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Why CEOs will never get "IT"

I liked this article
http://www.tomfairlie.com/tech/

StickyWicket
Sunday, November 02, 2003

Sorry. Clicked too fast. I liked the point made that executives have never been able to see past IT (or engineering for that matter) as a cost center. Perhaps Joel is the exception, but I've got the feeling that most of corporate America isn't like Joel. Kind of sad really.

StickyWicket
Sunday, November 02, 2003

Interesting reading. It validates my opinion that nowadays it's easier than ever for a bunch of hackers to form a start-up and successfully compete against a bigco.

Matthew Lock
Sunday, November 02, 2003

Joel isn't the exception.  This is the difference between working for a company that sells software versus working for a company that uses software.

If your company sells software that makes selling widgets easier, and you write code, then you are working in a profit center.

If your company sells widgets and you write code that makes selling widgets easier, then you are working in a cost center.

You may be writing the same damn code, but your role in the corporate environment will be vastly different.  And it may get outsourced.


Sunday, November 02, 2003

"Cost center" vs. "Profit center" is an arbitrary distinction.  Anything that costs money can be classified as a cost center, even sales people.  Sales people are usually classified as a profit center only because they lie close to the money in the chain of events. But if people would just naturally flock to buy your product, you wouldn't need sales people. Instead, the reality is that you have to pay them commissions and/or salaries.

Similarly, if you could get software to run your business for free (including managing itself), you wouldn't need to pay IT people.  But the reality is that you have to pay for at least some software and hire people to manage it.

A new software system that helps you sell or deliver more widgets may bring more added revenue than increasing your sales force.  Look at brokerage houses.  Stockbrokers used to be considered the big profit centers for them, but now with online trading, some firms view them as cost centers.

There is a campaign going on in the media to classify IT as a commodity which doesn't bring a competitive advantage.  The mantra has become "Every company has IT, so it's not a differentiating factor, and we may as well get it from the cheapest source possible."

But the reality is that even though every company has IT, some have vastly better IT than others, so that statement is as absurd as saying "Every team has a coach, so coaches are not an advantage, so let's just hire the cheapest one available."  The companies with better IT are able to turn products from conception into reality much faster than their competitors, can sell and support the products with less people, and are able to analyze company and market data in ways that help them get advantages in capacity and inventory management, pricing, and distribution.

T. Norman
Sunday, November 02, 2003

IT is a cost centre.

I see most inhouse development going the way of the typing pool.

The number of applications that users are developing themselves with Access and Excel is already indicative of this trend.

Tapiwa
Sunday, November 02, 2003

T. Norman, I think you're confusing cost of goods sold with cost centers. 

Without widgets, you could have the best IT, sales, & HR teams in the world & still not make any money. 

Unless of course your 'widget' was a software product, in which case the IT staff would be in the profit center.


Sunday, November 02, 2003

There are 2 common paradigms in business (not the only 2): cost centers and profit centers. The profit centers are exciting and drive the business and cost centers are necessary evils that are always minimized. My point was that IT, even if we know that it drives business, is still being looked at as a necessary evil that should be reduced (i.e., through off-shoring, outsourcing, etc.). This is where the logic is flawed IMO.

StickyWicket
Sunday, November 02, 2003

"Without widgets, you could have the best IT, sales, & HR teams in the world & still not make any money."

Or you could have a zillion widgets and not be able to sell them without the IT, HR, sales, etc... if you were even able to produce them without the IT, HR, sales, etc.

"Cost centers" increase profits, or it would be a stupid business decision to keep them there... unless they are there for entertainment or legally mandated reasons.  "Profit centers" cost money, otherwise we'd all be millionaires if profits would flow in for free.

It is an arbitrary distinction, made by the managers in power in order to serve their own interests.  You have better job security and can get bigger bonuses if your department is viewed as a profit center.

T. Norman
Sunday, November 02, 2003

Maybe we're just playing semantics, T. Norman.

I can always think of a business in terms of its 'core' business versus the support structure built up around that core.

To me, the core line of business is the profit center, while the support built up around that core is a cost center.

Not that that's necessarily bad - Dell & Wal-Mart have shown what a competitive advantage intelligent support centers can bring.


Sunday, November 02, 2003

I suggest that the article could equally be entitled "Why IT people just don't get business".

Let's look at this quote: "Overall, this will have the effect of depressing salaries, lowering morale and productivity, and reducing the number of computer science and engineering graduates in the United States. Do any of these trends sound positive?"

Depressing IT salaries looks very impressive to the comapmies that are having to pay them, and I would like to know how he thinks outsourcing is going to lower the productivity and morale of all these programmers in India who are getting the work. And I fail to see how less computer science and engineering graduates is bad news to anybody except for the staff of the computer science and engineering faculties.

It is worth also bearing in mind that until about 1999 (that is to say the last time figures had been made available) the net gain in productivity from decades of investment in IT was precisely zero! There have been dozens of weekend and full week conferences of economists to discuss the anomaly without anybody getting any closer to explaining it.  This explains why so many CEO's treat IT expenditure as being an example of the Red Queen effect; they have to keep on spending more and more money just to stand still.

As for CEO cost cutting remember if you are a hammer everything looks like a nail, and to CEO's who are in cost-cutting mood every department in their enterprise is viewed as a candidate for the chop. IT is no different.

Stephen Jones
Sunday, November 02, 2003

What happens to a country that no longer manufactures its own goods, no longer is the force behind innovation, and finds both its citizens and itself deeply in debt?


Sunday, November 02, 2003

"This explains why so many CEO's treat IT expenditure as being an example of the Red Queen effect"

How does it explain that, exactly?  It seems to me that productivity gains have been large in some industries and miniscule in others, and what you're citing is a macroeconomic report that gives an across-the-board view.

Perhaps CEOs for whom technology has failed to increase productivity, may attribute it to a "Red Queen effect."  But it could just as easily be attributed to a cargo cult effect, too:  the internet and technology were hot, and people invested in them without thinking about how to fit them into their business.  Which is precisely the article's point.  CEO's took a long time to reshape their business processes (eg, by creating the CIO position), and even today that's still the case.

A good example I see today is the collaboration business, where executives invest millions in such systems, but basically just turn them into automated versions of their legacy processes.  CRM is another example; often companies will just funnel customer data into centralized repositories, without _really_ using it to change how they deal with customers. 

I realize that changing one's business processes to accomodate technology is a tough sell.  The article is probably too harsh in the sense that executives probably _would_ get technology were it sold to them properly--and if it had been treated as a long-term investment.

it_ranter
Sunday, November 02, 2003

"It is worth also bearing in mind that until about 1999 (that is to say the last time figures had been made available) the net gain in productivity from decades of investment in IT was precisely zero!"

Productivity in terms of widgets/tons/whatever produced per person per day has WAY increased in the past few decades, thanks to IT (and other factors).

The "zero gain" you speak of is only plausible if you are talking about dollars.  As IT and other mechanisms enabled companies to produce more units per person, their competitors also enjoyed increased production capacity, which forced everybody to drive down prices or add more bells and whistles -- to the extent that they are probably no better off than before the productivity enhancements were in place, although any given company would be out of business if they didn't implement the technology.

T. Norman
Sunday, November 02, 2003

> the net gain in productivity from decades of investment in IT was precisely zero

According to who? Some third rate Gartner hack? None of the massive consumer oriented high transaction businesses like banks, or distribution networks, or almost anything, could even be in business today without automated centres.

The productivity gain from IT would be a high proportion of the improved value in national economies from 1970 to 2000.

Walter
Sunday, November 02, 2003

Funny how we're all talking like economics were an exact science... :-)

Let's put it this way: As seen from an accountant's point of view, salaries are a cost. So, a lean and mean company should just fire all its employees... and make a killing.

Unfortunately, robots don't buy anything ;-)

Frederic Faure
Sunday, November 02, 2003

T. Norman, one thing I agree with you about is that productivity has been astounding the last several years.

That's why we have growth right now with no new job creation - excess productivity.


Sunday, November 02, 2003

--"According to who? Some third rate Gartner hack?"

--""You can see the computer age everywhere but in the productivity statistics," Nobel economics laureate Robert M. Solow said in 1987."----

Not exactly a third rate Gartner hack. The source for the article is http://www.ncpa.org/pd/economy/pd031500i.html
and the article suggests that computers are now showing in the productivity features for the first time; the two years quoted for the change are 1995 or 1997.

Considering that companies have been investing in computers since 1970 somewhat of a long wait, and there are figures that doubt the increase in productivity figures for the late 90s.

The period from 1972 to 1997, when all companies were investing heavily in IT, is considered to be a period of stagnation in economic growith in the US, compared to the "Golden Period" 1913-1972, when scarcely any private companies had computers.

Anyway its late, and if I don't get to bed now this forum will be eating into my productivity. More figures tomorrow if anybody wants them.

Stephen Jones
Sunday, November 02, 2003

The topic of productivity is one where there are often ill-informed contributions ( possibly including mine.)

If computerisation didn't improve productivity, why would all those organisations have spent so much money on it?

Also, what would a company look like without computerisation? Imagine how cumbersome it would be. Productivity is not an issue I've examined, but there must be agendas behind reports that claim no productivity growth.

Walter
Sunday, November 02, 2003

Walter has it spot on.

If there's been no growth in productivity through IT, yet it costs money, it stands to reason that a company could go completely without IT and make a killing. After all, they'd be able to create products at the same rate as other companies, but at a lower cost.

So if that's the case, why isn't anyone going the no IT route? It just doesn't make sense.

Sum Dum Gai
Sunday, November 02, 2003

I had an interesting experience last week.

My sysadmin and I proposed a project to the president to transition from a frame-relay based voice/data network to Internet/VPN based.  We had a pretty strong cost analysis that showed 40% savings over 5 years, around $400,000.  We were asking for a little over $10K upfront for consultants to backstop our analysis and tighten up the numbers.

The president looked at us and said that the costs we were proposing to save were less than 0.2% of revenue over that period, and asked why we were bothering.  We thought he'd be ecstatic to see $80K in savings a year, when sales are flat.  He asked us why we were trying to save nickels and dimes in IS when we should be trying to save dollars in Operations.

I agree with the poster above who said that the article could as easily be read as "IT geeks don't get business", since the article seems predicated on the idea that putting money into IT is necessarily or normally beneficial, and that cutting costs there is always mistaken.  The head shift I had after that proposal was the IT is a cost or profit center like any other--neither more nor less special.  Money spent there is an investment like any other.  What the president hit me with was the fact that we were investing badly in IT, or at least not investing as well as we should be.

Justin Johnson
Sunday, November 02, 2003

Walter,

I've got a book here, "The Trouble With Computers" by Landauer. He extensively documents and analyzes exactly this mystery of computer technology failing to improve productivity very much, at least not more than the general productivity gains across the board over time. For example, a secretary will take far longer to type a letter nowadays with Word than she ever did back in the old days with a Remington typewriter.

His explanations for why companies do it even though there is no benefit is that pepole love computers. Even though computers make things less efficient, people think they are cool and fun and impressive sounding to explain to others and using them is nifty. He admits that this appears a good enough reason -- companies and people don't always do the thing that improves the bottom line -- sometimes they do what they want to because they think it sounds cool.

Dennis Atkins
Sunday, November 02, 2003

Computers are so completely ingrained in business that it's as impossible to imagine life without them as it is to accurately assess their weight in a particular circumstance or across the gamut of all business.

First of all, I completely disagree that they haven't helped productivity. Sure, there are cases where using a computer adds time to the equation, but even the secretary who takes twice as long to type her memo will benefit from not having to type it 100 more times with mail merge.

Productivity has gone up a lot over the last 20 years. Whether or not this period is better than those preceding it is almost irrelevant. For instance, GDP has grown a lot more %-wise in the past, does that mean we're really not growing as well any more? Perhaps all the produtivity tricks expired by the late 1970s and it took computerization simply to maintain any growth in productivity.

However, in the end, my analysis is that the advances computerization has brought have paled in comparison to what they could have been if executives actually understood what they were doing. Rather than keep up with the Joneses, the smart executive could have leveraged IT to really increase productivity, quality, innovation, etc.

www.tomfairlie.com

Tom Fairlie
Sunday, November 02, 2003

>>For example, a secretary will take far longer to type
>> a letter nowadays with Word than she ever did back
>> in the old days with a Remington typewriter.

...but she won't have to send out to an expensive printing company for something as simple a nice charts and pictures.

...and will she be much slower doing her figures with Excel than with a hand calculator?

Andrew Reid
Monday, November 03, 2003

> ...and will she be much slower doing her figures with Excel
> than with a hand calculator?

Of course she will.

Try to do a "what-if" scenario on a piece of paper with a calculator.

Matthew Lock
Monday, November 03, 2003

I feel a little more than uneasy, bordering offended (except that I really don't feel that strongly about it), to see "Secretary" automatically refered to as "she".

Totally of the Track
Monday, November 03, 2003

Well, back in the old days, companies made use of a type of clerical worker called a secretary. The secretary did typing, sometimes answered the phone, prepared coffee, did filing and ran errands.

These secretaries usually but not always were female.

Things are different nowadays.

Secretary's Week
Monday, November 03, 2003

Dennis, the thing is that most executives don't need secretaries to send out communications now. In five minutes they can edit and send out letters used to take a day - allowing for back-and-forth revisions and re-typing.

There are numerous examples.

Walter
Monday, November 03, 2003

Justin, you shouldn't presume that your own narrow understanding of business is typical, or use it as a basis to judge the reactions to the article.

I don't see since any basis for your interpretation that the
article "seems predicated on the idea that putting money into IT is necessarily or normally beneficial, and that cutting costs there is always mistaken."

I think in a way your own flawed assessment is typical of the flaws you're trying to condemn.

Walter
Monday, November 03, 2003

----" to the extent that they are probably no better off than before the productivity enhancements were in place, although any given company would be out of business if they didn't implement the technology.

T. Norman----

This is exactly what the Red Queen effect is.

You can find two further takes on the matter here; both admit the existence of the Productivity Paradox but claim that there are other advantages to IT, or that the Paradox is the result of bad measurements.

http://www.salon.com/tech/feature/1999/08/23/productivity/

http://www.wajsbrem.com/ironypp.shtml

One thing I do find interesting is the argument: "companies are clever - if not why spend all that money on IT?" often coming from the same people who go on and on about the total cluelessness of management in other threads, and even this very same thread.

I'd also like to throw in two anecdotes. In 1970 I left High School and had a few months to spare before going to Uni, so I got a job at a local factory that  made brake linings. My job was to assisit another clerk to draw up the monthly order for spare parts. He would look at sales for the previous months, look at the stock, and then decide how many to order. We had a card index of every spare part the factory made, maybe a couple of thousand of cards in a large trolley, and my job was to enter all the sales and orders from the chits we got from the warehouse, and then alter the totals.

Now we had a very large computer that lived in a very large triple room with airconditioning , the computer honcho, and .about a dozen nubile, mini-skirted sixteen year oldgirls whose job was to take the same info we got and put it onto punched cards. About once a month the honcho would visit our office with one hand up one of the girl's skirts, and another helping the other girls to carry an immense ream of paper, which was the computer departments work for the month. The spare parts inventory and a computer generated ordering scheme, which of course was exactly what we were doing. The problem was that the computer generated order was useless. Some girl would misunderstand what was on the order slip, or the boss would have been groping her while she was entering the data onto the punched card, and the worng parts number would go in and the computer would go off and order ten thousand spare brake parts for the Model T or whatever that legacy part furnished.

What we did was put the paper printouf from the computer in a large box and ignore it. We continued to calculate stock from the inventory (sometimes using a caculator, but normally doing it all in our heads because it was quicker (though that gave my immediate boss a 7% productivity score since pressing buttons on a calculator counted as working but thinking did not). And the whole result of a hundreds of thousand pound computer purchase, vast amounts of air-condtioned floor space, and a staff of fifteen, lay unused in a cardboard box behind our desks. Because the sole work of the computer department was to provide us with those stats.

After I left university one of my friiends there decided he wanted to make some money, so he decided to becoome an account instead of continuing in his field which was chemstry. He got himself hired by an American Multinational and found that his job was to collate statisitics for the whole British subisidiary and send them out as a report to headquarters in the States. After a few weeks he realized that the company had set up a direct computer link to the States a couple of years back and all the info he was sending over had been inputted into the system directly weeks before. He mentioned the fact to his boss that it seemed to him his job added nothing to the producitivity of the company and could be axed. He was told that if he sent that infomration up higher they would save the money on his job, but obviously sack him at the same time as he would no longer be needed.

A couple of years back I met another English tourist in Sri Lanka, who was working as an English teacher in Bangkok. I invited him round to my house and over a few beers he told me his story. For nearly twenty years he had worked on data entry in the computer department of a leading High Street Bank. This bank had bought a new software system that had cost millions of pounds sterling at 1970's prices. Unfortunately it was as hideously complex as it was buggy and there was nobody in the whole bank who could get it to work. So the bnk continued using its old system, but those who had ordered the multi-million pound didn't want to lose face, and probably perks or even jobs, so varying people including my new friend, were hired for nearly twenty years to put all the banks data into the new system, even though, nobody, absolutely nobody, did anything with the new system or the data in it after that.

This last story also explains why managers would keep investing in IT even though it often was simply an added cost with little or negative benefit to the bottom line. They were too scared to let the cat out of the bag (and often impressionable enough to be taken in a second time).

Now to offset these horror stories there are success stories; as has been pointed out here the productivity paradox works at the macro-economic level not the micro-economic level.

But when you look at the "savings" made by IT remember to factor in the cost of the IT equipment and the IT staff. The marginal savings of the secretaries who can use mail merge and save their letters has to be contrasted with the cost of the IT infrastructure and all of the support people that are necessary for her to do this, and who didn't drain the balance sheet when she used a Remington.

Stephen Jones
Monday, November 03, 2003

"The number of applications that users are developing themselves with Access and Excel is already indicative of this trend."

And there's no cost to users developing applications themselves?

Jim Rankin
Monday, November 03, 2003

"a dozen nubile, mini-skirted sixteen year oldgirls "

please email me the name & address of this company & any names of hiring managers you might know.


Monday, November 03, 2003

Stephen -

It seems that your examples of technology failures all occurred where people who knew the systems were inappropriate never reported this fact to someone who could address that. I don't think that examples of a company mismanaging its technology budget should be taken as evidence that technology cannot improve productivity.

Devil's Advocate
Monday, November 03, 2003

Dear Devil's advocate,
                                Nobody's saying that computers can't improve productivity; what we are saying is that very often they don't.

                                  You're still showing the geek mentality: - the technology was good but was misappied - and that is why I'm saying geeks don't understand business. It doesn't matter to the business that a solution can theoretically save money or increase productivity if in fact what it does is simple leech one and undermine the other.

                                And for the biggest two cases, the brake lining factory and the bank, you were quite wrong to say that people who could address the matter didn't know about it. In the case of the bank they were only too aware, which is why they hired a load of people to sit in the basement and key useless data in so the shareholders never found out, and in the brake factory we were perpetually badgered by management to try and do something with the computer data (the badgering stopped one month when my immediate boss decided to stop working overtime in protest at the time and motion study that said he only was working 7% of the time because the rest of it he was doing the math in his head; his job got pushed up to the line manager, who pushed it up to his line manager, and they actually used part of the computer data with nefariousl results for the company's bottom line).

                  I can give you plenty of other examples as well; I won't bother to give you examples where computers have increased productivity because that they can do that isn't what is under question.

                               

Stephen Jones
Monday, November 03, 2003

Andrew,

In the old days, graphics for mass production went to the art department to be handled by speedy specialists who could do layout then as fast as it can be done now with a computer. But you would never call on some art departemnet or specialist or secretary to insert color graphs into a one-off letter. That would be a complete waste of time, and it still is.

Yes, a computer (the specialist, not the device) with a 10 key is substantially faster than most people fiddling with Excell, changing colors and borders for hours on end, submitting each minor revision to the color printer.

Walter,

I dispute both that a trained secretary took 8 hours to write a letter and I also dispute both that a CEO now can write the same letter in 5 minutes, and that his time should be spent doing so.

Dennis Atkins
Tuesday, November 04, 2003

"I dispute both that a trained secretary took 8 hours to write a letter and I also dispute both that a CEO now can write the same letter in 5 minutes, and that his time should be spent doing so."

I second that. I used to BE a secretary and I can only conclude that you must have that backwards.

There seems to be a notion abroad that secretarial work is not skilled, and/or that CEOs are capable of doing everything their secretaries can do, but simply choose not to. In many cases, that's not so.

Fernanda Stickpot
Wednesday, November 05, 2003

"There seems to be a notion abroad that secretarial work is not skilled, and/or that CEOs are capable of doing everything their secretaries can do, but simply choose not to."

I think anyone who's been in the corporate world long realizes that if the CEO were to disappear, no one might notice any difference, but if the secretary were to disappear, the whole enterprise would fall apart.

Jim Rankin
Wednesday, November 05, 2003

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