Drucker on Information Challenges, Part 1

In his book, Management Challenges for the 21st Century, Peter Drucker analyzed and discussed the new paradigms of management.

Although much of the discussion revolves around the perspective of the organization, these are my takeaways on how we can apply his teaching on our journey of being a knowledge worker.

Drucker discussed the evolution of information technology (IT) in the context of business management. In the beginning, business experts thought that the computer would have its greatest and earliest impacts on business policy, business strategy and business decisions.

To the contrary, the computer and IT so far have had very little impact on the key top management tasks. Information technology so far has been a producer of data rather than a producer of information — let alone a producer of new and different questions or strategies.

While the preservation of assets and cost control are essential for business management, they are still operational tasks. For most organizations, information technology is still a long way from providing information critical and necessary for business strategies. While IT is very adept in capturing and processing operational data, it also explains IT’s low impact on the management of the business itself.

Rather than focusing largely on the technology aspect of IT like they have been doing, organizations should focus much more on the information aspect. By now the chief information officers in businesses should have realized that the accounting data alone are not enough for what their peers need. What was needed were new concepts to define information.

The question all organizations should be asking is, “What information concepts do we need for the top management tasks?” The approach for providing such information is still very disorganized. Drucker asserted that all organizations would have to learn to organize information as their primary resource.

There are two mindsets required to organize information as the primary resource. First, the organization needs to move from mere cost accounting to result control. Traditional cost accounting measures what it cost to do something. That alone is not enough anymore.

To do result control, organizations must also capture the cost information of not doing something. For example, the cost of waiting for parts from the supplier before the assembly line can start again is a cost component. Anything that can contribute to the result should be accounted for.

Second, the organization needs to move from knowing just its internal cost of operations to knowing the costs of its economic chain. This new approach will require the organization to acquire and process cost information for all parts of its operations, whether internal or external. This approach will also require the companies on the same economic chain to share information via compatible IT systems.

In many cases, the switch to economic chain costing model will be painful. Otherwise, even the most efficient organization will suffer from an increasing cost disadvantage forced upon by other more cost-effective competitors.