If Only Software Would Rust...

How many organizations are hampered by their existing technology base rendering them inflexible?  I think many more than are willing to admit it.  If you don't believe me just look over the counter the next time you are checking in to a flight.  The poor agent is typing in codes that look like Yiddish created by a mad computer scientist from the 1950s, and when they hit a snag they call upon some wizened old counter agent from the back room who pulls out a tattered notebook with a list of the arcane codes that did not even make it into the arcane-code-cheat-sheet which is underneath the glass in front of the counter agent.  The presentation of information on the agent's screen may look "modern" because it is in color and has interesting fonts, but the content is as old -- in parts -- as the Airline Control Program, which was the original technology created by IBM and the airline operators in 1965.  If the information "factory" was physical and could rust, when you walked into banks, or airports, or a phone companies, or the trading floor at the NYSE, or God forbid saw parts of the space shuttle software, along with any number of technology dependent companies, it would not be the clean blinking lights of the computer interface -- all glass, cool, and whirring.  It would look more like an aged machine shop where some of the metal lathes would be spewing out gelatinous goo from the bearings, and the "computer operations professional" would be whacking on the cam and drive shafts with a hammer to un-stick them, when they came off the rails.  Because software does not rust, and the physicality of the detritus ephemeral, it is easy for executives to ignore the need to reinvest in information infrastructure.

Now, being the rapacious capitalist that I am, my first thought is, "so what".  If you can make money with the most backward technology, go for it!  In some instances this is exactly the right thing to do.  I used to teach a wonderful case series when I was at Harvard Business School about a company called Pacific Pride, which was a string of a few hundred service stations which catered only to commercial accounts, and due to their superior reporting technology charged premium prices and had gross margins 3-4 times their competitors'.  Pacific Pride's technology was so trailing edge they only changed out computers when the used computer market dried up so completely they could no longer get parts to repair their equipment. 

However, the vast majority of businesses are dependent on information systems -- and most are hampered by them.  Why should a manager care?  Well, poor information infrastructure creates poor operating leverage, which in turn chokes off profit and investment.  For example, a large insurance company I know did a phenomenal job of investing in their company's information infrastructure back in the late 1970s.  They were a pioneer, with one of the first fully integrated customer databases, and they could measure household profitability, retention, cross selling, and every other useful indicator that any thoughtful marketer of insurance would want to have.  However, the very sophistication of the system and the centralized, integrated design, made change difficult.  They had not built it in a modular fashion, so they were loathe to make any major changes -- due to the complexity of the implications of those changes.  Meanwhile, the market moved -- and moved fast (in insurance time, which is kind of like sea turtle time -- sloooooow) and their agents wanted to sell new products to the customer, so the company added on a slew of new products and services -- but were not integrated into their information systems.  So, in 2004 -- a full thirty years after they had an integrated customer database, this company found itself not only unable to have a clear profile of their customers and the products they held -- they could not even send an integrated bill, with a consistent logo. 

This meant that service was more expensive per call because the agents were inefficient; the company wasted money on advertising and promotion as many different parts of the organization called on the same customer -- in other words they were not only achieving operating leverage -- they were achieving operating de-leveraging -- with increasing volume driving higher marginal cost. 

Contrast this to a company like 7-Eleven in Japan (which was originally pointed out to me by my friend Peter Weill at MIT).  7-Eleven has invested, and reinvested in their information infrastructure so that they can track every single transaction across the entire value chain.  With this information, not only do they restock 20% of the store 4 times a day (which creates the equivalent of an additional 60% floor space because 20 % is new four times a day ), but they also use it to do create new, store branded products and services -- which are immensely profitable for them -- which pays off with 7-Eleven Japan having a stock market valuation that is many multiples of a typical retailer like Wal-Mart, which trades at one times sales.  Investors see the value.  Furthermore, 7-Eleven's infrastructure enabled the company to move aggressively into the bill payment and truncation service.  It is much more likely in Japan that you will see someone go to the store to pay their bill in person.  7-Eleven, due to its strong network of stores provides convenience, and many suppliers are on their network, and have to pay a hefty fee for 7-Eleven to do the bill processing.  The operating leverage of their information infrastructure is significant.

So, the next time you can't do something in your company because "the system won't let you", or you can't get the most sensible information, or worst of all you sit in front of a screen -- waiting and waiting for it to complete its task, or boot up Windows -- just imagine the goo spewing out of the back of the workstation -- because the routine reinvestment that would have occurred to even the most lowly physical asset has not been done to your information factory.

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