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Silicon Follies
Silicon Follies
Chapter 46: Green tea and red ink -- Barry loses millions over breakfast
By Thomas Scoville
[08/21/99]

Six-packs, macaroni and software
Does stuff you like make for stocks you should hold? And why do companies offer "affinity groups" cheap stock when they go public?
By Mark Gimein
[08/20/99]

A PC in every pot
When we have free computers in every room, will alternative operating systems like Linux, Be and Amiga rule the world?
By Janelle Brown
[08/19/99]

Column
More on "deep links," journalists and IPOs
Why you don't need lawyers to block links -- and hot reactions to the Chris Nolan story.
By Scott Rosenberg
[08/18/99]

Silicon Follies
Silicon Follies
Chapter 45: The bad news -- WHIP gets whipped by pundits
By Thomas Scoville
[08/18/99]

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But both these scenarios were vague and futuristic. In fact, companies that have created object-oriented software have often found that they can't reuse it down the road. What the new system did do was offer the utility company's customers better service. Customers phoning for information no longer had to hold while an employee retrieved information from a slow mainframe; they didn't have to be transferred to a different department to order new service or resolve a bill. What the new system did, in effect, was help the company retain its customers.

The new system also corrected some problems caused by the limitations of the old mainframe and its terminals. The company was able to cut eight jobs through attrition. It estimated that between those jobs and a better bill collection system, the new software would save it $500,000 a year. But the system cost $16.5 million to complete. Not factoring in the cost of maintaining both the old and new systems, it would take 33 years to justify the cost of the new system.

The company says it needed the new software to keep its customers and stay in business in the newly deregulated energy industry. That's probably true. It might not survive without the new system -- but it certainly wasn't going to save any money.

Consider another typical success story. PMA Insurance of Bluebell, Pa., replaced what it admits was a sprawling, disorganized and inflexible policy-writing program with a new one that would let it write custom insurance policies. The old system didn't allow for unusual data-entry fields, print non-standard forms or calculate rates for non-standard policies; the new one could do all that. But Mark Clark, PMA's vice president of information systems, admits that the new system was more expensive than the old. The cost of the new system was less than the cost of maintaining the old one over four years. But maintenance costs and software licensing fees were higher on the new system. So, while the company knew it would not be saving money, it went ahead with the project, hoping the system would pay for itself by helping PMA gain new customers.

Then there's the not-so-secret history of the automated teller machine. ATMs may be saving the banks money now, but they weren't for 10 years, says Marc Perl, an MIS manager at a large financial services company and a former Bank of America employee.

"The banks put out ATMs because they thought they'd save them money, save them tellers. But it turned out teller demand didn't go down much," he says. "By the late '80s, they started to realize that the cost of maintaining the system was huge."

Initially, the banks' technology managers underestimated the costs, not taking into account such things as the expense of manufacturing and mailing out ATM cards. If there was a payoff, it came so late that the banks would have been better off investing their money in fixed-rate five-year certificates of deposit, Perl says.

Formal studies confirm that companies are using computers to do more, not to cut costs. "Today the focus is on customer service, quality, timeliness and innovation," says Erik Brynoffson, an economist at the Massachusetts Institute of Technology. He uses company data, like interviews with managers, to form a picture of productivity trends across many corporations. In the past, he says, "Everything was focused on lowering costs and increasing efficiency. Band-aids used to be any color you wanted as long as they were tan. Now you can get them in all sorts of shapes and sizes."

The truth is, government productivity statistics don't reflect the contribution that computers make. The numbers don't measure improvements in quality, innovation, flexibility or timeliness. Nor do most businesses measure these kinds of benefits when they evaluate their own computer projects.

"Often return on investment on information technology projects cannot be measured," says Stephen J. Winterburn, PeopleSoft implementation manager at Scottish & Newcastle Retail Ltd., commenting on a survey conducted by the Harvard Business School and Cambridge Information Network, an online community for CIOs. "How do you measure improved communications between internal and external customers in hard cash?" he asks. "How do you put a cost on having Y2K compliant systems? We all know Y2K could bring down an organization, but it's quite hard to justify the cost of ensuring that all systems are OK."

Companies are often stuck having to justify needed technology projects by claiming they will save money even when they won't. "The technology manager says, 'How can we convince the board of directors to make infrastructure investments that we know are right?'" explains Ed Baum, president of Cambridge Information Network. In the CIN-Harvard survey, one-third of 140 respondents said they don't believe the effects of information technology can be measured. But more than 80 percent of the non-believers said they do formal studies anyway on some or all of their investments.

Next page | FedEx invests in tech -- even when it's not cost-justified