The Enduring Value of IT and Process Investments
March 19, 2010 by Mary Adams
Fortran punch card on Wikipedia
Yesterday, I had a meeting with some consultants who told me the story of a group of IT and accounting people from one of their clients screaming at each other because they could not find common ground to communicate about the cost and ROI of IT investments.
Then, last night, standing in the parking lot outside the Boston KM event, I had a long chat with an engineer who has been around tech and business for decades. He was very active in the Y2K adjustments (yes, that was a decade ago?!). He volunteered to me that people still don’t have a disciplined way of tracking their IT and processes.
This is one of the big reasons that IT and accounting people end up screaming at each other. It’s not that the individuals are at fault. It’s that they are working in a broken system.
For more than 30 years, corporate America has been investing in processes and software (structural capital), competencies (human capital), networks and relationships (relationship capital). It is this investment that leads to the big gap between corporate value and book value of the corporation’s assets. These investments have driven increases in revenue and earnings to the extent that in 2007, 60% of investments (based on macroeconomic value) and 70% of acquisition purchase prices (M&A is one of the few times that intangibles get booked to the balance sheet) were intangible.
Yet, when I speak to most businesspeople about intangibles, they view them as truly intangible, unknowable and, therefore, not worth thinking about. They see the value of intangibles as short-lived and always at risk.
But this engineer immediately understood what I was saying and told me some great stories. He told me about an actuarial system that was built in Fortran in the 1970′s that is still in use in a large insurance company. About homegrown systems that are still in place decades after they were built.
The Fortran system actually hasn’t been recompiled in 20 years. Most systems do get modified. They may even undergo radical transformation. But they rarely go away. Because the processes that they are automating are usually core to the underlying business. This is why we like the analogy of the knowledge factory. The intangible capital of an organization is the way that it creates value for its customers and generates revenue. It is a system of processes (largely IT-enabled) that help maximize the human and relationship knowledge of the organization.
And the components of that factory are enduring. Like the Fortran system. Like Federal Express’s end-to-end package tracking system. Like the huge majority of the systems inside your own company.
To me, all this is an argument for better accounting for intangibles. Not GAAP or IFRS (yet anyway). No, intangibles management accounting. Every company should have a report that says how much it invests every year in its knowledge factory.
Ten, 20, 30 years from now, will your systems and processes still be there? The answer is yes. Would you operate a store without an inventory of your products? Would you operate a warehouse without an inventory of its contents? Why are you operating a knowledge factory (worth 60-70% of your total corporate value) without an inventory and basic information?
The good news is that there are organizations that pro-actively manage their “knowledge factory”. These organizations have systems in place that enable real-time analysis and management of core business processes.
I’ve noticed that such organizations typically have this in common: their leadership has a long-term view of the organization. They are not overly concerned about making long-term investments in intangible assets (people, relationships, and infrastructure.
There are business process management (BPM) methodologies and automation technology today that fits just about any size company and budget. The question comes down to why some Boards, executives and front-line managers choose not to invest in these tools and methodologies, and thus miss-out on the benefits.
The challenging worldwide economy has witnessed many businesses that suffered the consequences of ignoring the value if intangible assets, as the Knowledge Factory describes. Some of these organizations are no longer with us, and others continue to struggle in bankruptcy protection. Other companies, however, thrive and even grow in the worst of times. Why is that?
Regarding the FORTRAN actuarial system that had been built in the 1970′s and not recompiled in 20 years, it would be interesting to know what core business process the system was automating.
As the FORTRAN language strengths lie in programming applications that involve scientific and mathematical computations, it is likely that the core application was oriented around formula’s and equations (was it computing actuarial tables perhaps?) .
Most large-scale business applications in the 1970s and going forward were developed using the COBOL language. For most business applications, COBOL was better suited to the task of managing and automating business processes as compared to COBOL. COBOL applications are still very much in use today, with new applications being developed and implemented worldwide.
Thank you Jim for the thoughtful comments. We are definitely on the same wavelength here. I just checked out your blog at http://jimintrigliaconsulting.wordpress.com/ and will add it to my reader. I look forward to continuing the conversation about IT & IC!