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Sunday, October 31, 2004

Baseline 500 Rankings - Paul Strassmann

Baseline Magazine in association with Paul Strassmann has come with Baseline 500 Rankings. The premise of the Baseline 500 rankings is that capital no longer constitutes the most important factor in the success of a corporation. How that company manages information is the key. In fact, if you take sales, general and administrative costs - essentially the costs to conduct a transaction - and compare them with capital costs such as land and equipment, SG&A outpaces capital costs by 3 to 1. In a global market, capital assets become commodities and don't even have to be owned. Land and equipment can be leased, for instance.
Information Productivity ranks companies by how well they manage information, the source of their competitive edge. 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. 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. "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%." The Top 500 list is available here . If you want to measure your enterprise score on Information Prodcutivity, you can use the Information Productivity Calculator available here. Overall, a very interesting and useful study.
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