Baseline 500: Frequently Asked Questions

By Paul A. Strassmann  |  Posted 2004-10-18 Email Print this article Print

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Here are five commonly asked questions about how the Baseline 500 rankings are compiled.

Why Do We Need a New Measurement for Productivity?

You can best justify spending on information technology by comparing your spending with the performance of principal competitors. That means developing a benchmark that is reproducible and re-calculable, based on available statistical measures. For Information Productivity, the source is public filings with the Securities and Exchange Commission. Once a company calculates its Information Productivity, it can begin to discuss whether its information-technology budget—the amount it spends on managing information well—is greater or less than desirable.

Is Information Productivity An Indicator of Information-Technology Savvy?

Information Productivity shows how efficiently a company adds value through good information management. Technology is not the only component of a company's transaction costs—its sales, general and administrative expenses. But it can constitute from 10% to 35% of the costs of performing business transactions. That's why a high Information Productivity ranking will always be associated with competency in managing information systems.

Do Smaller Companies Have An Advantage?

A statistical computation known as a regression analysis shows there is no correlation between a company's size and its Information Productivity. Paul Strassmann, creator of the Information Productivity formula, says he has never been able to show that larger companies tend to be more efficient or effective than smaller ones in their uses of information. He has discovered that information management competence (or incompetence) can be found among companies of all sizes.

There are a Lot of Energy Companies Near the Top of the Baseline 500 List. Why?

The energy companies produce enormous profits with only a small number of employees. The value these employees add is huge; the cost of the transactions, low. You could say they are the lucky ones who hit it big on crude petroleum and natural gas gushing out of the earth without much labor, capital or risk.

Financial Services Companies are Also Dominant. What Is Their Advantage?

Their low cost of capital. Because they have access to low-cost funds from the federal government as well as insurance against risk, their average cost of capital is just 3.3%. The financial services sector is also in the vanguard of automating business processes via information technology. Simply put, financial services companies are adept at substituting technology for labor.