Executive Summary
Published in 1990, Paul Strassmann's The Business Value of Computers is a foundational text that dispels the myth that simply spending money on Information Technology (IT) automatically leads to increased profitability or productivity. Strassmann, a former Chief Information Officer for the US Department of Defense and Xerox, presents empirical evidence to show that there is no statistical correlation between IT spending and financial performance. Instead, he argues that the value of computers is entirely dependent on the quality of the management and the effectiveness of the business processes they are applied to. Bad management, when automated, just makes bad decisions faster and more expensively. The book introduces the concept of “Information Productivity,” a metric for evaluating how effectively management utilizes information capital, shifting the focus from hardware and software costs to management effectiveness and organizational restructuring.
Core Thesis
“Computers do not generate value; management does. Automating a flawed business process simply accelerates the rate at which you waste resources. The true measure of IT value is found in 'Information Productivity'—how effectively management leverages information to generate economic value above the cost of capital.”
Key Concepts & Pillars
1. The Computer Productivity Paradox
The core observation that despite massive investments in IT across the economy, aggregate productivity (especially in the service sector and among “information workers”) did not show corresponding growth. IT spending is not a magic bullet for profitability.
2. Information Productivity (IP)
Strassmann's proprietary metric. Traditional metrics (like ROI on a specific server) fail. IP measures management's output (Economic Value Added) relative to management's input (Information Capital and Management Costs). It treats management as an investment, not just an overhead expense.
3. Management Productivity vs. Labor Productivity
Historically, capital was used to increase manual labor productivity. In the information age, capital (IT) must be used to increase management productivity. Most IT spending goes toward “Information Workers” (management, admin, sales), so their effectiveness must be measured.
4. The “IT Black Hole”
The phenomenon where companies pour millions into IT budgets without ever being able to quantify the return. This happens when IT is viewed as a technical expense rather than a strategic business investment requiring organizational redesign.
The Information Productivity Model
How Strassmann Re-evaluates Corporate Value
Instead of measuring IT ROI directly against revenue, Strassmann measures it through the lens of Management Productivity. IT is a tool for management; therefore, the value of IT is reflected in how well management generates surplus value.
Key Analogies & Case Studies
Analogy: The Tractor vs. The Farm
Buying the world's most advanced, expensive tractor (IT) will not yield a better crop if the farmer (Management) plants the wrong seeds in bad soil during a drought (flawed business processes). The value isn't in the tractor itself, but in the farming methodology utilizing the tractor.
Case Study Pattern: The “Paving the Cow Path” Problem
Strassmann frequently observed companies taking highly inefficient, bureaucratic paper-based processes and simply writing software to do the exact same inefficient steps digitally. This is “paving the cow path.” It doesn't solve the underlying organizational dysfunction; it just embeds it into expensive silicon. Value only comes when the process is re-engineered before automation.
Chapter-by-Chapter Deep Dive
Part 1: The Search for Value
Key Concepts: Introduces the core paradox. Strassmann analyzes hundreds of companies and shows scatter plots revealing zero correlation between IT budget size (as a % of revenue) and return on investment (ROI). He establishes that traditional accounting fails to measure information assets.
Analogies/Examples: The “Black Box” analogy—executives throw money into the IT black box expecting money to come out, without understanding the internal mechanics.
Part 2: What is Management Value?
Key Concepts: Defines “Information Productivity.” Strassmann separates the costs of “operations” (making the product) from “management” (information workers overhead). He argues that computers primarily serve management; therefore, their value must be judged by how much value management adds over and above its own costs.
Analogies/Examples: Compares a factory floor worker (production) to a mid-level manager reading reports (information). Historically, we measured the factory worker's output easily. Strassmann provides a mathematical formula to measure the manager's output via Economic Value Added.
Part 3: The Causes of Mismanagement
Key Concepts: Explores why IT projects fail to deliver value. The primary culprit is organizational complexity. When companies have bloated bureaucracies, they buy computers to manage the bloat, leading to higher costs with no revenue increase. “Information pollution”—generating data no one uses—is a major symptom.
Analogies/Examples: The “Paper Factory” example: A company where the primary product becomes internal reports and memos, rather than goods sold to customers. Computers just speed up the paper factory.
Part 4: Measuring Information Productivity
Key Concepts: The technical core of the book. Details how to calculate Information Productivity (IP) using audited financial statements. It shifts the view of IT from an expense to be minimized to an asset to be maximized, but only if the business process is sound.
Analogies/Examples: Uses real-world anonymous case studies contrasting two firms in the same industry. Firm A spends heavily on IT but has poor management structure; Firm B spends less on IT but has streamlined processes. Firm B demonstrates higher Information Productivity.
Part 5: Policies for Improvement
Key Concepts: Actionable advice for executives. The primary mandate: simplify before you automate. Re-engineer the business process to remove unnecessary steps and management layers before applying software. IT must align strictly with strategic business goals, not technical novelties.
Analogies/Examples: The analogy of dieting versus buying a larger belt. Buying more IT to handle complex bureaucracy is just buying a larger belt. Simplifying the business process is the diet.
Conclusion
Paul Strassmann's work remains a vital corrective to “tech-utopianism.” The ultimate lesson is that technology is an amplifier. It is not an inherent good; it is a tool. If an organization is poorly run, highly bureaucratic, and strategically confused, adding expensive computer systems will only amplify the confusion and accelerate the waste of capital. Conversely, in a well-managed company with streamlined processes and clear objectives, IT can exponentially increase the value generated by management. The key to the business value of computers is, paradoxically, not the computers themselves, but the humans who manage them and the processes they support.