CLASSIC CASES: INFORMATION SYSTEMS IN ORGANIZATIONS Farmers Insurance Finds Higher Revenue and Lower Claims in Information Large

companies process millions of transactions every year and store huge amounts of data on these transactions. Often, the data is spread across a variety of different computer systems in different areas of the country or the world. This raw data, although needed for record keeping, has little value to managers and decision makers unless it can be filtered and processed into meaningful information. The results can be a staggering increase in revenues and profits. But doing this is the real challenge. Finding strategic information from a mountain of data can be like finding a needle in a haystack, but the effort is usually worth it. With todays fast computers and a knowledgeable IS staff, the possibility of turning raw data into useful and profitable information can become a reality. This was the case with Farmers Insurance Group. Like other companies, Farmers Insurance Group was sitting on a huge amount of raw data. The data, however, was spread across different computer systems in different locations. As in all insurance companies, underwriting determines what insurance policies a company can offer and at what premiums. Farmers underwriting business was responsible for assessing insurance risk, which can make the difference between profits and losses. The people who are responsible for determining insurance risk are called actuaries. According to Tom Boardman, an assistant actuary at Farmers, As competition has gotten more intense in the insurance industry, the traditional ways of segmenting risk arent good enough at providing you competitive advantage. Boardman was referring to how most insurance companies categorize risk. For example, high-powered sports cars are more likely to be involved in expensive accidents than ordinary sedans. Thus, insurance companies can put sports cars in a different risk category than sedans and charge customers who own them a higher premium. In assessing risk, an insurance actuary would traditionally have a hunch, such as sports cars are more prone to accidents than sedans. Then the actuary would test his or her hunch using the computer. According to Boardman, this was like using the computer to dig up data to prove or UN-prove those hunches. One disadvantage of this old approach is that small, but profitable, market niches may be ignored or not priced correctly. As a result, Farmers decided to look into a computer system to help it find profitable market niches. The company found the help it needed through IBM, which developed a customized software product for Farmers called DecisionEdge. The computer system was an advanced decision support system that combined raw data from seven different databases on a staggering 35 million records. Consolidating the raw data into useful information took about twice as long as expected, but the additional wait was worth it. Farmers was able to locate market niches that it didnt see before the decision support system. For example, DecisionEdge helped Farmers determine that not all sports car owners are alikethose who were older and had at least one other car were less likely to be in an expensive accident. Once this market niche was identified, Farmers could offer that segment of the sports car market lower premiums. Using DecisionEdge to find the market niche resulted in millions of dollars of increased revenues for Farmers. The approach used by Farmers is sometimes called data scrubbing. It allows a company to consolidate important information and squeeze additional revenues and

profits from it. After helping Farmers and seeing a market opportunity, IBM also decided to offer its DecisionEdge software to other insurance companies. Discussion Questions: 1. How was Farmers able to transform its raw data into meaningful information and additional revenues? 2. Describe how this approach could be used in other industries. Sources: adapted from Hoffman, Thomas, Finding a Rich Niche, Computerworld, February 8, 1999, p. 44 and Farmers Trim Paper Trail, Future Banker, September 6, 1999, p. 24. UPS Turns to Technology for a Strategic Advantage People often claim that the saying you cant teach an old dog new tricks applies to old, traditional companies. It is often said that it takes a new, upstart company to take full advantage of changing times and the Internet age. Although this may be true for some old, traditional companies, it is not true for one of the oldest and most respected companies in America, UPS UPS began in the early 1900s by moving a limited number of packages in the Seattle area. The first vehicles used were Model T Fords. With its coffee-brown uniforms and vehicles, UPS has not only survived for almost a century, it has thrived. Company income for 1999 exceeded $2 billion on revenues of $27 billion. In recent years, the company has seen annual growth rates that exceed 20 percent. Today, the company moves 13 million packages daily. The companys ability to change and adapt is a key reason for its continued success for almost 100 years. According to Chief Executive James Kelly, We have to be more adaptable. We have to know when to add and when to subtract. Clearly, James Kelly, who started with UPS as a part-time driver, knows how to compute the way to success for UPS. And that way is through technology. The success has reached to all levels of the company. After a recent initial public offering, a number of long-term UPS truck drivers and other employees became instant millionaires as a result of their stock options. This long-term success story is a result of the staggering investment UPS has made in computer technology. Over the last ten years, UPS has invested about $11 billion in computer systems and related equipment. In the past, UPS could be categorized as a trucking company that used technology. Today, UPS thinks of itself as a technology company that uses trucks. All aspects of its business have been automated, with the Internet playing a central part in its long-term business strategy. Each driver, for example, uses an electronic tracking device, called a Delivery Information Acquisition Device (DIAD). Using this device, a company can track its shipment even before the UPS truck leaves its driveway. But UPS does much more than deliver packages. For example, UPS delivers Gateway computers to customers with a cash-on-delivery system, where UPS collects payments from customers receiving Gateway computers and deposits the payments directly into Gateway bank accounts. UPS, however, hasnt always had an easy or successful time. A few years ago, the Teamsters walkout cost UPS about $200 million in lost sales. For many inside UPS, this

was a wake-up call to be even more aggressive in using technology to propel the company into the next century. According to one observer of the impact of the Teamsters walkout on UPS, You never want to wound a tiger. You want to kill it, because if you wound it, it only becomes more ferocious. From all accounts, UPS is becoming more ferocious in its use of technology to increase profits and give it a long-term competitive advantage. Discussion Questions 1. Describe the history and success of UPS. 2. How was UPS able to use technology to its competitive advantage? Critical Thinking Questions: 3. How could the lessons of UPS be used in other industries? 4. If you were the CEO of another shipping company, such as FedEx, what would you do to keep your company competitive over UPS? Sources: Adapted from Barron, Kelly, UPS Company of the Year, Forbes, January 10, 2000, p. 79 and Bacheldor, Beth, Ford-UPS Alliance, Information Week, February 7, 2000. Federal Express Redefines Its Services to Maintain Competitive Advantage Federal Express (FedEx) with headquarters in Memphis, has a fleet of 40,000 ground vehicles and 600 airplanes. It generates annual revenues in excess of $11 billion. The firm also has an impressive information system architecture that is driving FedExs transformation from a package delivery company to a strategic provider of E-commerce, logistics, and other supply-chain services. FedEx knows that building and leveraging its information systems and networks is key to its success in the 21st century. As a result, it spends about $1 billion a year on information technology. FedEx is not only reorganizing its internal operations around a more flexible technology infrastructure, but its also attracting new customers and in many cases locking in existing customers with an unprecedented level of technology integration. Although FedEx pioneered Web package-tracking capabilities, these have now become an industry norm rather than a competitive advantage. All major transportation and delivery companies, from United Parcel Service to Ryder System, are making major investments in information technology. Where FedEx is different is that it is using information technology to transform itself from a delivery service to a vital link in todays networked and increasingly electronic economy. FedEx seeks to become a fully integrated corporate partner that picks up, transports, warehouses, and delivers all of a companys finished goods from the factory floor to the customers receiving dock with status data available every step of the way. Large companies such as National Semiconductor Corp. have hired FedEx to handle most of their warehousing and distribution operations. Today, virtually all of National Semiconductors products, manufactured in Asia by three National

Semiconductor factories and three subcontractors, are shipped directly to a FedEx distribution warehouse in Singapore. National Semiconductors order-processing application, running on an IBM mainframe in Santa Clara, California sends a daily batch of orders directly to FedExs inventory-management system running on a Tandem computer in Memphis. At this point, FedEx takes over the orders are forwarded to the FedEx warehouse management application in Singapore, where they are fulfilled in a FedEx warehouse and shipped directly to customers via FedEx. Except for receiving a confirmation that the order was filled, National Semiconductor is done with the order transactions. National Semiconductor has gained significant benefits: the average customer delivery time has been reduced from four weeks to seven days, distribution costs have been cut from 2.9% to 1.2% of sales. In addition, seven regional warehouses in the United States, Asia, and Europe were closed saving National Semiconductor costs for warehouse space and employees. The tight information technology links between FedEx and National Semiconductor exemplify FedExs strategy of technology integration with its corporate customers. FedEx stores the product, operates the warehouse, and processes the order and then hands it off to the carrier which, of course, is FedEx. FedEx is not alone in using information technology to move beyond package delivery. UPS, which has spent $9 billion on IT since 1986, has already formed five alliances to help disseminate its logistics software among E-commerce users with UPS providing order-entry, catalog, and inventory management. Ryder System has formed an alliance with IBM and Andersen Consulting to deliver logistics services to customers. IBM will lend technology expertise and Andersen its consulting personnel to Ryder projects worldwide. Discussion Questions: 1. What is meant by strategic competitive advantage? 2. How can information technology help a company to gain and maintain a strategic competitive advantage? Sources: adapted from Monua Janah and Clinton Wilder, Special Delivery, Informationweek, October 27, 1997, p. 42-60; and FedEX Web site at:*http://www.fedex.com, accessed April 8, 1998. Textron Outsources IT Services Textron Inc. has its headquarters in Providence, RI and ranks 130th on the Fortune 500 list of U.S. companies with annual sales over $10 billion, assets of $18.6 billion; 64,000 employees; and a diverse, global customer base. Founded in 1923, Textron has expanded globally to provide customers worldwide with better value and improved service. Today, Textrons customers and shareholders benefit from the company's leadership positions in a diverse mix of business segments: aircraft including Cessna Citation business jets and Bell commercial helicopters (29% of revenue); automotive including instrument panels, plastic fuel tanks and plastic interior and exterior trim (17% of revenue); industrial including fasteners, golf cars, turf-care equipment, hand

and machine tools (24% of revenue); and finance including global consumer and commercial (30% of revenue). Textron's strategy for consistent growth is that it actively manages its mix of market-leading businesses to produce consistent earnings and revenue growth and to provide excellent returns to shareholders in constantly changing industry and economic environments. Textron plans to build upon its core business segments and execute four strategies for growth: 1. Invest in new products - About $1 billion per year is invested in R&D and capital expenditures. 2. Expand into international markets - In 1997, 39 percent of total revenues were generated outside the U.S. 3. Make strategic acquisitions - 12 market-leading businesses within its core segments have been added to Textron's family of companies since the beginning of 1997 4. Drive operating excellence Improve its operating margin by focusing on costs, quality and operating efficiency. Textrons Chief Information Officer (CIO), Bill Gauld, has made sure his companys Information Technology systems and networks enable the company to launch new products ahead of its competition. However, he has had lots of help. Gauld has turned to a number of outsourcers to build advanced information systems for Textron. AT&T Solutions, Inc. handles Textrons corporate network. IBM takes care of network security and intranet applications. EDS which handles its corporate office IT services, includes software support and corporate services. Discussion Questions: 1. What principles might Bill Gauld follow in deciding whether a particular service should be performed by internally or whether it should be outsourced? 2. Is outsourcing consistent with Textrons strategies for growth? Can you see any inconsistency? Sources: adapted from Esther Shein, A New Flight Plan, PC Week, January 19, 1998, p. 79-83 and Textron, Inc. Web site at: *http://www.camcar.textron.com. Black & Veatch Uses Software Tool to Compete Globally Black & Veatch is one of Kansas City's largest engineering firms and was founded in 1913. The firm specializes in civil engineering projects, including waterworks, highways and bridges, utilities, and sewerage. The firm epitomizes the reach and diversity of a global engineering/construction firm. It is working on the largest ozone disinfection project in North America, developed the first modern coal-fired power plant in Central America, and just completed the world's newest Planet Hollywood and the reconstruction of a 15th-century building to a five-star, 72-room U Sixtu Hotel in the heart of Prague's Old Town Square in the Czech Republic. With revenue of $1.4 billion, Black & Veatch is a relatively small engineering consulting firm that competes against behemoths such as Raytheon ($11.7 billion) and Bechtel ($8.5 billion). One of the tools it uses to remain competitive is Powrtrak, a

database about every component of a project, from the supplies used, to shipping times, to how long each part of the project takes, to partners involved in a project. It bridges all project management disciplines, including civil, chemical, electrical, mechanical, and structural engineering; project scheduling; cost estimating; procurement; and construction management planning. Each component of a project is given an identification code in the Powrtrak database and is tied to the requirements for a achieving a particular function. For example, if the user decides that a 10-inch copper pipe to transport water to a boiler is too small, Powrtrak generates reports to ensure that every item associated with the pipe is changed, along with the schedules for installation of the system. Without this, designers can change the pipe to a 12-inch pipe, but the valves stay at 10 inches, and the project is suddenly in trouble. This ability to automatically generate change reports to everyone affected slashes project costs. Powrtrak also enables Black & Veatch engineers to respond to changes suggested by customers. A customer can ask for a change in the performance, and Black & Veatch engineers can quickly determine the impact on design, cost, and schedule. Discussion Questions: 1. Does the Powrtrak software provide Black & Veatch with a strategic competitive advantage? Why or why not? 2. Is it possible that larger engineering firms such as Raytheon or Becthel have similar tools, but are not getting as much value from their use as Black & Veatch? How could this be possible? Sources: adapted from Black & Veatch homepage at *http://www.bv.com/ accessed on April 18, 1998 and The Art of Innovation, Informationweek, December 1, 1997, p. 36 64.