Doing Business in an Age of Electronic Miracles and Wonder

Wriston, Walter B.


Impact on Management Structures


In addition to products and services, and how they are delivered, technology is also having an impact on management structures. Most successful businesses have already passed through the period where automation has taken the hard costs out of a given operation and managements are now looking at reducing soft costs.

For years, corporations have emulated the old military model, the hierarchical structure. Today that model is being discarded, and structures are beginning to flatten out. As corporate restructuring takes place around information flows, layers of management are being eliminated. The occupants of the boxes in the organizational charts that are disappearing are not people who were actually running businesses, but rather layers of management that were reporting, or relaying information to others.

A modern electronic information system can do the job these people used to do faster and, in many cases, more effectively. This process is neither easy or free from pain. The people who remain in the organization bear a heavy responsibility, and, indeed, the nature of the jobs which remain is altered.

With his usual insight, Peter Drucker describes the information based system as resembling a "symphony orchestra." "All instruments play the same score. But each plays a different part. They play together, but they rarely play in unison. . In the orchestra... the score is given to both players and conductor. In business the score is being written as it is being played... Management by objectives and self-control is ... the integration principle of the information based structure.'

It is not always easy to get an organization to accept the changes necessary to get this teamwork going. It can be argued that some, if not many, of the problems of bringing everyone in a corporation to embrace change are caused by using a vocabulary that no longer describes the world in which we live.

In our country, the national income accounts that are supposed to tell us how the economy is functioning - and once did - are now out of date. The same is true of standard industrial codes. Of the twelve major code divisions, only two reflect the service industry, although about 808 of Americans work in a service business. Our accounting standards in business evidence much the same mind set.

Many of the accounting concepts and rules that have been developed over time are designed to reflect businesses operating in the industrial age. Against this background it is understandable that assets recorded on balance sheets tend to be something that you and I can feel and touch, like a building or a machine tool. Intellectual capital tends to be expensed, since it is not regarded as a 'real' asset, while physical capital tends to be capitalized.

The magnitude of the distortion produced by these accounting systems can be suggested by the fact that in the last five years IBM alone had revenues from selling software totaling almost $17 billion, and this number does not include any development expenses.

This $17 billion along with billions more produced by other vendors has almost disappeared completely into thin air. It appears on nobody's balance sheet. Certainly it is prudent to question whether or not this accounting treatment truly reflects the strength of American business.

It is almost beyond argument that many businesses would collapse if the software were not present to keep their systems running. On the other hand, the last few years have demonstrated that a great many corporations can get along very nicely without some of their "real, balance sheet assets. If today's software suddenly really disappeared, factories would stop running, accounting and payroll systems would cease to function, all telephone switches would freeze, airlines would stop flying, and the economy would grind to a halt. It is hard to imagine such a vital business asset being virtually unrecorded anywhere - but that is the case.

The Financial Accounting Standards Board has struggled mightily in its conceptual statement to define an asset. One of the parts of the definition is that an asset is something which will contribute to future net cash flows. Certainly software should fall into this category, and FASB-85 has begun to address the problem in a gingerly way. To suggest that accounting should reflect business reality is often met with the charge that people would play games with the numbers, earnings would be distorted, and balance sheets might become less reliable. All these dangers exist, but they are not a valid excuse for failing to face the reality of the information society.

All of this argues that the impact of information technology on our corporations, our nation, and on our world may be as important as previous massive shifts in energy sources have been. Human and animal muscles gave way to wind and water power, succeeded by coal, oil and atomic power -- each transition had immense consequences for business and for society. Information is having a not dissimilar effect, but in its own unique way. While information is becoming an ever more valuable and pervasive resource, it is simultaneously becoming easier and faster to distribute widely. It is far too early to say that the age of the fixed work place is over, but in thinking about the future of our business, we, at least, must take this possibility, into consideration.

Since no one can predict the future with any accuracy, if we want our business to survive and prosper, we have to structure our corporations to permit the entrepreneurial spirit to flourish. We have to organize our companies around the flow of information rather than the old military model.

We have to open our minds to the possibility that what we "know' now may be wrong. We have to be receptive to new knowledge. Many years ago Alfred North Whitehead put it this way: "The rate of progress is such that an individual will be called on to face novel situations which find no parallel in the past. The fixed person for fixed duties, who in older societies was such a godsend, in the future will be a public danger."

If we don't want to become a "public danger," we have to foster a corporate climate of innovation, the willingness to take risks, and a management that has a very clear understanding that the information age really is different from the industrial society we have all known in the past.

  • This document was created from the article, "Doing Business in an Age of Electronic Miracles and Wonder," written by Walter B. Wriston for the June 22, 1987 edition of "American Banker." The original article is located in MS134.003.027.00002.
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