Measuring the Strategic Value
of Information Technology
Investments

Hammer and Champy

Reengineering the Corporation, by Michael Hammer and James Champy, is referenced periodically, but not summarized in detail. Its popularity has already introduced a large audience to its key concepts. While the approach is consistent to the ones covered, the authors do not explicitly talk about the concept of strategic value as it relates to information technologies. Instead, they completely integrate thinking about technology improvements with changes to business processes.

Strassman

During the late 1980s, Paul Strassman managed the Corporate Information Management group within the DoD. By consolidating payroll systems, he saved DoD $2B the first year and approximately $4B the second. His writings have influenced reintegration efforts within The Boeing Company.

In 1975, when he was the Chief Information Executive at Xerox, Strassman pitched a 28% budget increase for information technologies. Although the expenditures were for customer-initiated projects, the Executive Committee threw him out on his ear, telling him to control costs, not expand scope. That started his research into the relationship between expenditures on computer technology and business profitability, which he documented in his 1990 book The Business Value of Computers

General Accounting Office

The General Accounting Office's Executive Guide Improving Mission Performance Through Strategic Information Management and Technology - Learning From Leading Organizations is the single most important work in this area that I have yet found. Get it. Read it. Make copies. Give them to your coworkers. Distribute them up and down the organization. Even if I retyped all the passages that I really like, it would be a poor replacement for the real thing.

If you work for a Federal agency or contractor and feel you haven't seen enough direction from the top, this could help. By the end of 1994, the GAO expects to publish a toolkit that can be used to assess performance against the eleven fundamental practices that are identified in the Executive Guide. It's a safe bet that at least one Federal agency will be audited against these criteria.

The Executive Guide is the result of case studies of the information management practices of the senior management teams of 19 organizations. Five private sector and five state government organizations were chosen based on independent evaluations of their success in aligning IT with mission performance. Nine Federal agencies were selected as controls. It takes a very comprehensive approach and effectively summarizes and integrates many of the other approaches described in this paper.

Activity-Based Management / The Government Performance and Results Act

One of the approaches described in the GAO Executive Guide is called Activity-Based Management, or ABM. ABM is also being driven by the Government Performance and Results Act of 1993 (GPRA). Jim Brimson is one of the leading experts on ABM. He contributed to the GPRA and more recently, has joined the CAS (Cost Accounting Standards) Board, which defines the standards for DoD and DOE financial systems. Much of the information on ABM was based on the course, Activity Analysis: Managing Towards Excellence, that Brimson taught at the Hanford site in February of 1994.

Meyer and Boone

Boeing Computer Services, Richland has subscribed to a series of Dean Meyer Teleforums for several years. A couple of them have dealt with the management issues associated with establishing and maintaining executive support for IT projects and activities. N. Dean Meyer and Associates have also published a number of books on the subject. In 1987, N. Dean Meyer and Mary E. Boone published The Information Edge. Boone also authored Leadership and the Computer - Top Executives Reveal how they Personally Use Computers to Communicate, Coach, Convince and Compete in 1991.

These books describe a variety of structured interview methods which can be used to measure and document the strategic value of systems both before and after deployment. This paper summarizes the executive interview process that they have developed to identify the opportunities for what they call strategic systems.

Interdependence and Ineffectiveness

Hammer and Champy, Strassman, the GAO, and others provide numerous examples to support the contention that many, if not most, modern organizations are unable to meet the demands of their customers. Past norms of organizational performance are no longer considered adequate:

American entrepreneurs, executives, and managers created and operated companies that for more than one hundred years met the expanding demand for mass market products and services. American managers and the companies they ran set the performance standard for the rest of the business world. Sadly, that is no longer the case.

[Hammer and Champy, p. 1]

The same pressures exist for organizations that receive Federal funding:

...The Congress finds that –

(1) waste and inefficiency in Federal programs undermine the confidence of the American people in the Government and reduces the Federal Government's ability to address adequately vital public needs;

(2) Federal managers are seriously disadvantaged in their efforts to improve program efficiency and effectiveness, because of insufficient articulation of program goals and inadequate information on program performance; and

(3) congressional policymaking, spending decisions and program oversight are seriously handicapped by insufficient attention to program performance and results

[GPRA, 1993]

The GAO has concluded that the effectiveness of an organization and its information management practices cannot be easily separated.

Making government more effective and efficient is a national issue. But getting it to work better and cost less will be impossible if Federal agencies cannot learn to manage with modern practices the information age demands.

[GAO, Preface]

In most organizations, information and information technology influences the quality, cost, and speed of nearly every major function and the decision-making, productivity, and even morale of employees.

[GAO, p. 10]

Accordingly, in reviewing Federal information management processes, the GAO has found them to be sadly lacking.

...for most Federal agencies, strategic management is a well-orchestrated paper chase responding to personal agendas and short-term crises, rather than an integrated, institutionalized process that focuses on producing results for the public. Most agencies also live with loose, undisciplined, and opaque processes for selecting and controlling investments, and these investment results are rarely evaluated against projected benefits. More often than not, information management decisions are made in response to crises, without first examining how to simplify and redesign embedded, complex mission processes. In short, the emphasis lies on conforming to existing processes–which are rarely reevaluated–rather than focusing on results.

[GAO, p. 21]

And the results of these processes fail by most accepted measures of performance.

Despite spending more than $200 billion on information management and systems in the last 12 years, the government has too little evidence of meaningful returns. The consequences–poor service quality, high costs, low productivity, unnecessary risks, and unexploited opportunities for improvement–cannot continue in today's environment.

[GAO, Preface]

Because process management and information management are interdependent, neither can be fixed by itself.

Accomplishing order-of-magnitude improvements in performance nearly always requires streamlining or redesigning critical work processes. Consequently, information systems initiatives must be focused on process improvement and guided by an organizational architecture. Information systems projects that do not consider business process redesign typically fail or reach only a fraction of their potential. Those that ignore technology usually leave significant opportunities on the table.

[GAO, p. 26]

The following diagram illustrates this relationship. If an organization's core management processes are ineffective, this will be reflected in their products: the information and decisions which direct the organization's behavior. The IM process is not immune from misdirection. Unlike other business processes, however, the impacts of ineffective IM are not isolated, or contained, or simply directed at external customers. The IM process provides direct input back to the organization's management apparatus. The quality and appropriateness of this information and data directly determine the quality of decisions.

The Management / Information Management Cycle

Prospects for Change

Recognizing the interdependence of management and information management, and using that understanding to affect change are two different things. Although collaboration and teaming are required to synchronize technology and process changes, a Gulf War exists in most organizations today. A gulf of perceptions and understanding separates those in the IM/IT process (suppliers) from those involved in the management of the business processes (IT customers). As a result, trust is generally lacking and both sides feel frustrated, disappointed, and dissatisfied with the other party's performance.

IT providers are often seen as magazine-reading technology junkies who are out of touch with true business needs and preoccupied with their own goals for personal growth, career advancement, and cool toys. On the other side, many technologists perceive their customers and especially the senior managers who control IT investments as confused; unable to cope with the changes around them; utterly insensitive to the long-term issues surrounding IT; and able to make decisions only on the basis of expedience or political considerations, not an understanding of the core technical or information management issues.

These bipolar misperceptions are both unfortunate and a recipe for disaster. The two camps (IT customers and their suppliers) speak different languages and hold dramatically different attitudes about the potential role of technology. Combined, these differences seem to create an inherent barrier to significant change. Organizations in both government and private industry that cannot successfully employ and synchronize radical technological and process change are increasingly falling behind in their ability to meet the changing expectations of their customers.

The office automation arena is one of the more significant battlefields. Most office automation technologies are not well suited to traditional justifications, as they are not targeted at reducing the costs of specific production processes. In addition, many of them are enabling technologies. Enabling technologies derive most of their benefits from dramatic changes to business processes, not simple automation or reductions in cost. Email, for example, is an enabling technology. Its true value comes from the changes that result to the organization as a whole, not just the displacement of paper mail.

Paradoxically, it is enabling technologies that could do the most to improve organizational performance and help reduce the impasse between management and information management personnel. But successful deployment of enabling technologies requires the teaming of IT suppliers and customers. Such a level of collaboration is difficult in many organizations where the gulf of understanding results in open warfare over control: how decision-making responsibilities are allocated; how budget levels are set; what mechanisms are used to allocate funds; how projects are approved and managed; how technologies and technology standards are selected and implemented.

Correcting these problems requires both sides of our Gulf War (IT suppliers and customers) to stop blaming the other for not doing things correctly and develop a shared vocabulary and value system so that both can contribute to integrating the necessary changes. Before a solution can be found, however, the cause of this interdependent ineffectiveness must be identified. The following section describes how a fixation on finance-based concepts of value are the root cause of the impasse that threatens many organization's survival.

Fixation on Capital

In The Business Value of Computers, Strassman describes his quest for a valid method of demonstrating how computers add value to organizations. Initially, when he tried comparing computer expenditures to profitability, he got scatter charts, not curves. Strassman tried a number of financial analysis approaches, based on per-employee revenue, unit costs per invoice, and similar indices. Again, no correlation. At one point, he abandoned revenue ratios and focused instead on the value added by the institution (i.e., revenues minus purchases). While this gave him a better index for comparing dissimilar organizations, it still didn't provide the direct correlations that he was looking for.

The conceptual turning point occurred in 1978, when he adopted an epidemiological model, proposing that computers are analogous to prescription drugs. Their application, doses, and therapeutic powers can be clinically substantiated before use. Believing that the effects of computers are systemic, he started to look at overall performance as the measure of organizational health. [Strassman, p. 69]

The next challenge was to define a useful metric for evaluating productivity. Traditionally, productivity is measured by dividing output by some input. But what input? The Taylor model defined productivity in terms of physical inputs and outputs, but this started to lose appropriateness in the 1930's as quality–not quantity–became a significant measure of value. Throughout this period, the information content of goods and services increased. In the 1970's with an even more noticeable shift from a manufacturing-based economy to a service-based economy, the Taylor model of productivity lost almost all validity.

Without a replacement metric, however, American productivity appeared to fall as white collar workers became an increasing portion of the labor force and the gains from information work evaded calculation. Using the standard productivity models, reduction of clerical and secretarial staff is counted as a cost savings, even if their work is just shifted to higher paid managerial and professional personnel. The fastest growing segments of information handling units–managers, administrators, professionals, and computers–were virtually invisible from the productivity calculations.

The first twenty years of euphoric acceptance of computers ended when overhead costs (including supporting capital) surpassed direct labor costs (including their supporting capital) in the service sector. Since the immeasurable became the largest input, physical productivity ratios ceased to have any meaning. Because there were no valid measures of productivity, investments in computers were justified only in strictly financial terms.

[Strassman, p. 78]

Misperceptions of Scarcity

The classic methods of measuring financial value, such as ROA (return on assets) and ROI (return on investment), trace their origin to a time when capital was the scarcest, and thus most valuable, input. Today, capital is a commodity item, crossing international borders at the speed of light. Even within government, where capital may not be quite as fluid, it is not the most critical input. Strassman concluded that–

management is the essential input to productivity... The scarce resources today are people who can organize and motivate the productive capacities of their employees, and who know how to maximize the use of capital.

[Strassman, p. 81]

It is important to remember that when Strassman talks about management, he is talking about management in the broadest sense. Management is not limited to managers, but includes all functions that are not classified as operations, regardless of who performs the work. This definition is used throughout this paper, including previous sections. Strassman differentiates Operations and Management by a variety of criteria.

Operations is concerned with how to do; doing the things right; today's business; structured tasks; today's decisions for today; workflow [that is shaped by] decisions.

Management on the other hand has a broader focus, including: how to organize; doing the right things; tomorrow's business; unstructured tasks; today's decisions for future; decisions [that] shape workflow. [Strassman, p. 81]

Confusion Over Overhead

As budgets are reduced, many organizations respond by cutting overhead. What is overhead? By most definitions, it is the costs associated with management. If capital–not management–is the critical scarce resource, cutting overhead management expenses improves value by increasing the return on capital. But Strassman argues that this fixation on capital prevents organizations from understanding the fundamental economics of overhead and the true impact of these decisions.

R.H. Hayes and R. Jaikumar in Manufacturing Crisis, Harvard Business Review, September 1988, tell about managers who were eager to buy parts from suppliers. As justification, they include allocated overhead costs for each direct labor hour saved. Increasing purchases called for added overhead costs. As direct labor costs fell, they drove the overhead rate on the remaining products even higher. This forced the company into a deepening spiral to divest all manufacturing operations.

[Strassman, p. 71]

Overhead has value. Specifically, the value of overhead is preparing for the future–

To identify the essential Operations resources does not deny the critical role of everybody else. Everyone not essential for sustaining current Operations is Management. This covers planning, motivating, controlling, rewarding, researching, investing, hiring and marketing. If you can separate out who and what generates the immediate revenues, the remainder can be considered as the safeguarding of the future. The costs of providing for the future continuation of a business are mostly information-handling costs. This involves meetings, budgeting, hiring, promotional activities, research, legal actions, accounting, financing and other such activities that engage information workers.

[Strassman, p. 114]

Using different terminology, the GAO Executive Guide points out that the core problem is that government has failed to obtain sufficient return on its overhead: its business management and information management processes. In the Federal government today, the biggest challenge is not how to cut overhead but how to reengineer management processes and infuse them with needed information technologies to make them more efficient and responsive.

Today's information systems offer the government unprecedented opportunities to provide higher quality services tailored to the public's changing needs, delivered more effectively, faster, and at lower cost. Moveover, they can enhance the quality and accessibility of important knowledge and information, both for the public and for Federal managers.

Unfortunately, Federal agencies have not kept pace with evolving management practices and skills necessary to (1) precisely define critical information needs, and (2) select, apply, and control changing information technologies. The result, in many cases, has been wasted resources, a frustrated public unable to get quality service, and a government ill-prepared to measure and manage its affairs in an acceptable, businesslike manner.

[GAO, Preface]

It is the need to improve the effectiveness of management that drives the various definitions of strategic value, but the same misperceptions of relative value that produce erroneous decisions about overhead often prevent needed information technologies from being developed and deployed.

Impact on IT

Paul Strassman details how this fixation on dollars as the ultimate measure of value drove the processes that were used to select and manage all significant organizational change.

Management focused on capital budgeting as the place where they could exercise maximum influence over the future directions of a business. Once a capital investment was approved, the operating expense would then follow from the initial investment decision. Therefore, the annual costs would not be amenable to major changes. As a consequence of such thinking, all innovation required estimation of expected benefits and costs with confidence.

[Strassman, p. 79]

When applied to IT investments, these processes become counterproductive, preventing needed changes. By focusing on the budget sheet, it is easy to miss the big picture. In fact, if an organization succeeds in that measuring cost savings does provide a complete picture, the company is probably limiting itself to the automation of routine, clerical operations and has abandoned efforts to provide strategic value.

When such investment-oriented logic was applied to computer projects, it resulted in elaborate, lengthy and tortuous approval procedures. In the absence of reliable productivity measures, industrial-age executives became convinced that the preferred way to control computers was through project authorization procedures which reduced the risks of computerization to a minimum. This resulted in favoring projects that automated existing business procedures instead of changing them to take advantage of the new information-handling methods.

[Strassman, p. 79]

Even more fundamentally, this approach actually backfires, and what appears to be cost control results in chaos and uncontrolled cost.

Investment-oriented executives failed to recognize that computerization is an incremental, continuous and evolutionary organizational learning process that requires better controls over operating results for the entire business. Cumbersome project review procedures produced elongated development schedules, and created a tendency to combine long overdue incremental improvements into a single costly project. Emphasis on controlling new investments led to the establishment of the information system as a discrete and separate function, instead of integrating it into every manager's job.

Executives who rely primarily on project authorizations to control computer spending are focusing on a diminishing fraction of total costs.

[Strassman, p. 79]

Again, the same patterns exist within government.

Current government practices illustrate industrial age thinking. Government control over its computer activities is primarily project oriented. The legislative and administrative emphasis on project management instead of long-term Agency or Department operating efficiency is the principal reason for huge budget overruns. That thinking also explains the lengthy delays in the installation of desirable operating improvements. The government's over-emphasis on controlling hardware and software detracts from its capacity to apply computers to improving its operating productivity.

[Strassman, p. 95, note 11]

Information technology and information assets are typically substantial, poorly understood, and under-controlled areas of capital investment and expenditure that are growing, not shrinking.

[GAO, p. 10]

Despite the problems, however, dollars are one of the few concepts that all parties seem to understand. Project justifications regularly rely on calculated cost savings, which can be tangible, intangible, realizable, or even imagined. As there are few or no accepted methods of calculating cost impacts, some very creative calculations are applied. Development, implementation, and maintenance costs are underestimated. Training and support costs are shifted to end-user organizations. Downstream uses of information are ignored, discounting the organizational cost of sub-optimized stovepipe solutions.

Cost-benefit analyses, cost savings estimates, and net present value calculations attempt to objectively measure value. But as was pointed out in the previous section, these management approaches have not resulted in sustained levels of performance that are considered acceptable, not for IT functions, and not for the organizations as a whole. This happens because at their core, these concepts of cost-based value rest on misperceptions of scarcity and, by attempting to maximize the return on the wrong input, organizations, tend to misallocate resources. The same lack of high-quality metrics that allows fictional improvements to be claimed causes real benefits to be discounted.

If cost does not provide an adequate conceptual framework for integrating changes to business practices and IT, what can take its place? The following section attempts to outline some of the key drivers, concepts, and approaches that can be used to accomplish this integration. They can be used both in individual projects and in the development of institutional infrastructures for change.

Return on Management

Based on the premise that management, not capital is the critical scarce resource in modern organizations, Strassman stopped looking at ROI and ROA and coined the term Return-on-Management™ or R-O-M, to measure management productivity.

In calculating R-O-M, Strassman classifies all of the profits of a company as the Management Value-Added. This idea strikes some individuals as wrong, but he backs it up with some strong and detailed analysis. In most cases, the criticism is directed at the idea of attributing all profit to the activities of managers, not management in the broad sense that Strassman applies to it. Specifically, Management Value-Added is what remains after purchases and taxes, shareholder payments, operations costs, and management costs are subtracted from total revenue. These calculations can also be adapted to public sector organizations, but without prices, profits, taxes, and shareholders, management productivity is measured by the ratio of Operations Costs to Management Costs, after purchases and transfers are subtracted from the total agency budget.

Armed with the R-O-M metric, the various statistics began to make sense. The scatter charts were even replaced with curves and meaningful correlations were becoming visible across industry groups. To simplify the analysis, Strassman divided companies into five groups: Under-achievers, Below Average achievers, Average businesses, Above Average achievers, and Over-achievers. The R-O-M metric compared well to the Management Value-Added for each of the achievement groups and a clear relationships could be seen between reductions in management costs with the net profits of the organization.

Based on his work Strassman reached a conclusion similar to the other approaches discussed in this paper: To obtain strategic value from computing systems, define the mission first and only apply IT afterwards. From this point, the book begins to read much like Reengineering the Corporation. Strategic systems are defined in terms of providing competitive advantage, not the computing technologies that are employed.

Process simplification should be a precursor to the use of IT, as the design of both process and automation are interdependent. As a general rule, the automation of existing processes doesn't create sufficient value. Most of Strassman's examples of strategic systems follow a common pattern of relying on the use of computers to provide access to information at low incremental cost in order to reduce flow times and economically customize products to meet unique customer requirements.

Strategic Systems for Executives

Meyer and Boone's approach includes an explicit model to allocate tasks within the IS organization to allow employees to focus clearly on well-defined missions, and not try to split their time between inherently conflicting activities. One of the job classifications that they define is that of generalized consultant. These are individuals who provide guidance to customers in applying IT to meet business needs. They are chosen for their analytical skills and must be generally familiar with the broad range of IT options.

The goal of making consulting its own discipline is to avoid bias. Meyer and Boone's research has indicated that when consulting is provided in addition to other technical activities, the individuals are likely to limit their recommendations to existing technologies, technologies that the individual has experience in, or even technologies that the individual wishes to gain more experience with.

Boone charges the generalized consultants with ensuring that strategic value is provided, and she uses the term strategic systems. In Boone's vocabulary, strategic systems are characterized not so much by what they do, but by for whom they do it. The target: executives. Unless the executives think that you are doing a good job, you're dead. The numbers won't matter. Your reams of analysis won't matter. Your past successes won't matter. The executives who control the company purse strings will still be likely to cut IT at some point, especially after someone in Finance shows them the growth trends.

As a solution, Boone offers a detailed executive interview process. For the most part, it looks like most requirements definition models: what's your organization's mission, objectives, goals, etc. But it adds an important twist. After identifying the organization's highest priority activity, the executive is asked, What are you going to do, personally, to ensure success? This identifies the executive's leadership strategy.

Boone maps these leadership strategies to three or four information success factors. At this point, the emphasis shifts from tools for the organization to tools for the executive. We are starting to get an understanding of their management style, at the way they communicate and direct their subordinates, and the way they use and interact with information. The following table lists some of the information success factors.

Information Success Factors

---

Personal Thinking Be well-informed Stay up-to-date Increase depth of knowledge Adjust filters on information Absorb information quickly About what? Internal Activities Business operations: status, problems Business measures: goals, achievements Projects: status, milestones, due dates, critical path Commitments, appointments External Activities Who's doing what? How do they see us? Marketplace status and trends Investments, the economy Global business and political events Think and make decisions Enhance creativity, brainstorm, invent, design Get the facts Organize ideas and information, manage complexity Analyze and compare alternatives Balance logic and intuition Forecast Allocate resources Leverage time Work independently of time and location (asynchronous work) Improve responsiveness

Managing Organizations Design organizations and cultures Pick, promote, and reward people Flatten hierarchies and empower people Measure performance on selected objectives (feedback loops) Communicate with people (inside or outside) Know people Reach people, be accessible (asynchronous communication) Listen to people Write with clarity and consistency Personalize messages Present, convince, negotiate Improve teamwork and collaboration Improve meeting effectiveness, thinking in groups Announce, one-to-many Coach people Broaden people's perspectives Focus people on what's important Teach critical-thinking abilities Balance the need to know and the need to delegate

[Boone, p. 288]

Meyer and Boone expect that by providing tools to improve executive performance in this one activity, those same tools can be applied to other activities, and thus improve organizational performance in general. Equally important, because these tools demonstrate strategic value to the executives, the executives are more likely to become personally engaged in developing an understanding of information management, recognize its potential impact on business processes, and expand their perceptions of value beyond strictly financial measures.

The executive's information success factors can then be matched to specific tools. Boone provides an Appendix that maps specific management behaviors with families of technologies. It is not intended to link directly to products, but to narrow the analysis to the types of technologies that will meet the executives' individual needs. The specific information technologies include computer conferencing, email, graphics, commitment-tracking systems, Gantt charts, electronic calendars, external databases, teleconferencing, outline processors, personal phone book, voice messaging, facsimile, and corporate models.

Activity-Based Management

Activity-based costing (ABC), activity-based management (ABM) and activity-based reengineering are important to the question of strategic value because (1) they help shift the focus from strictly monetary determinations of value to broader sets of metrics; (2) they will provide improved baselines for assessing organizational performance and measuring changes to it; and (3) they will codify demand for information management systems that can be considered, because of the information they manage, strategic systems.

Strategic Information Management

Government Performance and Results Act

Of the four initiatives, the GPRA, also known as the Bang for the Buck Act, is the most important driver for the shift towards a focus on organizational performance. The following excerpt helps to illustrate the nature of this change.

Excerpt the from Government Performance and Results Act of 1993

• (a) Findings — The Congress finds that —

  • (1) waste and inefficiency in Federal programs undermine the confidence of the American people in the Government and reduces the Federal Government's ability to address adequately vital public needs;

  • (2) Federal managers are seriously disadvantaged in their efforts to improve program efficiency and effectiveness, because of insufficient articulation of program goals and inadequate information on program performance; and

  • (3) congressional policymaking, spending decisions and program oversight are seriously handicapped by insufficient attention to program performance and results

• (b) Purposes — The purposes of this Act are to —

  • (1) improve the confidence of the American people in the capability of the Federal Government, by systematically holding Federal agencies accountable for achieving program results;

  • (2) initiate program performance reform with a series of pilot projects in setting program goals, and reporting publicly on their progress;

  • (3) improve Federal program effectiveness and public accountability by promoting a new focus on results, service quality, and customer satisfaction;

  • (4) help Federal managers improve service delivery, by requiring that they plan for meeting program objectives and by providing them with information about program results and service quality;

  • (5) improve congressional decisionmaking by providing more objectives, and on the relative effectiveness and efficiency of Federal programs and spending; and

  • (6) improve internal management of the Federal Government

[GPRA]

The GPRA mandates the use of activity-based management (ABM) and is driving changes to Federal financial system standards. The CAS (Cost Accounting Standards) Board is revising Federal guidelines to incorporate the principles of ABM. This is critical, as the current financial systems re-enforce obsolete models of organizational performance and value and have been found to disrupt ABM-based improvement efforts. If the financial systems aren't aligned with the concepts and data models of ABM, organizations will find it virtually impossible to comply with the GPRA.

The GPRA also mandates the use of performance targets. This is the main difference between ABM and ABC (activity-based costing). At this time, most of the corporations that are working with these concepts are satisfied to break down costs by activity, without a specific plan on how this additional information is to be used. It is left up to the individual organizations to determine how to make use of the results of ABC analysis. The GPRA, however, requires that this detailed performance data be used as a baseline from which specific performance targets will be derived. In most cases it will be the customer who sets the performance targets.

ABM can also be applied in the context of reinventing government. By identifying the incremental activity burden, the costs associated with a given cost driver can be measured. This provides the owner of the regulation or requirement with the information needed to determine if the regulation provides sufficient value relative to its cost. In reality, the process is unlikely to be so conciliatory as process owners use the information to develop justifications for exemptions, waivers, or outright rescindance.

At its core, ABM and the GPRA are based on the simple idea of the customer defining the criteria against which performance will be measured, and thus paid for. The customer is only obligated for buying the outputs of a given process that meet the established performance criteria. While this is the way that most of us buy goods and services, it is a significant departure from many of the contracting models which are used today within the DOE.

It is common, for example, to have software development, publications services, and other service organizations charge customers on an hourly basis. This is, in effect, charging for the inputs to the process, not the product. This funding subtly shifts financial responsibility for the quality of the product to the customer. If the product doesn't meet specifications, the customer is usually faced with the option of accepting the delivered quality or paying for more work. Again, the GPRA is part of an effort to shift away from this model and to place the responsibility for defining output specifications with the customer, not the supplier.

Department of Energy Initiatives

This change in philosophy is definitely being reflected within the DOE. Budget reductions, the movement towards fixed-fee performance-based contracts, and outsourcing are all evidence of the DOE's desire to get more bang for the buck. These contract reform efforts are also consistent with the movement to break up the big buckets of money into smaller units of work with explicit performance expectations and profit (if not revenue) levels based on the ability to objectively meet the established performance criteria.

DOE Secretary O'Leary has adopted GPRA ahead of the legislated timetables, and some organizations are facing compliance requirements in FY95. Specifically, the Environmental Management (EM) Program is one of the GPRA pilots and is in the process of preparing the FY95 Performance Plan for submission to the Office of Management and Budget. EM made an initial attempt to develop performance measures and targets in FY94, and describes the results as mixed.

While some of the summary measures and targets appear to provide the type of planning and budget information both desired and intended, other measures and targets have produced inconsistent, incomplete, and/or somewhat meaningless results. In addition, only 55% of the FY94 budget (as reflected in our performance based budgets for FY96) was captured by the performance measures reported in the FY94 Performance Plan.

[EM, p. 4]

In addition to directly supporting the EM pilot, the DOE in Richland has established the Hanford Performance Measurement Program (HPMP) to develop ABM-based methods for use at Hanford. In FY94 the HPMP staff adapted storyboarding techniques to facilitate ABM analysis sessions at the workgroup level.

The activity-based management methodology has been used in evaluating the Westinghouse Hanford Company travel accounting and the Hanford well drilling processes. In both cases, process baselines were established. In the travel accounting evaluation, radical process changes were identified with a corresponding estimated reduction of expense report processing costs of nearly 95 percent if all the proposed changes were implemented! The well drilling evaluation determined that the existing process was inherently sound but organizational issues were creating inefficiencies. Proposed organizational changes and incremental process improvements were identified to reduce drilling costs by nearly 30 percent and reduce the time required for drilling by up to 40 percent.

[DOE-RL, p. 2]

Boeing Computer Services, Richland Initiatives

Boeing Computer Services, Richland's Multimedia Services (BCSR/MMS) organization is another group that has been chosen for piloting by HPMP. MMS provides graphics, document production, video production, animation, photography, and a variety of other production services to the Hanford Site. The department has been actively analyzing and documenting its processes for a number of years, using flowcharts, customer surveys, and product and services assessments. By using ABM, MMS expects to formalize the information that they have collected and identify gaps in its analysis. This should help to balance the metrics for inputs, processes, and outcomes.

MMS also expects that this detailed analysis will lead to better pricing for its goods and services. Many MMS organizations charge the customer for labor. By charging the customers for the input consumed, not the value provided, it is almost impossible to recover the costs associated with process improvements, as total revenue capacity of the organization doesn't change, even with the improvements. With detailed activity costs, MMS will be better able to define specific products and services and charge customers on the basis of units of output, not by hours of labor.

ABM should also provide MMS with a baseline for outsourcing contracts and protecting its core products and services from inappropriate outsourcing. Armed with detailed cost data, MMS will be able to demonstrate cost effectiveness relative to outside suppliers and/or customer organizations, to identify realistic performance targets for becoming competitive, and to identify specific process improvements that will improve its cost effectiveness.

As DOE contract reform efforts increase, ABM will help to position MMS for potential fixed-fee performance-based contracts. With the existing award-fee contracts and headcount restrictions, for example, MMS has been unable to hire additional staff for its Mail Services operation, despite a doubling of mail volume. Few organizations currently possess the detailed cost data necessary to negotiate reasonable fixed-fee or performance-based contracts.

Another potential application of the ABM analysis process is the identification of reengineering opportunities. As a general rule, if a large percentage of the cost drivers are problem areas and the performance metrics are low, then incremental improvements are not likely to be enough. MMS is expecting ABM to help identify activities that are in need of major process and technology changes, prioritize improvement efforts, and help ensure that the claimed cost savings can be substantiated.