The 500 Companies That Manage Information BestBy Larry Dignan | Posted 2004-10-18 Email Print
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Measuring information productivity was thought to be a lost cause. Until now.
The Baseline 500 is based on a simply stated premise: Prowess in managing information should be measurable.
Information systems are installed every day that help companies measure and manage their businesses. But measuring the overarching craft of managing information is easier said than done.
Oh, it is often clear when companies aren't good at it. But calculating some sort of "return on information management" is a squishy subject, says Jerry Luftman, a professor at Stevens Institute of Technology. Why? Because there's no simple formula or single number that can accurately capture all of the factors that make a company a success—or detail the role that information plays in the result.
So Baseline set out to quantify not how well information systems work, but how well the people in an organization manage information. That's what they use systems for, but they also use their brains, their insights, their abilities to interact and their actions. That's why these are rankings of groups of individuals, of corporations. Not technology by itself.
These rankings select, through analysis of financial results of publicly traded companies, the 500 organizations that are the most productive users of information in America.
The rankings are based on two benchmarks: one that measures the value added to a company's economic performance by good information management, called Information Value-Added; and one called Information Productivity, that incorporates this measure and the costs used in producing the added value. In the end, the 500 companies shown are those with the greatest Information Productivity.
What are these things called Information Value-Added and Information Productivity? They are formulas, created and trademarked by Paul Strassmann, currently a consultant and formerly chief information officer at large organizations such as Xerox, Kraft and the National Aeronautics and Space Administration. They are designed to measure the effectiveness of an organization in an information age, as opposed to a manufacturing or agricultural era.
To measure the economic contribution of corporate information management, you start with the end result: profit. "Profits always matter," says Strassmann. "And in the information age, information has its fingerprint on every component of it. Information is what ties all of it together."
A look at some of the moving parts that affect profits:
- Inventory is a key asset; if it's not managed well, profit declines. Without information systems detailing what's in the warehouse and what needs to be replenished, profits will fall.
- Labor also has a big impact on profits. Information management helps you get by with less labor and allows you to be a competitive buyer of workers and their time.
- Business is impossible without customers. Information is what gives a company an edge targeting its customers and markets.
To measure only those parts of a business that are affected by the active management of information, the starting point is profit after taxes, tossing out any payment of preferred dividends, one-time charges and special adjustments. Then that profit is lowered to account for a basic fact of business: Its owners expect a certain return for the use of their money. Only if you exceed that expectation is there any value added. Thus the first unique measure, Information Value-Added, is, in its essence, profit less the cost of capital being invested in a company by its shareholders.
But the ultimate measure of the corporation that manages information well is whether it generates that added value by spending a lot of money, or just a little. So Information Productivity—that final measure—takes the Information Value-Added generated by management and divides it by the costs of information transactions. These are the selling, administrative and general expenses of the company, not the costs of producing its goods or services.
Why these measures, in place of just net income or return on shareholder investment?
According to Strassmann, because capital assets of a company, those fixed assets like land, equipment and facilities, are no longer what determines a corporation's success. They are commodities that don't even need to be owned for a company to operate successfully.
Indeed, sales, general and administrative (SG&A) costs outpace capital costs 3 to 1. And information technology accounts for about 10% to 35% of sg&a.
But what really counts is information and what a company does with it.
Take two comparable commercial banks, New York Community Bancorp (No. 35 on the Baseline 500 list) and Hudson City Bancorp (No. 43). They use the same raw materials: branch offices, tellers and loan officers, and money borrowed from the Federal Reserve at the same low interest rate. The difference between the two is how well they identify creditworthy customers, attract deposits and identify ways to reduce transaction costs. That difference is Information Productivity.
Another way to define Information Productivity is to clarify what it is not. The Baseline 500 is not directly measuring the effect of information technology on an organization. Yes, there is a strong correlation between Information Productivity and information systems management. But even if a technology stalwart "eats its own dog food,'' that doesn't mean it will be a superstar in adding economic value through smart management of information. If you don't use cash effectively (Microsoft) or your strategy depresses your own margins (Wal-Mart), you might not even make the list. In fact, only Oracle and Dell among technology giants made it into the Baseline 500 this year.
The quintessential Baseline 500 company is one that doesn't get carried away with spending on technology projects, keeps head count low, rakes in profits and delivers solid returns. The sophistication of the company's information setup—whether it's enterprise resource planning software, paper forms or yelling down the hall to a coworker—is not a mathematical factor. If that setup works and the company is good at using information to its competitive advantage, that company will make it into the Baseline 500.
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And behind every result in the 500 is a single, interconnected insight: Information is important, but how it is managed is even more important. While data scrubbing, equipment maintenance and other systems chores are important hygienically, savvy managers who know what to do with the information that is stored, sliced and diced make all the difference. The managers behind many of the companies in the list are focused on three things—operating their businesses efficiently, keeping customers happy and delivering returns. These are all information occupations. Everything else is a distraction.
- Terry Permenter, senior vice president of information systems at Washington Federal (No. 25), still operates Windows 98 desktops and had to put a Baseline reporter on hold twice in an hour to help employees who had troubles with e-mail and the usual computer nuisances. "We have an i.t. staff of 10," Permenter explains. "When a couple of people are gone, it's significant."
But he gets the most from his people: Information Productivity of 254.5%. In effect, he gets $2.54 of value from information his company produces for every dollar spent on generating it.
- Or how about Lon Winton, cio at Chesapeake Energy Corp. (No. 2)? Winton is an oilman first and cio second. He knows the booms and the busts, so he keeps an even keel. "We're in a fat year, but I still have to stay lean in i.t.," he says. Bottom line: Information Productivity of 700.7%.
- Like Winton, Kent Barner, chief information officer at Prentiss Properties Trust (No. 12), gets by with a small staff of less than a dozen information systems employees. How does he do it? He focuses on continuity, delivering information on the company's $1.9 billion in operating real estate assets (as of June 30) and retaining his employees. The result: Information Productivity of 417.5%.
To be sure, some of the managers at the aforementioned companies are at the right place at the right time—business is booming at their companies. Given the strength in oil prices, it's not surprising to find a slew of energy companies in the rankings. The lesson: Not all companies are created equal. Because energy companies have a low head count relative to sales and profits, they carry lofty Information Productivity percentages.
Financial services companies are also regulars in the Baseline 500. That's not terribly surprising given that these companies live or die by the instant precision of the information they have on their customers and the markets in which they operate. With a lot of automated processes and low cost of capital due to depressed interest rates, financial services companies have an advantage over, say, a retailer. In fact, retailers are virtual no-shows in the Baseline 500. Rent-A-Center (see profile, p. 56) leads the pack with an Information Productivity rating of 205%, good for a No. 31 ranking.
Nevertheless, effective management is the common thread in the Baseline 500, and chief information officers at these companies have lived up to their title—they help their colleagues and decision-making executives manage and use information effectively. They limit that effectiveness if they equate their title with just managing and using hardware and software.
"Most cios are really [chief technology officers] responsible for just information technology," Strassmann says. "i.t. accounts for 3% of a company's success; information management is anywhere from 20% to 50%."