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What do we believe the future will be and what should we be doing today? by John Havey

Published in the World Leasing Yearbook 2003

Information Technology represents, and will continue to represent, a profoundly important part of every organisation’s strategic planning effort. But what do we believe the future will be? Clearly the choices we make today are central to our effectiveness tomorrow. To appreciate the context in which these decisions will be made, we need to understand the current technological and economic environment. Sadly, the recent high-profile examples of disingenuous financial accounting practices and the dot-com boom and bust (emphasis on the “bust”) don’t inspire a lot of confidence. In the latter case, the benefits of the Internet and its contribution to the marketing mix are obscured. Moreover, an uncomfortable prejudice against technology threatens to stall the kind of investment in infrastructure that’s usually correlated with an improved competitive position. In this tempest of misrepresentation, markets are contracting and investor and consumer trust are diminishing at an alarming rate.

Trust Matters

Trust is a confident positive expectation about another’s conduct. Trust matters because it reduces uncertainty – and uncertainty equates to risk. In software, we might express this as:

IF NOT_CERTAIN_ABOUT_YOU THEN RISK=TRUE

For the most part, trust is developed experientially, over a period of time. One notable exception is a business combination; in a merger or acquisition, due diligence is used as a proxy for experience. In general however, we trust the things we know. Competitive markets partially compensate investors for uncertainty, but a level of trust in the way firms report their revenues and expenses and the value of their assets and liabilities is fundamental to avoiding market failure. The New York Times recently suggested that U.S. GAAP “was supposed to be the gold standard in disclosure” , but fraud and scandal have seriously impacted foreign direct investment in the United States. In response to this decreased certainty, the regulatory bodies in North America and the EU are revising their accounting standards (subscribing to the doctrine of substance-over-form ) and are enacting tough legislation to discourage corporate deception and deceit.

But fraud’s not the only cause of diminished trust. The economic downturn we’ve observed over the last 18 months was precipitated by the dot-com collapse, accelerated by the terrorist attacks on September 11th, and has led to a pervasive apprehension toward the competitive benefits of IT, particularly the advantages of e-commerce and the Internet.

Why is this uneasiness about IT important? It’s a valid question. A big part of it is a broad shift from product-focused marketing to a customer-focused approach. The common phrase used to describe this is CRM. The key to successfully marketing a product or service is timely, accurate, and relevant information. Customers have different needs and represent different levels of value to lessors. Information about these differing needs enables firms to focus on providing products and services to those customers that represent the highest value to the organisation. In other words, improved information allows lessors to implement a customer differentiation strategy. IT plays an important contributory role in this effort. In a larger sense, the benefits of enhanced information have the capacity to improve the relationships firms have with all stakeholders. Organisations that scale down their investment in Information Technology forego the ability to use the “I” in IT as a competitive lever.

The “I” in IT

In microeconomic theory, “factors of production” are the inputs used to create products and services. Traditionally, the three most important factors of production are labour, land, and capital. For example, when a farmer produces wheat, he needs land to grow the crop, labour to sow and harvest the wheat, and capital to purchase appropriate machinery and equipment. Information represents an important “new” input to the production of goods and services, because better information greatly improves the quality of an organisation’s decisions and its ability to manage its interactions with customers and strategic partners. These benefits translate to a long-run ability to provide differentiated products and services and/or implement advantageous cost structures. Clearly, improved information is in itself a compelling objective.

The principal IT challenge that lessors face today is to become both technology-literate and information-literate. Too often, we focus on just the “T” in IT. However the quality and availability of information are critical factors in sustaining strategic relationships with funders, vendors, dealers, and brokers and in a firm’s customer acquisition and retention activities. In addition to supporting data collection, storage, and retrieval, an organisation’s foundation technologies have to include tools that deliver strategically important information in a timely way.

It’s vital to understand that data is not information. Data has to be selected, manipulated, organised and aggregated to have informative value. Figure 1 shows the relationship between data and information and how each ultimately contributes to improved organisational knowledge and/or superior relationship management.

Figure 1
The Evolution of Data

Not surprisingly, the ability to extract useful information from data is directly proportional to decision and relationship quality. Figure 2 illustrates how increased information leads to higher quality decisions, which ultimately means improved organisational results. Notice that the returns to decision quality tend to diminish when an excessive amount of time is spent gathering information. In fact, too much analysis may precipitate indecision. The Informed Decision Line represents the point at which a reasonably high-quality decision can be made.

Figure 2
Information and Decision Quality

Through improved “Information” and appropriate “Technology”, the informed decision line can be shifted to the left. An IT Strategy is a plan to achieve this overarching objective.

Information Technology 101

Before we proceed with a discussion about ways to develop an Information Technology plan, it might be useful to review some definitions. What is Information Technology? What’s an IT Infrastructure and how is it related to IT Architecture? One way to define something is by describing its parts. The fundamental components of IT are:

• Content (the storage of data and information);
• Computing (the hardware and software used to process content); and
• Communications Technologies (the movement of data and information).

These elements are the building blocks of Information Technology. An IT Infrastructure defines the physical resources – the computer hardware, software, and data – of the firm. In contrast, a company’s IT Architecture identifies the logical organisation of its infrastructure and the policies and guidelines that regulate its content, computing, and communications resources. As we’ll see, an IT strategy needs to concern itself with (a) determining an appropriate technology infrastructure and (b) defining a suitable information architecture. Most organisations focus their skills and competencies on the former activity. But understanding and defining an information architecture that plays an important role in meeting organisational objectives is the principal area where firms can achieve a substantive competitive advantage. Again, the real challenge is to become information-literate.

This isn’t to say however, that the technology infrastructure is unimportant. On the contrary, the physical resources that comprise the infrastructure play a crucial role in the strategic direction of the firm. Figure 4 classifies these resources into three groups: foundation technologies, building block technologies, and watch list technologies. Together these groups constitute the Emerging Technologies Iceberg - which is a useful metaphor for the visibility and pervasiveness of each resource.

Figure 4
The Emerging Technologies Iceberg

Watch list technologies have a lot of visibility. They’re the ones that receive most of the press and they may or may not have a practical business application. Of course, the potential applicability of each technology varies from firm to firm. Watch list technologies represent new, often niche, solutions and their probable impact is uncertain. In most organisations, individual business units research and identify watch list technologies. For the most part, the downward pressure on these groups to reduce cost and improve revenue encourages them to seek ways to become more efficient. Accordingly, they survey emerging trends and scan innovative technologies to assess the potential benefits to productivity. The difficult part is controlling for the “peak of inflated expectations” in the technology hype cycle and in forecasting what the long-term effect on productive output will likely be. Consider some of the wireless Internet appliances on the market today. A cell phone that includes a web browser has some interesting possibilities and a leasing system that supports the ability to originate credit applications this way has some competitive value. This seems obvious today, but it wasn’t two years ago when wireless web applications were a watch list technology. One of the attributes lessors should look for in third-party leasing solutions is the “bets” the vendor placed on watch list technologies. Is the vendor continuously surveying trends and scanning new innovations? If the product’s capabilities are somewhat anaemic, maybe not.

The identification, acquisition, implementation, and support for building block technologies is much more formally organised than the ad hoc manner in which watch list solutions are acquired and implemented. Lease accounting software is an example of a build block technology. These systems are widely used within the organisation, but have different value to different business units. For instance, the importance of a contract management system to the various departments in the finance group will be considerably different than its value to the manufacturing planning group.

Given their fundamental importance, foundation technologies are chosen by the CEO or the CIO. They are the elemental parts of the IT Architecture for the organisation. They define the standards and have a positive investment payback horizon. Foundation Technologies are usually fully managed and supported by the organisation’s IS Group.

IT Strategy

For the most part, there are three approaches to strategic planning. The first method attempts to “fit” the organisation into an industry, taking into consideration the contending forces that affect the firm’s competitiveness . The second approach argues that incremental improvements have obvious limitations and firms have to set stretch goals and achieve discontinuous progress through revolution . The third alternative views strategic planning as a valuable activity, but suggests strategic thinking is more fundamentally important. It posits that insight and creativity, both products of organisational learning, should be used to develop an integrated vision of where the organisation is headed . Regardless of the style used, a firm’s Information Technology Strategy needs to be aligned with its overall strategic objectives.

A strategic plan identifies two things: “what we are” and “what we can be”. The first of these is evaluated by analyzing both the internal environment (the strengths and weaknesses) and the external environment (the opportunities and threats) . Once a firm determines this, it needs to articulate a vision for the future and identify missions and specific objectives to attain its vision. The alignment of organisational direction and IT involves determining which technologies contribute to the long-run goals identified by the firm and (perhaps most importantly) how any new hardware and software acquisitions will add value to the company’s informational capabilities. An IT strategic plan should also include an evaluation of where strategic alliances and outsourcing opportunities would be beneficial. If the IT component, tool, or activity doesn’t represent a core organisational competency, it may make sense to consider outsourcing it.

Developing a strategic plan is a considerable task – and there are at least three ways to approach the planning process. The objective here isn’t to underscore the importance of having an IT Strategy. The essential idea is that any increase in your company’s ability to manage information should be a primary consideration in every infrastructure decision. Attention to the information architecture should pervade the plan.

The following checklist is a useful tool to assess the substance and breadth of an IT Strategic Plan :

Information

1. What information do we need to do our work?
2. When and in what form do we need this information?
3. Where and how should we get this information?
Process
4. What new activities should we consider doing now?
5. Which existing activities should we do differently?
6. Which existing activities should we abandon?
7. What key activities need IT support?
People
8. Are we assigning our IT staff effectively?
9. Are we optimally organised and skilled to support IT?
10. Could some IT activities be done best by outsiders?
Technology
11. Are we using our existing technologies efficiently?
12. Are we identifying and experimenting with emerging technologies?
13. Are we replacing legacy systems with proven new technologies?

Quo Vadis? – The Information Imperative

Where do we go from here? We’ve seen the failure of accounting to protect investors against misleading practices and we’ve experienced the misery of market failure. The effect seems to be an unhealthy discrimination against investment in technology. Although this under-investment is probably a short-lived circumstance, the moderated degree of trust is another matter.

At a summary level, competitive advantage can be achieved by developing an IT Strategy that builds a technology infrastructure and information architecture properly aligned with the processes and people in the organisation. The Information Imperative is the idea that information must be infused in the value chain or (apologies for the colloquialism) it ain’t good. Figure 5 shows how dramatic this infusion needs to be.

Figure 5
Information and the Value Chain

Lessors face increasing pressure to understand, support, and explain the results of transactions – to funders, vendors, lessees, etc. (the list goes on). Every organisation’s strategic plan has to address this requirement – and Information Technology is fundamental to meeting this objective.

Author’s Note:
The information presented in this article is based on course material presented by Professor Salman Mufti, Queen’s University, Kingston, Ontario, Canada

by John Havey, APAK Group, Published in the World Leasing Yearbook 2003