship, you have to be a competent navigator. And your crew has to trust you in a storm. So that's my comment on MBAs running big computer operations.
And so the danger of IT managers becoming negligent in their duties is to the corporation and to society in general? And you know, it happens many times in history, and I can give you many examples of destruction of very prosperous societies, the collapse of the French Empire, the Spanish Empire, the Portuguese Empire. Ultimately all can be traced to the leadership of the politically correct.
There are certain things that have to be done professionally. Technology alone isn't good enough. But if you want to build something and provide true captains, then you must combine both the skill of navigation, the skill of command, the skill of knowing whether you have enough rations for the crew.
The other notable thing that I've picked up on during our conversations is that there is a strong warlike element to your conversations.
You're dealing with commercial warfare. The world as I see it at this juncture - and this is a very favourable development - has economic competition, which is a form of warfare. I don't like other warfare - Kosovo is a deplorable situation. Warfare is the proper way to deal with modeling what's going on. And much of the reason why people are technology-promiscuous is that it is an arms race. An arms race is OK, but then you also have to invest in the generalship, the ability to lead.
Ultimately, when everyone has the same weapons, it's the best troops and the best generals who win. And in fact having weapons alone will not win you the war, like we have proven in Vietnam.
The timespan in business today for competitive advantage is becoming much shorter.
It's becoming shorter, but this is why this phenomenon of Amazon.com is a dramatic phenomenon. This is about disintermediating coordination costs. This is the economic label for it.
Yes, I love that word, "disintermediation."
It's an armed attack on the whole establishment. You see it on brokerages and financial industries, all of these vestiges of entrenched, monopolised or quasi-monopolised transaction costs are just crumbling.
So in terms of this new economy, and the changing rules of engagement for business warfare, how does the IT manager of the future become a good general, and how do his troops become good troops?
Well you become part of the spear, the edge of the spear. The shaft is still provided by business, but the front edge of the spear and the aim must be perfect. It must be well-timed, economical, aggressive, reliable and most provide a protection against risk. If you trust a Spanish warship loaded with gold to a flunkey son of a Spanish grandee, well he's just going to get picked apart by the British pirates. You see, Betty Number One [Strassmann refers here to Queen Elizabeth the First] was basically a venture capitalist.
This is not a role many IT directors would see themselves as, a spearhead I mean.
It's almost comparable with what happened in England and Scotland in the mid-19th century where people like James Watt figured out steam engines. Steam engines had been around since the 1500s, but no one knew how to harness it into an environment.
For a technology to come through a number of political and economic conditions must be present to create this chain reaction. We are clearly at a point in history not equaled since the Rennaissance, and the Western World took off in the Rennaissance.
The Rennaissance took off and created the merchant class, and [saw] the breaking of the power of the church and the breaking of the power of the aristocracy. What I'm saying is that we are now at the threshold of a period - which may or may not come soon - where the power of the entrenched bureaucratic monopolies is weakened. Industrialisation has created wealth - the lawyers, the customs agents and the brokers. The information workers in the US now receive 64 per cent of all wages and salaries.
In the same way that the rise of the merchant class destroyed the power of the church and the landed classes, who is going to be the loser in this revolution?
In those days power lay with those who had land, which was the primary source of wealth, and the church sort of legitimised it. But in the same way as land as a primary asset was broken, we are now seeing the breakdown of financial capital as a primary asset. The dominant asset around which all the information warfare will revolve for, say, the next 100 years will be knowledge assets, prime assets that give you competitive advantage. In many ways this is a more precarious revolution because the risks are greater.
There is a strong element of responsibility on the IT manager here.
I take the theological view that people are responsible. With freedom comes responsibility. In my view, there are only two commandments, one is man shall be free, the other is that man shall be accountable. And so privilege is really a form of freedom, but with that goes accountability, because if you don't have that the freedom will be taken away.
I think there is a frustration out there with IT managers because people don't really understand what they do, and the contribution they make. I think it's good for IT managers to place what they do in some kind of context, that there is a great significance in what they do.
But few people get into IT for any altruistic reasons.
When you look at the history of ideas there are lots of reasons why people became Christians, and not necessarily financial reasons. As a human being life is brutal and short, you come and go. And so you have to provide some kind of hope beyond your own existence, otherwise you are just like a slug.
So the legitimacy of the privileged class, the intelligentsia and well-compensated people comes back to my second commandment [man must be accountable]. You must understand that until recently mankind really struggled for survival and financial well-being unless you were born into the right family. And so now that you have the position of privilege, for heaven's sake, don't give it away.
You must also be careful to make a distinction between technology and information and knowledge. What is at stake here is not the plumbing. This is where the thing gets lost. You call these people CIOs - it's nonsense, they're not CIOs. They are computer junkies. They are stone cutters. Now you will always need stone cutters, but the possibilities to take whole nations up the next slope, is up to a different class of people. I actually really believe it may well come out of the Pacific region.
The Chinese and Japanese cultures are going through a tremendous shock. In fact, because of the enormous human capital, they may turn out to be better off having gone through those tribulations. It takes 40 years in the wilderness sometimes to make a nation.
Once again, to bring this back to the day-today level of the IT manger, what does he need to do?
He has to become very good. He needs to survive. He really has to become the person that deals with information as a commodity, rather than as a privilege or a concession. Ultimately, information needs become a commodity. It has to be democratised, it has to be in a marketplace.
Every human being within 50 years is going to own hundreds of microprocessors. Chips in everything. They will have the ability to steer the process in the same way as the people who started managing steam engines and then electrical motors.
In my house today I may have hundreds of electrical motors. Actually, last time I counted it was 60. They are in places you wouldn't even expect. People never give enough thought to the amount of electrical motors they have in their houses. The beauty of the chips is that they are actually capable of populating everything, including your milk carton and the contents of your refrigerator. But if you would have told my grandfather that his grandson would own 100 electrical motors, he wouldn't have believed it. Yet the engineering of that transition - making it possible for the enterprise to convert all of this into economic value - is really the task of the IT manager [when chips are pervasive].
It is the ability of the IT manager who isn't just the technology pusher, the architects of information, not the plumbers, is the role of the IT executive in the 21st century. The architect designs, looks at the economics. They need to hire in contractors, the plumbers, the excavators and so on. But you build a cathedral.
This whole notion that the IT executive becomes an architect that can match the needs of society, the customer, can deal with competition, and really show the corporation how it can integrate information and knowledge into its economic engine, is really the task. And if they don't lift themselves, they will just remain the plumbers, the service workers.
This interview was recorded at the MIS MindShare Annual Retreat, May 1999.

The power of IT

Financial capital and labour are less important in the modern corporation than knowledge capital;
IT managers have a responsibility to generate wealth for their organisations and advance the standard of living in their societies;
IT should be used to generate new markets and defeat opposing organisations;
IT managers must have a background in IT and understand what they are managing.

The progress of mankind has always been associated with mankind's tools

These MBA wonders, who sort of get flushed in and out as custodians, are dangerous

The timespan in business today for competitive advantage is becoming much shorter

Return to Strassmann, Inc.

	Case study first published in MIS Aust Jul 1999
	In the firing line Paul Strassmann has been studying information productivity for 30 years. He meshes that experience with a passion for history to form a compelling view of IT managers' responsibilities in modern business. By Tom Iggulden
	It's not often you meet figures in the IT business who are truly inspirational. Oh yes, there are gurus aplenty, and certainly a wide and interesting range of opinions. IT managers, in fact, are almost always strategic thinkers with an uncanny knack of seeing around corners, figuratively speaking. Paul Strassmann, as well as having these qualities, is inspirational. A leading exponent of the Economic Value-Added (EVA) model of information productivity, Strassmann is a big-picture thinker. His passion for history puts the information age in context, and his opinions on the responsibility of the IT manager are backed up with the weight of history. Strassmann was the keynote speaker at the recent MIS MindShare Annual Retreat, where he presented his research into the productivity of information in US corporations. His background combines experience in information management with strong economic skills. Strassmann began his career in IT management with Xerox Corporation in 1969, and was involved in the seminal Palo Alto Research Centre (PARC). He worked with Xerox in various information management capacities. It was during this time he began his life's work on information productivity and economics. His focus during this time was on return on management (ROM), developing influential indicators on information productivity and knowledge capital. Strassmann began publishing books on the subject in the early 1980s, beginning with Risk and Technological Innovation, before he left to begin consulting. During this time he chaired a White House committee on productivity. His work soon attracted the attention of some of America's biggest corporations, including General Electric, General Motors, Shell Oil, AT&T and IBM, among others, for whom he provided consultancy services. Strassmann was also the first director of information at the US Department of Defence, where he was in charge of a US$35 billion cost reduction program. He left this post in 1993 and since then has been advising governments and corporations across the globe, including the Australian Defence Forces. Much of your work touches on the contribution that IT can make in terms of the general economy and the wealth of a nation. How did you come to the view that IT could contribute to society in such a way? Well, much of this is to do with the philosophy of how societies advance and dealing with the fundamental issue of historical forces. Mankind has a long history of probing to advance itself and to create liberty for people, and the ability to live in freedom. My hobby is really the history of the world. In fact, I did the museum for Xerox's world headquarters on the history of communications covering 10,000 years. What I've come to recognise is that the evolution of a broad historical trend has always been based on mankind being able to capitalise on skills. Whether that means chipping a stone, so that it then becomes a piece of capital, or whether it comes from an irrigation system, a steam engine and so forth, the progression of mankind has always been associated with mankind's tools. In fact according to some philosophical views, man is a tool-making animal. And you always see that there is a limitation of growth. But you can only extract so much productivity out of raw materials and machine tools. And after a while you end up having as many refrigerators as possible. I became fascinated about 30 years ago with the whole notion of what is the next wave of mankind. In the last 50 years most of the developed countries have pretty much caught up with America in terms of income per capita. Everyone seems to stagnate at about $40,000 to $50,000 per capita. I started looking at what limitations mankind has to overcome. And what basically happened was that as we started really developing a capability of almost unlimited supply of goods, the discounter that started kicking in was the overhead, or what I call social coordination costs. Starting in 1976, when I was able to look at the global Xerox Corporation, and I was able to look at 89 countries, I had total data about what copying equipment they sold, how many employees they had and so on ... total information. I started to become very much concerned about the future of Xerox. Because it became quite obvious that Xerox, in terms of manufacturing these machines that spewed out more paper, was coming to a limit. And this is where I started. In the early 1970s some of us started developing the concepts, which in those days we called the office of the future, but my writing rejected those terms. We started really looking at information-based society. I started looking at the cost of coordination. What came out of this work was that if we don't solve the problem of coordination cost, then what are the economies that we get out of materials? They are going to be choked by the increased complexity and the increased cost of so-called middlemen. In order to achieve the global distribution and optimisation of materials they have to start looking at a global society, global connectivity. Middlemen and warehouses and the like were just not going to work. And so I basically postulated in my first book that most developed countries can overcome the limitation of $40,000 to $50,000 in real income per capita and move to what may be perhaps as much as $250,000 real income per capita, in a fairly rapid way. [To do that] we have to try and find a way to overcome what is called market transfer costs. You're talking about creating wealth in a society? I'm talking about society, but wealth is created in corporations. Corporations are the engine of wealth creation. If you want to solve the societal problems, you have to look at the engines of wealth creation. In terms of the individual CIO, how does he or she look past the day-to-day? Well, are you cutting stones and building a wall, or building a cathedral? What I am beseeching these people to do - because they are enjoying a privileged position - is to start realising that if all they're doing is putting together rock piles, particularly brittle rock piles, then they're just going to invite doubt. You mentioned in your keynote the danger of having generalists moving into the IT role. Yeah, and the reason is again lessons from history. Competence is very important. If you want to build a civilisation based on information, then you must have people who really understand the dynamics and the risks. These MBA wonders, who sort of get flushed in and out as sort of custodians, are dangerous. Let me tell you the story about the demise of the Spanish Empire, which used to be the most powerful empire in the world because they had all the gold. The fundamental flaw that the Spanish Empire made was that you could only hold a position as a general or as a captain of a warship if you came from a noble family. The Brits just took any pirate who knew how to run a ship. And guess who won the game? The Brits? The Brits. Without the gold, without anything except eking out a living. So it was an economic victory as well as a social one? That's right. So these grandees who enter parliament ... they just believe the latest buzzwords they read in the newspapers. You can't run things that way. I mean if you want to run a warship, you have to be a competent navigator. And your crew has to trust you in a storm. So that's my comment on MBAs running big computer operations. And so the danger of IT managers becoming negligent in their duties is to the corporation and to society in general? And you know, it happens many times in history, and I can give you many examples of destruction of very prosperous societies, the collapse of the French Empire, the Spanish Empire, the Portuguese Empire. Ultimately all can be traced to the leadership of the politically correct. There are certain things that have to be done professionally. Technology alone isn't good enough. But if you want to build something and provide true captains, then you must combine both the skill of navigation, the skill of command, the skill of knowing whether you have enough rations for the crew. The other notable thing that I've picked up on during our conversations is that there is a strong warlike element to your conversations. You're dealing with commercial warfare. The world as I see it at this juncture - and this is a very favourable development - has economic competition, which is a form of warfare. I don't like other warfare - Kosovo is a deplorable situation. Warfare is the proper way to deal with modeling what's going on. And much of the reason why people are technology-promiscuous is that it is an arms race. An arms race is OK, but then you also have to invest in the generalship, the ability to lead. Ultimately, when everyone has the same weapons, it's the best troops and the best generals who win. And in fact having weapons alone will not win you the war, like we have proven in Vietnam. The timespan in business today for competitive advantage is becoming much shorter. It's becoming shorter, but this is why this phenomenon of Amazon.com is a dramatic phenomenon. This is about disintermediating coordination costs. This is the economic label for it. Yes, I love that word, "disintermediation." It's an armed attack on the whole establishment. You see it on brokerages and financial industries, all of these vestiges of entrenched, monopolised or quasi-monopolised transaction costs are just crumbling. So in terms of this new economy, and the changing rules of engagement for business warfare, how does the IT manager of the future become a good general, and how do his troops become good troops? Well you become part of the spear, the edge of the spear. The shaft is still provided by business, but the front edge of the spear and the aim must be perfect. It must be well-timed, economical, aggressive, reliable and most provide a protection against risk. If you trust a Spanish warship loaded with gold to a flunkey son of a Spanish grandee, well he's just going to get picked apart by the British pirates. You see, Betty Number One [Strassmann refers here to Queen Elizabeth the First] was basically a venture capitalist. This is not a role many IT directors would see themselves as, a spearhead I mean. It's almost comparable with what happened in England and Scotland in the mid-19th century where people like James Watt figured out steam engines. Steam engines had been around since the 1500s, but no one knew how to harness it into an environment. For a technology to come through a number of political and economic conditions must be present to create this chain reaction. We are clearly at a point in history not equaled since the Rennaissance, and the Western World took off in the Rennaissance. The Rennaissance took off and created the merchant class, and [saw] the breaking of the power of the church and the breaking of the power of the aristocracy. What I'm saying is that we are now at the threshold of a period - which may or may not come soon - where the power of the entrenched bureaucratic monopolies is weakened. Industrialisation has created wealth - the lawyers, the customs agents and the brokers. The information workers in the US now receive 64 per cent of all wages and salaries. In the same way that the rise of the merchant class destroyed the power of the church and the landed classes, who is going to be the loser in this revolution? In those days power lay with those who had land, which was the primary source of wealth, and the church sort of legitimised it. But in the same way as land as a primary asset was broken, we are now seeing the breakdown of financial capital as a primary asset. The dominant asset around which all the information warfare will revolve for, say, the next 100 years will be knowledge assets, prime assets that give you competitive advantage. In many ways this is a more precarious revolution because the risks are greater. There is a strong element of responsibility on the IT manager here. I take the theological view that people are responsible. With freedom comes responsibility. In my view, there are only two commandments, one is man shall be free, the other is that man shall be accountable. And so privilege is really a form of freedom, but with that goes accountability, because if you don't have that the freedom will be taken away. I think there is a frustration out there with IT managers because people don't really understand what they do, and the contribution they make. I think it's good for IT managers to place what they do in some kind of context, that there is a great significance in what they do. But few people get into IT for any altruistic reasons. When you look at the history of ideas there are lots of reasons why people became Christians, and not necessarily financial reasons. As a human being life is brutal and short, you come and go. And so you have to provide some kind of hope beyond your own existence, otherwise you are just like a slug. So the legitimacy of the privileged class, the intelligentsia and well-compensated people comes back to my second commandment [man must be accountable]. You must understand that until recently mankind really struggled for survival and financial well-being unless you were born into the right family. And so now that you have the position of privilege, for heaven's sake, don't give it away. You must also be careful to make a distinction between technology and information and knowledge. What is at stake here is not the plumbing. This is where the thing gets lost. You call these people CIOs - it's nonsense, they're not CIOs. They are computer junkies. They are stone cutters. Now you will always need stone cutters, but the possibilities to take whole nations up the next slope, is up to a different class of people. I actually really believe it may well come out of the Pacific region. The Chinese and Japanese cultures are going through a tremendous shock. In fact, because of the enormous human capital, they may turn out to be better off having gone through those tribulations. It takes 40 years in the wilderness sometimes to make a nation. Once again, to bring this back to the day-today level of the IT manger, what does he need to do? He has to become very good. He needs to survive. He really has to become the person that deals with information as a commodity, rather than as a privilege or a concession. Ultimately, information needs become a commodity. It has to be democratised, it has to be in a marketplace. Every human being within 50 years is going to own hundreds of microprocessors. Chips in everything. They will have the ability to steer the process in the same way as the people who started managing steam engines and then electrical motors. In my house today I may have hundreds of electrical motors. Actually, last time I counted it was 60. They are in places you wouldn't even expect. People never give enough thought to the amount of electrical motors they have in their houses. The beauty of the chips is that they are actually capable of populating everything, including your milk carton and the contents of your refrigerator. But if you would have told my grandfather that his grandson would own 100 electrical motors, he wouldn't have believed it. Yet the engineering of that transition - making it possible for the enterprise to convert all of this into economic value - is really the task of the IT manager [when chips are pervasive]. It is the ability of the IT manager who isn't just the technology pusher, the architects of information, not the plumbers, is the role of the IT executive in the 21st century. The architect designs, looks at the economics. They need to hire in contractors, the plumbers, the excavators and so on. But you build a cathedral. This whole notion that the IT executive becomes an architect that can match the needs of society, the customer, can deal with competition, and really show the corporation how it can integrate information and knowledge into its economic engine, is really the task. And if they don't lift themselves, they will just remain the plumbers, the service workers. This interview was recorded at the MIS MindShare Annual Retreat, May 1999.
	The power of IT Financial capital and labour are less important in the modern corporation than knowledge capital; IT managers have a responsibility to generate wealth for their organisations and advance the standard of living in their societies; IT should be used to generate new markets and defeat opposing organisations; IT managers must have a background in IT and understand what they are managing. The progress of mankind has always been associated with mankind's tools These MBA wonders, who sort of get flushed in and out as custodians, are dangerous The timespan in business today for competitive advantage is becoming much shorter