Competing in the Information Age:

Here is the main opportunity for IT in the l990s. Computer-integrated manufacturing, EDI, customer-to-supplier links, POS, and electronic payment systems open up the chance to change the cost structures of service and quality and thus help rebuild margins. EDI offers the most obvious example of combining service, quality, and improved operating margins per unit of revenue. For instance:

1. 1992 estimates show that electronic claims processing and payment of medical bills cut health care providers' costs of paperwork from $4.85 to under $1 a claim; the industry generates five billion paper claims a year. Payment is much faster, typically two days instead of several weeks.
   
   
2. Levi Strauss's Levilink system reduced replenishment time from fourteen to three days for a major chain of stores and cut the time for Levi Strauss to deliver orders from nine days to three.
   
   
3. The Port of Rotterdam clears goods through EDI in fifteen minutes vs. the typical two days. Every export order typically has twenty-five to thirty documents. Of these, 50% have to be sent back because the information is inaccurate. Electronic movement of documents has led to greatly reduced error rates and time to correct errors.
   
   
4. Super-Valu, the largest U.S. grocery wholesaler, directly saved $100,000 a year on purchase orders and $2 million on inventory carrying costs. In addition, disputes about reconciliation, discounts, and allowances dropped by over half.

The figures here are less important than the underlying issue of directly relating key IT applications and technologies to quality profits: transforming cost structures and quality and service at the same time. The specifics will vary by firm and industry, and effective implementation will depend on the successful fusing of business, culture, and technology. EDI and image processing, for example, involve dramatic organizational change and rethinking of entire business processes. We can expect many firms to introduce them but see a technical success that is an organizational failure.

IT is a key enabler here. Some of the targets of opportunity are:

1. Manage profits, not revenues.
   
   
2. Contribute to improvements in traditional costs.
   
   
3. To help provide the needed quality and service premium without adding a cost premium.

Tactically, these principles provide the base for assessing where and of IT offers a more likely source of economic benefit than other contenders for a share of scarce capital; if not, then there is no reason to protect IT budgets, let alone continue their historical growth rate at two to four times that of business growth.

Traditional Costs

Traditional costs include the obvious elements of labor, materials, and real estate. IT can contribute to profit engineering in three main ways.

BUILD LOCATION-INDEPENDENCE

Bring work to people, not the other way around. Given the decline of education in the United States and consequent problems of labor demographics, this is sure to be one of the driving forces for international business networking. Cities, states, and even countries are recognizing the opportunity here. There is a common pattern underlying Omaha's becoming the 800 number capital of the United States, Ireland's capturing the back offices of financial service firms in New York for electronic processing, and the many comparable moves to exploit business networking for economic development: (1) a recognition among business and government leadership of the new opportunity location-independence opens; (2) a coherent plan to shift education, especially at the junior college and high school senior levels, toward building skills that can be marketed in relation to that opportunity; (3) close cooperation by the local or national telecommunications providers to ensure fast installation of facilities and service; and (4) a policy and strategy to put in plan an IT platform ranging from "intelligent buildings" to teleports to fiber-optic networks to satellite hubs."

RECREATE ORGANIZATIONAL SIMPLICITY

EDI and image processing have dramatically streamlined over-complex administrative processes so that American Express cut its billing costs by 25%, USAA improved productivity per employee by a factor of six, and Northwest Airlines increased efficiency in revenue accounting fifty-fold.

Much of today's emphasis for consultants and managers in the IS field is on business process "reengineering," "redesign," and other of "re-"words. These share two underlying common principles: questioning the basics of the process, including why it should exist in the first place, and meshing process, people, and IT, rather than "applying" IT. These principles almost invariably result in streamlining and simplification. They also, over the longer-term, contribute to a reduction in the levels of hierarchy and administrative staff. These can sometimes be dramatic: purchasing departments lose two levels and 80% of people since image processing, EDI, e-mail, and creative thought about the basic activities take out much work that is not worth doing and is better eliminated or handled electronically. Our organizations are too often frustratingly complex. Recreating simplicity seems a vital part of strategic organizational intent.

IMPROVE THE COST DISCIPLINES FOR IT ITSELF

IT is typically the third largest expense for service firms, after labor and real estate. In most companies, the accounting system and management processes do not capture the nature of the costs accurately. A reliable rule of thumb is that the apparent price is really just 20-25% of the full cost.12 It costs $4 million over the first five years of use to operate and maintain a $1 million systems development. A $5,000 PC takes $8,000 to $18,000 a year to support. While it is outside the scope of this paper, improving the tracking of real costs and their inclusion in business justification is a central responsibility of IS and its business clients.

Quality and Service Premiums

Quality and service premiums have already been discussed several times in this chapter. The core premise of quality profit engineering is that firms have no choice but to ensure ever-higher levels of both quality and service, which will inevitably erode margins unless they can be provided without adding labor costs, managerial layers, and administrative overhead, which in themselves add more of the organizational complexity that has been a barrier to quality and service.

Improving Revenues

Improving revenues is not the same as increasing them. "Downsizing" often means "We can't afford these revenues; they are hurting our profits." This is, of course, the natural outcome of erosion of margins for the reasons of deregulation, globalization, and overcapacity discussed in earlier sections.

IT may be able to help add revenues that do not disproportionately add costs. One emerging trend among the leaders in many industries is to exploit their occupancy at a point of event and operation of their IT platform to change the economics of innovation. For example, as mentioned earlier, it was cheaper for BA to add hotel reservations to its platform than for Marriott and Hilton to build their own infrastructures. McKesson's ownership at point of event of the pharmacist's office for ordering and distribution made it easy to add insurance claims processing and thus become the third largest processor in the United States, business that it took away from the insurance industry.

Point of event and platform open up new opportunities and correspondingly new competitive threats. One key reason why IT has to become part of the knowledge anchors, along with business and culture, is that failure to observe trends in business networking in core logistics in other industries can easily mean overlooking coming intrusions on one's own traditional industry. In addition, if a firm must spend substantial money on telecommunications, information, and transaction processing, it logically ought to maximize the revenues it can gain from the platform that is already largely paid for. The network and data base then becomes a true business asset.

Summary: Quality-Profit-Engineering

The above summary of quality-profit-engineering is, of necessity, brief and the topic demands detailed attention by IS managers, business leaders, researchers, teachers, and consultants. It is now the core element in getting payoff from IT. It is the largest single frustration of business executives. The quality-profit-engineering framework is just that, a framework for thinking creatively and practically about how to resolve the most difficult single problem in IT and the one that has dogged its progress: getting real payoff.

The phrase "quality-profit-engineering" is cumbersome, of course, but was chosen to highlight the following points:

1. Quality profits are not the same as profits, nor are profits the natural bottom line outcome of revenue growth. IS has to focus ruthlessly on helping solve the dilemma of quality and service as essential in an era of eroding margins.
   
   
2. Profits are the main issue. The competitive advantage model for justifying IT has largely missed that.
   
   
3. This is not an issue of reengineering. We never did the engineering in the first place. IS, as a field of research and practice, has focused on technology, development methods, project management, and most recently competitive advantage. It has neglected the practical economics of managing IT capital.
   
   The term "engineering" is useful in that engineering is the discipline most analogous to the aim of IS. It is a profession, with a clear tradition and body of knowledge. Its core is design and project management. It has to keep up with new technology while operating and updating existing technology.
   
   
4. As a profession-or if it wants to be seen as a real profession-IS needs to shift its perspective and build the new disciplines and principles which every senior executive is demanding, principles for ensuring that IT contributes directly and reliably to the top line.