InformationWeek
Defining The Business Value Of Technology
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March 19, 2001 |
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Testing Greenspan
By making productivity gains possible, IT can be a weapon to fight the economic slowdown, says the Federal Reserve chairman
By Chris Murphy (cjmurphy@cmp.com)
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lan Greenspan believes that information technology is one of the most important factors for powering the economy out of its slowdown. A trip to one of Home Depot Inc.'s home-improvement stores a couple of months from now will help explain why.
By then, Home Depot expects to have begun using software that automates how employee work schedules are set, making it possible to assign cashiers and sales staff when and where they're most needed within the cavernous warehouse stores. Ron Griffin, Home Depot's senior VP and CIO, says the new application should improve the efficiency of its 250,000 employees by as much as 20%.
That would be a huge productivity gain that's yet to be reflected in the retailer's business performance, let alone the economy at large. Other businesses, including Amtrak, Boise Cascade, Federal Express, Mesaba Airlines, TRW, and Vanguard Group, have their own IT projects under way, all promising their own business benefits (see Positive Thinking). In other words, the "forces" Greenspan had in mind when he addressed the U.S. House of Representatives' Committee on Financial Services last month do indeed remain intact in many companies. So if the Federal Reserve chairman is right, that should bode well for an economic recovery that's faster than would otherwise be the case.
Another possibility? The downturn worsens as bad news spreads faster and businesses tighten supply chains even more--and technology facilitates it all. "For the period ahead," Greenspan warned the Financial Services Committee, "downside risks predominate."
Greenspan may be known for his complicated and carefully chosen syntax, but he's been crystal clear in his public remarks on this point: Business investment in IT as a way of reducing labor costs has been at the center of the recent economic boom (see Greenspan Gives IT Credit-And Blame-For The Economy). Now that the economy's in a slowdown, he hasn't changed his tune. "Crucial to the assessment of the outlook and the understanding of recent policy actions is the role of technological change and productivity in shaping near-term cyclical forces as well as long-term sustainable growth," he said.
The prospects are good, he added, for continued productivity gains. Though the pace of improvement slowed with the economy in the second half of last year, he said output per hour improved enough to suggest productivity is still advancing much faster than a decade ago. And he indicated businesses seem inclined to keep investing in IT. Business managers, "rightly or wrongly, appear to remain remarkably sanguine about the potential for innovations to continue to enhance productivity and profits," he said.
Rob Carter, executive VP and CIO of FedEx, agrees. Carter sounded upbeat March 12, even as the TV in his Memphis, Tenn., office provided up-to-the-minute news on the steady and dramatic decline in the stock market that morning. "Many corporate managers and CEOs are becoming [even] more optimistic about the breakthroughs that technology can provide," Carter says.
Projects at FedEx include better support for new wireless technologies, the globalization of the company's high-traffic FedEx.com Web site, and a major upgrade to the package-delivery company's call centers. In just one example of efficiencies waiting to be realized, FedEx says the cost of a package-tracking request drops from $2.14 when handled by a call-center representative to 4 cents on its Web site. To put that into perspective, the company's 800-Go-FedEx phone-support service handles 600,000 calls a day.
FedEx also has what may be good news for Greenspan and others nervous about the economic outlook in general. Based on the information flowing through FedEx's databases about product movement among its customers, Carter says business activity has "ticked upward" in the first half of March after hitting a low point in late February.
"We do think we have not only a good leading indicator for the economy, but also a sort of catbird seat that allows us to look out at primary sectors and assess business," Carter says. "There's a fairly unanimous feeling that we've probably bounced off the bottom. We've seen a subtle upward nudge in what our customers are doing relative to February. We have a guardedly optimistic view that the economy may have turned."
Businesses in a variety of industries are doing their part to help. Vanguard is investing in Web initiatives to expand its business model without adding lots of staff. Known primarily as a seller of low-cost mutual funds and 401(k) plans, Vanguard is trying to become a financial hub for its customers, providing financial advice, bill payment, and a wide range of investment choices. That includes integrating its Web site and mainframe-based data warehouse with a third-party financial adviser, Financial Engines Inc., that can provide online advice without the cost of buildings and professionals throughout the country.
CIO Bob DiStefano says half of Vanguard's daily customer contacts are now done online, a much lower-cost route than using phone representatives. He predicts the productivity growth enabled by technology will continue--both at Vanguard and at other companies--because senior business executives outside of IT departments have become convinced of the value of technology and are looking for opportunities to exploit. "This isn't a blip that occurred because of the Internet that will now flatten out," he says.
Xcel Energy Inc., a utility company in Minneapolis, has a long list of IT initiatives in the works. They include implementing J.D. Edwards & Co.'s financial application, Indus International Inc.'s Passport enterprise asset-management software, PeopleSoft Inc.'s tools for self-service human resources information, and a Windows 2000 distributed architecture. Paul Anders, Xcel's CIO, says he has proposals out now--with bids from IBM, webMethods Inc., and another vendor--for a project to encourage data sharing. "It's for the [middleware] 'glue' to take all that information and make it accessible for all who need to use it," Anders says. "It's the most promising technology experience for us in two years."
Robert Egan, VP of information technology at Boise Cascade, says his company, used to cyclical ups and downs, is continuing to fund its IT projects. Consistent with Greenspan's assumption, Egan says the paper and timber company can indeed respond more quickly to a downturn today. That ability, he says, didn't just appear with the Internet--it's been gradually improving for years as IT systems let employees within the company help themselves to information.
That process is also moving outside the company's walls. One Boise Cascade project involves giving its business customers more self-serve capabilities by using the Web to enter Boise Cascade's back-end transaction system for information such as production and shipping schedules. The capability is being used by its paper business and is being extended to its wood products group. While the information is the same as that which customers now get by calling phone representatives, Egan predicts customers will collect more information and do it more often when they can help themselves. "The number of customer contacts will increase dramatically," he says.
Greenspan believes the flow of nearly real-time information along the supply chain, such as what Boise Cascade is sharing with customers, not only improves productivity, but also means this downturn is moving at a faster pace. Businesses can perceive a slowdown sooner--by watching sales and inventory data--and take steps to quickly cut production accordingly. He sees that happening now, though high-tech manufacturing was growing so quickly it couldn't slam on the brakes fast enough. That's why the Federal Reserve chose earlier this year not to wait for a scheduled meeting to lower interest rates to try to jump-start the economy.
This speed of information movement and business reaction could mean the economy will climb out of a downturn more quickly--or feed a herd mentality that exacerbates it. "The same forces that have been boosting growth in structural productivity seem also to have accelerated the process of cyclical adjustment," Greenspan said.
All that leads to what Greenspan sees as a potential dark side to this information-intensive society--that business managers will be reacting to much of the same news and data, and therefore making production cuts and layoffs all at once, making their effect more painful. "Business managers throughout the economy also are likely responding to much of the same enhanced body of information," he said. "Firms appear to be acting in far closer alignment with one another than in decades past. The result is not only a faster adjustment, but one that is potentially more synchronized, compressing changes into an even shorter time frame."
Chris Wiegand, an economist with Salomon Smith Barney, says businesses already are showing signs of moving in unison. He points to the string of manufacturing layoffs in January and February, which he says in the past would have more likely been spread out over many months. "It used to be that it wasn't a whole crowd of companies hitting a brick wall at once," he says. "It was more scattered."
This slowdown, Wiegand says, should feel the positive effect of moves to just-in-time inventory and more real-time demand monitoring that prevents big inventory buildups. He forecasts economic growth will pick up to about 3% in the second half of the year. "Businesses won't get these massive inventory buildups that take five, six quarters to clear," he says. "It can be compressed to two or three quarters at most."
However, Wiegand warns that an inventory buildup is only one piece of an economic slowdown and that the Internet doesn't make it any easier to predict another critical factor. "There's an unobservable element," he says. "There's a massive shift in business and consumer confidence that's impossible to predict."
Ultimately, those emotions will determine how long a slowdown lasts. Greenspan doesn't think technology changes the most basic facts about human nature--that people take fewer risks in times of change and wait until the future is more certain to make decisions in areas such as IT investments. But shouldn't that fear be lessened by the fact that we've come off such a historic boom? Greenspan suggested otherwise in his speech to Congress, likening the situation to water backed up behind a dam that finally gives out. "The torrent carries with it most remnants of certainty and euphoria that built up in earlier periods," he said.
Home Depot CIO Griffin isn't euphoric, but he's not fearful, either. Among the $1 billion worth of IT projects in the works at Home Depot, some have been moved to the slow track, such as an upgrade of the company's accounting system that's needed to handle the foreign currency complexities of an international expansion. On the fast track are projects with a hard return in productivity, such as an i2 Technologies Inc. software-based system to let trucking companies bid for partial loads of goods, thus keeping freight costs down.
Not content to sit around and lament the state of the economy, Griffin and other Home Depot executives recently met to discuss ways the retailer could entice reluctant consumers into the stores. "We shouldn't attribute everything to the economy. We can influence demand," Griffin says.
That's the spirit. Greenspan might say that Griffin, the one overseeing Home Depot's IT investment, is doing his part.--With John Foley, Martin J. Garvey, George V. Hulme, and Rick Whiting
Photograph of Alan Greenspan taken by Brian Smith
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