The Information Edge
March 1 1989 by Alexander D. Jacobson
Using information technology (IT) to gain a competitive edge has become a necessity for corporations worldwide. In the past, IT was used to gain a competitive edge by only a few U.S. companies (for example, the SABRE airline reservation system at American Airlines, the package-tracking system at Federal Express, ATMs at Citicorp, and online ordering at American Hospital Supply). There were often ways to win.
Now, driven by the increasing power of computers, the world has changed. Markets are becoming global, first-tier companies are becoming unmanageably large. Back-office computers are deluging front-office workers with undigestible amounts of data, and telecommunications are increasing the speed of business transactions beyond human reaction times. And, in order to compete successfully in this type of environment, corporations must use the leverage provided by IT to insure a competitive edge.
THE U.S. AT THE CROSSROADS
On the surface, this situation appears to be advantageous to U.S. companies. America has led the world in both the innovation and the exploitation of IT. American computer companies dominate world computer markets, and their businesses are heavily computerized. However, the need to use IT competitively poses a major new challenge to our leadership position. The majority of information systems operating in U.S. companies are dedicated to back-office business functions (e.g., accounting systems, inventory systems, personnel records, etc.). To compete using information, we must redirect IT programs away from the automation of back-office tasks toward the automation of front-office business operations (e.g., marketing, sales, customer service, credit authorization) where they can be used in applications designed to gain competitive advantage. The timing is right to make this transition for two reasons: First, the task of automating the back office is largely completed, so resources once dedicated to that task are now available to be used elsewhere; and second, recent advances in computer technology have made it economically and technically practical to automate the front office.
Shifting the focus of IT to front-office applications represents a major change in the way IT is used by American businesses, and technology exploitation transitions are always threatening-particularly for the leaders. Entrenched interests, established in the process of creating the lead, are usually substantial and are always strongly resistant to change. Large investments made to create assets that helped build the lead must be protected, which leads to problems of obsolescence. The exploitation of technology by business is an intrinsically difficult and demanding process, and managing this process through a period of change is doubly difficult.
American companies are not adequately prepared to manage this transition successfully. There is a deep schism in most U.S. corporations that separates the employees who “do” and manage the company’s business, from those who build and are responsible for the company’s IT. This schism is caused by a culture gap between the business and the technology sides of the company.
The management of the transition must be led by the CEO. Delegation of this leadership role to a chief information officer or to a functional equivalent will not work. It makes routine IT initiatives difficult to manage technology transfer processes rather than simple business development processes. One consequence is ragged exploitation of IT that severely blunts the competitive edge that U.S. companies need as our markets go global. The CEO is the only person in most corporations who has the position to manage cultural issues effectively. If the CEO is not committed to a policy of aggressively using IT, internal barriers will prevent it from being practiced with the vigor and at the level of excellence required to compete with a company that has made a top-level commitment.
BUSINESS OPERATIONS, TECHNOLOGY AND THE CULTURE GAP
There are two major subcultures within our society as well as within our corporations: Technologists or toolmakers and business people (wealth-makers). These two subcultures co-exist and are interdependent, but they are not naturally sympathetic to the needs and interests of each other. It is rare that the successful businessperson is versed in the culture of tools. It is also rare that a capable technologist has a highly developed feeling for business.
For example, the basic period whereby business is measured in America is the quarter; the next, and only other important business period, is the business year. On the other hand, there are few significant IT initiatives that can be developed, deployed, evaluated and assimilated in less than several years. This mismatch in natural periods is one of the major obstacles to integrating technology programs into business practice. Another example is that the introduction of technology implies change. Again, a fundamental property of technology-to cause change-is at odds with a basic need of business-to minimize risk. So the gap between the culture of business and the culture of technology is a natural phenomenon. It is not the result of poor organization, nor of mismanagement, nor of any other failing on the part of people.
In most corporations, there is not only a culture gap between business operations and systems regarding IT, but organizational and political gaps as well. Historically, IT has reported up the management chain through finance rather than through business operations. This is because the initial applications of IT were designed and built for the financial side of the business (e.g., payroll, accounting, inventory control, etc.). In addition, the equipment was usually purchased from capital budgets administered by finance. As a result, systems organizations nucleated and so it grew up in the back office, separate from operating divisions that generated the revenues and served the company’s customers. The consequence of all of these gaps has been to force even routine IT initiatives to overcome formidable institutional barriers-barriers in order to achieve success-barriers that have little or nothing to do with the nature or value of the technology project itself. If IT is to be used competitively, these barriers must be eliminated. The process of bringing IT into the front office must be systematic, manageable and practical for the business people who require the use of the technology. Otherwise, IT will remain a back-office asset and a front-office burden.
To become efficient at integrating IT into business operations requires fundamental changes in the way IT is practiced. These changes can only be made if the CEO insists upon, and leads, the process of change.
U.S. SUCCESS STORIES
Several visionary companies have made this executive commitment to change, including American Airlines, American Express, American Hospital Supply, American President Companies, Citicorp, Federal Express and Ford Motor Company. Some of these companies have already reaped major competitive advantages. American Airlines, with its famous SABRE travel reservation system; American Hospital Supply, with its on-line ordering system; Citicorp and American Express, with their general use of computers to support front-office operations; and Federal Express, a company that built its entire business operations on an information system foundation, are all well-known success stories. Each of these programs was driven by the CEO.
Bob Crandall, CEO of American Airlines; John Reed, CEO of Citicorp New York; Lou Gerstner, president of American Express; Fred Smith, CEO of Federal Express; and Karl D. Bays, CEO of American Hospital Supply, all played critical roles in the IT successes of their companies. For example, at American President Companies (APC), CEO Bruce Seaton implemented innovative organizational structures designed to accelerate the use of IT by the company’s service workers around the globe. The new structure is designed to make this shipping container company more responsive to the changing needs of its customers. At Ford, CEO Donald E. Petersen has committed his company to the strategic initiative of using IT to dramatically reduce the time required to take a new car from concept to customer.
In a carefully orchestrated process of organizational and cultural change, APC’s Seaton has infused IT into the business operations of his company. To make APC more competitive, Seaton extended the company’s use of computers beyond data management to direct participation in online decision making throughout its business operations. His goal: To use decision automation to provide more reliable customer service and to make the company more responsive to customers. To make this change, Seaton undertook two major initiatives: He radically changed the organization and practice of APC’s information resources division and he implemented several IT initiatives designed to alter the corporate culture so it would become compatible with IT solutions. His intent was to move IT into business operations quickly and permanently.
The most important organizational change he made was in breaking down the barriers between systems and operations by creating a new information resources organization staffed equally from the corporate systems organization and from business operation units. Seaton carefully chose people for this new organization who had already demonstrated strong interest in the type of work done by the other group; that is, he chose businesspeople who were interested in computers and systems people who were interested in business practice. The managers in this new organization report directly to business operations management; in addition, they report any dotted line to the management of the corporate systems organization. This change created a new information resources organization that is driven directly by the business side of the company, has an internal culture formed from an intermingling of business and technology, and is answerable to systems professionals on technical issues. Seaton personally works with this new organization on a routine basis to formulate and implement specific projects that:
· Automate APC’s front-office operations;
· Set APC technology and systems quality standards; and
· Support new technology initiatives until they are fully operational.
Seaton changed the corporate cultures with regard to IT; first by installing a worldwide telecommunications system that puts all of APC’s far-flung offices on the same network, then by buying and dedicating an IBM mainframe to create a network-wide electronic mail system with which to establish “screen consciousness” in APC’s army of field service agents. He also increased the number of PCs on the desks of his business operations people from six in 1983 to 1,300 at present. These programs, combined with the radical change Seaton instituted in his information resources organization, have created an appetite for increased automation on the part of his front-office work force. Furthermore, his programs created an atmosphere that facilitates, rather than resists, the rollout of new computer capabilities as they emerge from the information resources group. Finally, they have reduced the burden and risk of generating and implementing the IT projects that bring automation support to the front-office workers. Since the program is new, it is too early to judge its overall impact on the company. But one thing is clear: Without Seaton’s sponsorship and guidance, the program would not exist.
ELIMINATING THE CULTURE GAP-A SYSTEMATIC APPROACH
Information technology, unlike all other technologies, is concerned with automating what people know rather than what they do. As a consequence, to practice IT correctly, the employees who will use the technology must be active participants in developing, installing and maintaining it. Users’ involvement must increase as business practices close to the company’s customers become automated. The more the function impacts customers, the more complex, ambiguous and changeable are the associated information and business knowledge. So those who use the technology need to participate in determining how the system employs and applies this information.
As computer systems progress from manipulating data to providing true decision automation (making business decisions by computer in concert with human decision-makers), their development must move from being largely in the hands of the systems organization to being shared in a partnership between business operations and systems. These partnerships must be established at the level of the individual piece of application software being built.
Many of these observations have come from my company’s experiences in spearheading the introduction of expert systems technology into more than 150 of America’s largest corporations. This new software technology, created to bring automation to the front-office work force, can contain and automatically apply far greater quantities of business knowledge than equivalent conventional software technologies. This new type of software requires that those who use and manage the expert system work together throughout the development process with those who program it. This departure from conventional software practice is caused by the focus of the expert system development process on the business practice it supports. In the past, the practice of IT, so heavily focused on the computer itself, has been poorly related to business. The new, more powerful information technologies offer, for the first time, the opportunity to integrate business operations and systems.
To facilitate that integration, the traditional ROI analysis of expense-reduction benefits for justifying IT projects should be abandoned. Systems that enhance customer relations, implement new marketing strategies, improve morale, or facilitate interdepartmental cooperation may not survive conventional ROI analysis, which usually focuses on expense reduction and ignores intangible or unproven benefits. New methodologies based on marketing and business opportunity analysis must replace ROI in judging the value of front-office automation projects. All of these changes are directly opposed by the institutional barriers that arise from the current practice of IT. These changes cannot be implemented effectively bottom-up; they must be implemented top-down through the authority, enthusiasm, and earnest commitment of the CEO. Specifically, the CEO must:
· Create a strategic IT plan that defines specific IT initiatives within the context of the company’s overall strategic plan;
· Include projects in the strategic IT plan that specifically require deeply integrated joint participation for business operations and systems (i.e., projects that bring automation to the front-office workers of the company);
· Ensure that the requisite partnerships between systems and operations become a working reality;
· Renovate the review process to focus IT projects on marketing and business opportunity benefits rather than on expense-reduction considerations; and
· Serve as the rallying point and symbol of the company’s commitment to move IT into the front office.
Recent revolutionary advances within the computer industry have led to the emergence of “expert systems,” software technology that can leverage the process of change required to move IT more aggressively into business operations. Expert systems are software applications that contain expert-level competence about specific business tasks. This technology uses human-like reasoning processes to arrive automatically at solutions to the business problems for which it is designed. Expert systems were created to provide decision automation for the first- and second-tier decision makers who make the vast number of routine business decisions every day as they carry out front-office business operations.
In order to build an expert system successfully, the company must first address and bridge the cultural, political, and organizational gaps that separate the businesspeople involved in the project from their technical and systems counterparts.
Expert systems embody substantially larger amounts of pure business knowledge than conventional programs. In order to acquire and program this knowledge, technologists who program it must work in a partnership throughout the life cycle of the system. Using expert systems can help to effect general change in the practice of IT in the company.
One of the most significant uses of expert systems has been implemented jointly by American Express (AMEX) and Inference Corporation to assist AMEX credit authorizers in deciding about the acceptability of credit transactions made with AMEX credit cards. This project arose from a technology initiative created several years ago by Lou Gerstner, president of AMEX, to seek and master new information technologies with which to build the foundation for AMEX’s next generation of information systems. Although the initiative was not formulated to bridge the operations/systems gap, it did, in fact, forge a working partnership between systems and operations during the three years the system was in development. Gerstner’s staff, having selected expert systems as one of the new technologies to be considered, created a specific systems project targeted to support business-operations decision makers-specifically, the credit authorizers. If technically successful, the expert system would be deployed as a production decision-automation system. The project was carried out in three phases. First, the development of a pilot version of the expert system was funded as an R&D project to establish and validate the technical performance of the system. Secondly, a business analysis was performed to forecast the system’s economic payback. Finally, the expert system was integrated into the existing production environment that supports the American Express credit authorization process.
Three groups worked in partnership throughout the project: AMEX credit authorization operations personnel (the users/experts), AMEX systems people (the
database and application software professionals), and Inference expert system-development professionals (the expert systems builders/integrators).
Throughout the first phase-which took 15 calendar months to complete-all three groups worked routinely as a single development team. For example, during the second half of Phase I, weekly teleconferences were held, often involving more than 20 participants from around the U.S., for the purpose of coordinating the work of these groups. The transition from the first phase to the second phase was an internal hand-off of the project within AMEX from corporate R&D to credit card business operations. The second phase was primarily a business operations function that relied upon the AMEX systems organization to perform data analysis and provide technical advice. The decision to proceed from pilot to production system was made by the executive in charge of AMEX card businesses.
The transition form Phase II to Phase III was a hand-off from card operations to systems that integrate the completed expert systems into the production environment of the credit-authorization computer system. This phase was, once again, implemented by all three groups-AMEX credit operations and systems organizations and Inference working together.
The Authorizer’s Assistant expert system, as AMEX dubbed the application, was installed as a production system and is in daily use in the U.S. by an AMEX domestic credit authorizer. The joint efforts of AMEX’s systems and business operations people have produced a successful production-expert system that now supports an important front-office business function of their company. The system has successfully challenged the institutional barriers between business operations and systems, and has overcome the resistance that typically opposes the introduction of new technology into business-proving that expert systems technology can be used to overcome the intrinsic schisms and impediments that threaten front-office IT programs.
The conventional wisdom in business is to be cautious in bringing a new way of doing business into practice. Change in business practice-driven by aggressive use of IT-should be encouraged, not avoided. The issue is not whether or not to change, but how to manage change so that it happens quickly, efficiently and successfully, with minimal disruption. Proper implementation of a strategic IT program that aggressively automates the company’s business operations will move that company to the forefront in its markets.
Alexander D. Jacobson is founder, chairman, and CEO of Inference Corporation, a Los Angeles-based firm that develops and markets advanced expert systems for business, industry and government.