IT CAPITAL:
What the IT World Can Learn From the Non-IT World

by Herb Rubenstein
President and Founder, Herb Rubenstein Consulting

INTRODUCTION

In the same week Dr. Laurie Bassi, CEO of Human Capital Capability, Inc., and Matt Mani of ATT said the same thing about two completely different worlds. Dr. Bassi said, “The problem with our accounting systems is they treat employees as costs and liabilities when, in fact, employees are assets of a corporation.” Matt Mani said, “The problem with companies today is they just think of IT as a cost and fail to think about it as an asset, an enabler within their organizations.” Dr. Bassi has one advantage over Matt Mani. She is a leader in the new field of “human capital” and has developed “The Human Capital Capability Scorecard.” And she is joined by many thought leaders, including Baruch Lev, Gary Becker, Theodore Schultz, Jonathan Low and Bruce Pfau, who have developed a sound theoretical and empirical base to support their notion of “human capital” as a forward thinking economic concept.

The IT World Lags Behind

Human beings have been an essential element in the economic production function since the beginning of human history. In 2003, the accounting systems used throughout the world still have not figured out the proper method for accounting or measuring their value in economic enterprises. But, there is now, at least, the concept of human capital that is now being analyzed, measured and understood by CEO’s and their financial advisors throughout the world.

It is not surprising since the term IT is less than 100 years old and the role of information technology is still in its infancy compared to the role of human beings in economic enterprises, that a concept like “human capital” has not been well defined in the IT space. This paper sets out to begin to put meaning into the term “IT capital.”

IT Capital

The term “IT Capital” is not new. In 1996 The Clinger-Cohen Act was passed by Congress to improve the management of Federal agencies' information technology (IT) resources. A key requirement of the Act calls for the head of each agency to develop and implement a process for maximizing the value of and assessing and managing the risks of IT acquisitions. According to the Act, this process shall provide for ". . . the selection of information technology investments to be made by the executive agency, the management of such investments, and the evaluation of the results of such investments . . ." This bill uses term “IT Capital” as it instructs agencies on new and improved approaches to improving the government’s investment in IT. However, even though this bill is over six years old, a person who recently served as the Senior Vice President for IT at Nextel, informed us that the term “IT Capital” was not in regular use in the information technology space. Our experience confirms that there is no analogous term to human capital in the IT space, so we have chosen the term “IT Capital” to fill this void.”

The definition of the term “IT Capital” therefore, should parallel the definition of the term human capital. “Human capital” refers to the skills, knowledge, asset value and economic value of the people of an organization to that organization. Similarly, “IT Capital” refers to the capabilities, the value and worth of the information technology (hardware, software, processes, data, analytical and presentation capabilities) to the organization.

Changing the Perspective

By looking at “IT Capital” rather than looking at IT as merely a cost, CEO’s and those responsible for IT purchases are much more likely to take a longer run, strategic look at IT than if it is merely looked at as a cost to be minimized. If every major IT purchase must be justified by creating an addition to the “IT capital” of the organization, organizations must have a framework for assessing the current “IT capital” of an organization. This means that organizations must become clear as to the current worth (as opposed to the cost) of their IT to their organization. Such a change in perspective will have enormous implications for the future economic decisions around IT, including affecting decisions on upgrading, outsourcing, utilization, value, return on investment and analyzing IT as an asset rather than a cost.

IT Capital is the Enabler

We often hear the term “IT is an enabler.” It is more accurate to state that “increasing the IT capital of an organization yields additional value to the organization.” By focusing on IT as an asset and being able to bundle this asset’s value to an economic enterprise under the term “IT capital” will give organizations a much keener ability to make better, more strategic IT purchases. Ultimately, being able to quantify the “IT Capital”l of an organization will enable IT purchasers to be able to measure the true value of an IT purchase by measuring the rise in the organization’s IT Capital less the cost of the purchase and operation of the IT purchased. While these numbers will be crude, like all initial numbers produced by a new measurement system, they will become more robust and useful over time.

Conclusion

Upgrading hardware or software and not using its new features or benefiting from its extra speed or reliability is a perfect example where an IT expenditure does not increase the IT capital of an organization. The creation of large data bases that are not mined or used in any way to improve the performance of an organization presents a similar story. Once CEO’s and those responsible for IT purchases clearly understand the notion of “IT capital” as I have defined it, the nature of the discussions about and decisions regarding IT purchases will be more effectively managed.

The term “IT capital” can benefit from the growing literature on “human capital.” And organizations that can appropriately measure and consistently improve their IT capital will, in all likelihood, outperform their competitors financially just as the new research has shown that companies that invest significantly in their human capital outperform their competitors. It all begins with asking the question,
“What is the IT capital of my organization?” That is a powerful question. The answer, over time, will be even more powerful as a management tool.

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