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Technology as a Cost Center

Clearly, both of the situations just described are interesting dilemmas with no easy answers. But how do these situations arise? By understanding how technology is managed within an organization, we can gain considerable insight into how to handle these two very real scenarios.

Let's look back 100 years at another industry that was as on-the-rise then as digital technology is now. We'll start with a growing railroad company with row after row of clerks checking, logging, signing, and reading the sea of paperwork that an intercontinental railroad system generated daily. As the years passed, typewriters, stenographic machines, and calculators were added incrementally, replacing paper, pencils, clips, ink, blotters, and erasers. Although these were all items vital to the railroad's business, they were simply tools to allow the railroad to carry out its business of moving people from one place to another. Or is it possible that they were as much a part of the business as the trains themselves? An owner, an office manager, and an accountant would most likely give you three different answers to this question.

An accountant thinks a pen or a typewriter may be essential for someone to implement a specific task, but these tools certainly don't transfer Mr. Jones from point A to point B. These items can't be inventoried because they're not seen as contributing directly to the bottom line in terms of sales or deliverables. In fact, they seemingly don't add revenue in any way. Therefore, in simple accounting terms, they must be expenses. Expenses are paid for out-of-pocket and therefore decrease total net profit. From an accountant's point of view, companies should not want to spend money on these items unless absolutely necessary. And, once purchased, the items must be kept long enough to at least recoup any extra expense through tax incentives and depreciation. These items are costs, and as any good businessperson will tell you, controlling costs is essential to any hope of survivability and growth for the business.

But let's look at the scenario from the perspective of a typical railroad employee, the secretary of a rail yard manager at the central hub. His job is to keep track of destination timetables and schedules, monthly payroll, rail yard expenses, and most importantly, reports to and from corporate headquarters. To save expenses, the secretary must do all the work in pen and ink. There is no typewriter, telephone, or direct connection to a telegraph service.

Our secretary starts his day at 7:00 a.m. by opening the morning correspondence. Let's assume that an experienced secretary can open, read, and assess the content of a letter in three minutes. For 65 letters in a typical day, that's 195 minutes, or 3 hours and 15 minutes. It's now 10:15 a.m. The next task is to handle the 40 or so letters that need an immediate response in the form of reply letters, telegraphs, or cables. By hand, a good secretary can write and edit a letter and address and stuff an envelope for an average response in 10 minutes. Just for these typical 40 letters, that's nearly seven hours' worth of work. It's now 5:55 p.m. Responses due either that day or early the next day must be brought to the telegraph office, sent, and acknowledged. The trip to and from the telegraph office and the actual transmissions and replies take an hour. It's now 6:55 p.m. Also, there are messages that need to be delivered within the rail yard. The manager wants to talk to several engineers about their drinking while on duty. To round up these people takes another hour, and now it's 7:55 p.m. Since meticulous records of all the day's transactions must be kept, each letter must be organized and filed, adding even more time to the workday. Arriving home after 10:00 p.m., our secretary can eat his dinner, kiss his wife goodnight, and sleep until 6:00 a.m., when he must start a new day. This is a bit of an exaggeration, but a century ago, this was not an uncommon way to do business. If the workload became too much for one person, another could always be hired to improve efficiency. Labor was cheap compared to the cost of the then newly invented typewriter or the cost of telephone and telegraph service. Why spend $10 on telegraph when you could have your own messenger for less than $10 a month?

The main advantage to this type of business economics is not the cheap labor costs but something far more difficult to define: productivity. It has taken years and a rudimentary education for our example secretary to hone his skills to the point that he can carry out his daily duties in a little over 15 hours, not including time to eat or chat with a colleague or two. But say our secretary becomes ill for a day or a week. He could be replaced, but finding someone with such practiced skills would not be easy. A century ago, even transcontinental businesses recruited locally, and generally from people they knew. There would be only so many secretaries in an area, much less secretaries with the applicable skills. It was generally easier to start from scratch, promote the messenger boy just hired, and wait for him to come up to speed...in a year or two.

Although the simple office items I've discussed were very expensive in their day, what if they could enable the secretary to create and send his mail responses in half the time? The time spent traveling to the telegraph office and messaging about the yard could be eliminated. Our secretary could wrap up his day by 5:00 p.m., leaving another five hours for him to do other administrative tasks for which he previously had little time. (It has generally been accepted that technological advances may eliminate some human tasks, but this doesn't create more leisure time; it only allows people to do more with the same amount of time.)

Productivity doesn't show up on an income statement, balance sheet, or cash flow report. So, in the world of accounting, productivity does not exist. Traditionally, office technology (everything from paper clips to mainframes) within nontechnology based businesses has been viewed as pure cost. Money is spent with little or no direct return. In the case of computer technology, this principle more often than not is also applied to the people who maintain and support that technology. This cost was often bearable when technology primarily consisted of centralized mainframes from a single vendor. Although there could be an enormous initial expenditure (often in the millions), this expenditure would eventually be offset by simple capital depreciation. Buying a mainframe computer meant that the firm would own a million-dollar asset without having to pay appreciable taxes on it, a corporate accounting bonus.

However, during the 1980s, with the introduction of distributed client/server computing, operating costs skyrocketed while capital expenditures hardly moved, despite reliance on smaller, much cheaper PCs and workstations. Although PCs were less expensive unit for unit, businesses now had to replace their one or two mammoth mainframes with hundreds or even thousands, of individual systems scattered around the country or the world. In addition, private networks had to be set up and maintained to distribute all the data from location to location. And although businesses were becoming more and more empowered by these technologies, a senior executive dependent on his own PC for spreadsheets, reports, and electronic mail was constantly presented with exponentially increasing costs. These costs seemed to constantly gyrate, compared to the days when he received the same information on oversized "greenbar " paper.

The solution frequently implemented for the increase of technological assistants is to treat them as office expenses. And if office expenses get too high, the senior executive frequently mandates cutting them. No new typewriters this year! And if there are any purchases, manual typewriters instead of electronic!

In other cases, the solution is to send the work to an outside vendor that will do the work for a fixed monthly fee. The number of corporations relying on outsourcing began to rise in the late 1980s, and these firms continue to provide truly reliable solutions to such cost-escalation problems.

We're not talking about typewriters anymore. In fact, due to PC technology and software, typewriters are all but a thing of the past. But is a PC only a typewriter with memory, or is it something more? PCs are "intelligent" and can talk to other PCs, the mainframe, and outside vendors. By being able to network and be networked into new and existing information channels, business is obviously easier and more productive, hence the senior manager's reports and spreadsheets. This is what gives the PCs their value and justifies their expense. But if they justify their own expense, then why all the spiraling costs?! Why can't PCs simply replace these mainframes that are paid for but costly to maintain? Why can't the costly networks, which link all these PCs, workstations, and mainframes, be maintained by some other company devoted exclusively to such service? After all, businesses were never asked to run their own telephone systems. For a reasonable monthly rate, this service was always provided for them by an outside telephone service provider. Are computer networks that radically different from telephone networks?

From the senior manager's viewpoint, just what should she be paying for and what shouldn't she be paying for?

Part 2 of this article looks further into some managerial concepts behind what technologies we pay for and what kind simply pay for themselves.

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