NBSIR 74^15 report of

^^mmgaanifesalconference on

making service industries

more productive through

computers and automation

SPONSORED BY

THE ENGINEERING FOUNDATION

AND THE

NATIONAL BUREAU OF STANDARDS

NBSIR 74-515

report of conference on

making service industries more productive

through computers and automation

Sponsored by The Engineering Foundation

and the National Bureau of Standards

New England College

Henniker, New Hampshire

August 12-17, 1973

Compiled and Edited by

Alan McAdams and

Madeline M. Henderson

Issued June 1974

U.S. DEPARTMENT OF COMMERCE, Frederick B. Dent, Secretary

NATIONAL BUREAU OF STANDARDS, Richard W. Roberts, Director

FOREWORD

The Engineering Foundation and the Institute for Computer Sciences and Technology,

National Bureau of Standards, co-sponsored this conference on the basis of their

convictions as to the importance of the subject and the need for a forum to discuss it.

The objectives of the conference were to 1) bring together individuals and

representatives of organizations actively concerned with the technology, economics, or institutional arrangements necessary to apply computers to increase productivity and

improve quality in the provision of services; 2) identify gaps in knowledge within

applicable technological and administrative disciplines; 3) identify business, government

and societal needs and opportunities; and 4) identify appropriate governmental goals and

programs to respond to these needs.

It was recognized by the co-sponsors that the conference would have a direct bearing

and impact upon the country's economic posture since it addressed the identification

of specific needs and opportunities for the transfer of innovative applications of

computers, automation, and networking for increasing the productivity and quality of

services rendered to the public.

The Conference Staff included General Chairman, Alan McAdams of Cornell University;

Program Chairman, Edwin J. Istvan; Program Assistant, Madeline M. Henderson; and

Conference Coordinator, Roy G. Saltman--an of the National Bureau of Standards, Institute

for Computer Sciences and Technology.

i

TABLE OF CONTENTS

PAGE

Foreword i

Introduction 1

Conference Overview (Report of General Chairman) 3

Workshop Panel Reports

Panel 1 : Economics and Productivity in Service Industries 9

Panel 2: Planning Introduction of Computers and Automation 19

Panel 3: Institutional Barriers to Innovation and Diffusion 33

Panel 4 : Needed Improvements in Computer Technology 41

Panel 5: Government Roles, Policies and Programs 57

Summary and Closing Comments by Chairman 65

Roster of Participants 69

Appendix: Presentations at Conference (Principal presentations and material referenced

in Workshop reports!)

1. Productivity Trends in the U.S. Private Domestic Economy: John Kendrick 73

2. Productivity Developments in the Service Industries, Public and Private: 77 John Stewart

3. Summary of FCST Study Findings: Lawrence Goldmuntz 91

4. Do We Know What to Expect From Relaxation of Regulation of Surface 95

Transportation: Alan K. McAdams

5. Mini-computer Applications in the Service Industries--A Case Study of 105

AVCON, Inc.: Earl Sasser

6. CENTAUR--Central Exchange Network, Trading, and Unified Reporting: 141

John Alexander

7. Needs, Obligations and Opportunities for Productivity and Quality in the 155

Service Sector: Gerald Smith

8. Humane Quality: Frank Bernstein 163

9. Participatory Goal Setting Planning System: Shimon Awerbuch 167

i i i
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INTRODUCTION

The Conference opened on Monday morning with keynote addresses on definition and

measurement of productivity as applied to public services and service industries. These were followed over the next four sessions by theme-setting presentations on technologies

for improving productivity in the service areas; automation opportunities in the service

areas; a case study of mini-computer applications in the service industries; and education

for the design, implementation, and management of service systems.

Conference participants were then assigned to Workshop Panels (five in all) which met

to consider their particular topics and to recommend appropriate goals and programs to respond to the needs of these topic areas.

The Workshop Panels met three times and hammered out definitions of issues, problems,

and possible solutions. Through special arrangements made by the Engineering Foundation,

representatives of Synectics, Inc. of Cambridge, Massachusetts, were available for

assistance during Workshop Panel sessions. Synectics, Inc. specializes in facilitating

comnunication and enhancing productivity of conference and seminar groups.

The reports of the five Workshop Panels were presented in summary form to the total

conference on Friday morning, for full discussion and comment.

This report includes the principal presentations from the keynote and theme-setting

sessions, where available, and also material later referenced in Workshop Panel reports,

again, as available. It also includes the texts of the Panel summaries. These are not

uniform in approach or content, a reflection of the diversity of the par»ti ci pants and

their deliberations. They do however reflect the flavor of those deliberations and their

interesting and • stimul ati ng results.

1

CONFERENCE OVERVIEW (REPORT OF GENERAL CHAIRMAN)

The conference at Henniker, New Hampshire, of which this monograph is a report,

was itself an activity in the service sector. That is, it presented in microcosm for

all the conference participants the problems, fun, and frustrations of this vast area

of activity which we have labeled the service sector.

One of our early difficulties in the conference was to define what a "service" was. Indeed, this occurred on two levels: first, on the intellectual level dealing with the

concept of service in the abstract, and second, on the concrete level dealing with the

real meaning and significance of the activity in which we were all engaged. We can look at these two levels and carry the analysis through the entire working report of

the conference.

Let's begin with a formal definition of service.

A service is defined to be a commodity (broadly defined) which

is consumed immediately upon its being produced.

This definition has some profound implications. If a service is a commodity, a process,

or an activity which is consumed immediately upon its production, this implies that the

producer and consumer must come together physically in space and in time for this

transfer to take place. Indeed, this was the case with the Henniker conference. We were

all located at Henniker, New Hampshire. We did meet together physically in a conference

room or rooms and interchange took place, and it was a dynamic interchange. It will be

noted from the table of contents of this report that there was no single producer in

this conference and no single consumer. All participants were both producers and consumers. As much of the conference time was spent in spontaneously arranged presentations by conference participants as in the prearranged presentations of thoughts,

reports, and materials by scheduled speakers. No speaker emerged without significant

challenge to his thinking and ideas. All at least appear to have modified their

positions to some degree as a result of the interactions.

By contrast a "product" we define in the following way.

A product is a commodity which is capable of providing service on a deferred basis.

One of the consequences of the realities of a service is that it is impossible to inventory (while products can be inventoried). By definition, if a service is consumed

immediately upon being produced it cannot be stored for later consumption. This in

itself has profound implications for the activity which differentiates services from

other commodities. The understanding of this definition then provides an avenue to

action which can lead us to overcome the apparent lack of storability (and thus

transferability through time) of given services.

This report itself is the attempt of the service activity which took place in

Henniker, New Hampshire, to create a "product" which can store at least a portion of

the service delivered at the New Hampshire conference such that it may be enjoyed at a later date and at other places in space by widely diverse groups even at their leisure.

In fact, this is an objective of the printed word in most situations. This is our attempt to inventory the output of the Henniker conference to provide its service to a broader audience in more diverse physical and temporal locations.

The working reports included herein show some of the limitations of a service

activity. For example, the output of each conference workshop was being developed

simultaneously. There was some feedback among workshops which occurred informally

throughout the conference activity, but the timing of report development was so compressed that this was far from sufficient for the thinking that was crystallized in

3
one workshop to be transferred to others. This is a problem for any service activity.

To some extent, each of the workshops had to resolve identical questions early in

order to move forward to their assigned tasks. But none had the benefit of the careful

in-depth thinking of the others while all could have benefited significantly from that

output. The output did not occur until the final day of the conference, Friday morning,

when workshop reports were presented orally.

One of the greatest difficulties in dealing with a service is to know, in fact, what

has been produced. The measure of our output at Henniker itself is a matter over which

much controversy can exist over a long period of time. In the short term, we were clearly

able to see that individuals spoke to each other, laughed together, became angry and

argued, worked, played and, at the end, applauded. But what is our output in the longer

term? It is difficult to know. One thing we do know is that various participants have

written letters expressing the worth to them of the conference activities. But do they

constitute a true measure of the output of the conference? We do know further that there were flashes of insight, that there were transfers of ideas, that persons could be seen perceptively to change their point of view. This is an exciting phenomenon to observe

in any context, the more so in a conference.

It was our perception that this conference was significantly different from the

typical conference. As has already been pointed out, this was a conference at which the consumers became producers and in which significant interaction took place both on the

formal and informal levels. We do not yet know the long term outputs of the conference,

but in raising this point we highlight another important fact. We do expect that this

service actually has lead to the creation of products- -outputs which are not immediately

visible, that will occur at deferred times and places distant from Henniker, New Hampshire.

They will occur in the future and they will occur with uncertainty. The participants

themselves do not know now what they will actually be. This in itself is an interesting

characteristic of service activity and this is an indication of the difficulty of

measuring the true value of a service. Frequently this value derives from the impact

the service has on people . The product it creates is implemented through people. And

here is where measurement becomes complicated: what portion of which future actions occur for which people as a result of the Henniker Conference? A service such as ours produces immediate impact, it produces impact of intermediate term, and it produces

impact of long term. The service provided from this conference is now embodied in the

minds of the participants and will be implemented through their day-to-day activities,

and even perhaps in some major responsibilities which they bear.

Speaking for- myself as conference Chairman, I can say that I do look at problems

differently today than I did prior to my most challenging assignment at Henniker,

New Hampshire. I do look at my own job as an educator significantly differently from

the way I did prior to that conference. I do understand better, because I have been

forced to conceptualize some of the things which have been at a subconscious level in

my day-to-day activities. I do better understand the meaning of the service activity in

which I engage professional ly--the service of education--which produces a product of

intellectual capital.

The conference focuses on productivity in services through automation . Thus the

conference itself was dealing with three concepts, all of which are themselves difficult

to conceptualize and deal with. We did define the term "productivity." Our definition

is:

"Productivity is more bang for the buck."

"More bang for the buck" is another way of saying greater output for a given input or

the same output with lesser input.

4
We also defined automation. Our definition is:

Automation is a process utilizing machines (devices) with associated

control systems in the production of goods or services.

Let us now return to one of the basic difficulties which is suggested by service activity.

We could not complete the activity of one workshop and produce its output for use in the

next workshop--al 1 workshops proceeded simultaneously. The activity of Workshop 1 in

effect was to define the conditions under which it is desirable to undertake innovations

which have potential impact on productivity in the service sector. This would be an extremely useful output. The output of Workshop 1 would have been useful to Workshop 2 in its deliberations, and so on cascading through all of the activities of the workshops.

Nonetheless, each of these workshops did produce output, and we can, through the

commentary of the conference organizers and reporters, show the significance of the output

of one workshop for the work product of the others. Necessarily, this is an ex-postfacto operation. Necessarily, it is a delicate operation. The written work is a codification of the service as perceived by individuals. Individuals have egos, their egos

become very tightly entwined with the words which they have produced. Any commentary by

outside persons on the words which they have used to capture the service activity in

which they were participating can appear to be an imposition and thus inappropriate. We,

nonetheless, will risk it. In so doing, we hope that we will convey some of the true

meaning and excitement of service activities. Back to our definition of the service.

If the service involves a high degree of interpersonal interaction, there is the question

of ego that will always influence the degree to which that interaction achieves its

stated and/or true goals.

In the deliberations of Workshop Panel 1. a lament came forward. It was that we should be able to operate the service area by "taking the egos out" when transferring

information that is recognized by serious students of a given area as non-controversial.

Yet, this proved to be enormously difficult. Merely the words used to describe the type

of information suggest why. Serious students of a particular area are different from

others. For others to accept their word implies perhaps a superior/inferior relationship.

This is especially affronting to the ego of a person who views himself as an expert in some other activity or area. So it was extremely difficult for us to "take the egos out."

Important in any evaluation of a service and underlying all economic theory is the role

of ego. The true satisfaction to individuals is the measure of the degree to which

economic activity has been successful. If we define productivity as more bang for the

buck, the bang really occurs in the ego of the individual served. So we have the very

delicate problem of finding ways to "take the egos out" when that is necessary to provide

for the delivery of the service and then immediately and effortlessly to "put the egos

back in" in order that we may achieve a successful measure of the success of the service

delivery itself. These are enormously difficult tasks. We wrestled with them at Henniker throughout the week. We continue to wrestle with them in our reoort of the

conference at Henniker.

At Henniker, we had the services of a productivity-enhancing group known as Synectics. When we first sat down in our workshops, we had a lot of tension. Initially

whenever anyone put forward an idea someone else immediately discounted it. But then,

as this "stranger" sitting with us kept looking at us, saying nothing, making us increasingly uncomfortabl e--the Synectics facilitator in our midst--we began rather to be overly polite, and to readily agree with each other. It was only after some con- siderable period of sparring of this type that we gradually began to use the tools in the

complex and interactive Synectics tool kit. But as we did, we began to throw out ideas,

to fill the board with them, and to capture them. Then as a second step we had individuals putting themselves in the role of clients taking any one of the ideas he felt had

value, to come ud with any scheme, no matter how seemingly outlandish, to implement the

idea, as well as pinpointing problems along the way. And this dynamic began to disclose

potentially feasible operational approaches and mechanisms for overcoming the problems.

It was proved to be a dramatically successful dynamic where used.

5
In compiling and editing the material from this conference, we have tried insofar as possible, to relate the various outputs of the sessions so as to enhance the value of the

product we are attempting to codify as an output of the Henniker conference. We hope, too,

to have captured some of the excitement, some of the prejudice, some of the insight, and

perhaps even some of the fun of that conference. You, the reader, will have to be the

judge of the degree to which we are successful in our undertaking.

6
Report of Workshop Panel 1

on

Economics and Productivity in Service Industries

Panel Participants

* Sanford V. Berq

Frank L. Bernstein

William Bradley

Ritchie B. Coryell

* Werner Z. Hirsch

David Ironfield

Alan McAdams

Thomas Paterson

University of Florida

Auerbach Corporation

Puredesal Company

National Science Foundation

University of California at Los Angeles

Office of Science and Technology (Canada)

Cornell University

MARCOM Applied Systems

Assisted by George Prince, Synectics, Inc.

* Panel Leaders (Dr. Hirsch left the Conference early; Dr. Berg

served as Panel Leader and Dr. McAdams assisted in the preparation

of the Panel's report.)

7

ECONOMICS AND PRODUCTIVITY IN SERVICE INDUSTRIES"

Workshop Panel 1 distributed to the conference attendees an outline of the kinds

of questions to which its members devoted their attention. A copy of that outline is

included here. In addition, the contribution of the Panel was seen to be the output of

tutorial discussions of some of the issues facing all the panels. Thus a discussion of

the essential differences between services and products was considered to be useful.

Also the procedure for determining investment decisions in the service sector was deemed

to contribute to the general background information needed for the broad subject.

Outline of Questions

BROAD ISSUES

1. Why is productivity in the Service Industries important, relative to other sectors?

Is there a structure among the Service Industries (or within the economy) that makes

one subsector more important than another?

a. Services impinge on national goals:

aggregate price change

balance of payment situation (invisibles (services) as well as goods)

economic growth

equity, sense of justice and opportunities

quality of life associated with services

physical resources required for services may be less than for manufacturing,

i.e., human capital

2. Do we have a different perspective from the standpoint of national (social) goals

and firm (private) goals?

a. The social benefits and costs may not equal private benefits and costs.

Care must be taken that suboptimi zation does not occur. The preconditions for private and public optimization must be determined.

b. A tax and subsidy system that makes the fit needs to be established.

3. What kinds of measurements are needed and can be developed to quantify inputs,

outputs, relationships?

a. Social indicators as proxies

b. Careful and correct definition of output, e.g., arrest vs. crime prevented

4. How can we facilitate communication among experts and with the affected consumers

and producers?

a. Possible development of an interdisciplinary methodology

b. Technology assessment, if meaningful

c. Engineering specifications developed for services, but which could

depersonalize the system

9
5. How can we improve the productivity in service industries through the intelligent

participation and contribution of the consumer?

a. Education and training result in "flexible," knowledgeable consumer

b. Planned participation is part of the design.

c. Train the deliverer to recognize that consumers can and should participate

actively in the creation of the service.

6. How can we gauge consumer welfare?

a. Panels of consumers registering satisfaction or dissatisfaction.

b. Possible role for an "experience firm" (a la Plimpton) to satisfy non-rational,

spontaneous, aesthetic elements of life

c. Use technology to create services to enhance the quality of life

7. How can we devise institutional mechanisms for sharing the benefits (and costs)

of automation?

a. Questions of institutionalizing creativity and of making institutions

responsive to change.

PROBLEMS: consumer-producer interface

producer-equipment interface

incentives (monopoly provision)

Why is a "service life-cycle" long?

1. Intangible nature of service:

a. transitory

b. incremental effects

c. producer slow to change

d. consumer slow to change

2. Can patent product, can't patent organizational change

a. therefore mix of basic and applied R&D biased away from service innovations

3. Absence of specific focusing mechanisms:

a. lack of competition

b. consumer ignorance

c. producer ignorance of quality of consumer input

d. complex production i nterdependencies (compared with assembly line), e.g.,

education and health

4. Division of labor non-existent

a. disaggregation is nonlinear

b. develop modules, benefit from scale economies.
HUMAN DIMENSIONS

1. As an input: design consumer into system,

educate him to participate,

educate him to eva1 uate . Therefore provide information

2. Change in consumer as output, measure what didn't happen

3. Responsiveness of consumers to aspects of services

SOLUTIONS

Consumer Studies

a. Current population survey, for examp1e--integrate into several indicators.

b. Government provision of information to consumer on, e.g. schools and hospitals

c. Market-type forces thus brought to bear; this establishes incentives.

Consumer Information Commission

a. Like SEC, with full disclosure by potential investors--

for consumers, data on doctors, hospitals, educators, schools.

b. Computer can give data on past results, along with tracking of parts or performance of autos.

c. Government has responsibility to ensure that market f orces present

Technology Impact Statenient--simi 1 ar to Environmental Impact Statement

Automation

a. Possibility lies in capturing in hardware and software the essence of highly

complex services, e.g. management, library services, diagnostic medicine.

b. Inventory services- then transform to goods

c. Information as an input can be inventoried.

In summary: The incentives are messed up; we need to get consumers back into the

loop by getting him information; we need to help him realize his role as an input; and

to see how he has changed. We also recognize how really complex the services are, and

need to get experimenting with more measurement in these areas.

n
A. Essentia! Differences Between Services and Products

The crucial difference between "services" and "products" is the timing of their

consumption. Services are commodities consumed immediately upon being produced.

Products represent "inventoried services" capable of being consumed on one or more

deferred occasions.

Commodities have other characteristics that are important to understanding their

economic significance and thus improving the efficiency with which they are produced,

i.e., their productivity. These other characteristics are sometimes confused with those

which distinguish products from services--with disastrous results for productivity.

Let's illustrate this. We will deal with two quite different commodities, national

defense and haircuts . Though they are economically quite different on one dimension,

they are both services. After this discussion, we will present a brief analysis of the

characteristics which distinguish national defense from haircuts; this could lead to a systematic framework within which the reader can keep each of the important characteristics straight.

One a Public Good, The Other a Private Good

National defense falls into a category of commodities which have become identified

as "public goods" or "public commodities." They have two distinguishing characteristics:

once they are produced they are not appropriable —no individual can appropriate the

benefits from them to himself, other persons cannot be excluded also from receiving

benefits from the commodity; and they are also not di visible--whatever is provided is

provided to all, either all have it, or they don't; it's not possible for one person to have a little and others to have a lot. Let's make this explicit.

National defense provided to one citizen is immediately and automatically available

to others. Another way of stating this is that a public good is not diminished by

being consumed by one consumer. Then, since it is indivisible, all the costs of

producing national defense are incurred in providing it to the first citizen served.

Once they have been incurred, no more costs are required for the service to be provided

to other citizens. That is, once produced, national defense is available to additional

citizens at no additional cost (zero marginal cost).

The situation for haircuts is quite different. A haircut given to one person is

available to that one person only. Two haircuts cannot be produced by the same barber

simultaneously. To provide the second haircut requires the attention of the barber--and

thus, the incurring of costs specifically for that matter. The key characteristic here

is that a haircut is appropriable . A second characteristic is that haircuts are divisible . It is possible to cut the hair of your whole family, or only two members, or only the

hair of one member, or only part of the hair of one member. These two characteristics

of haircuts--appropriabi 1 ity and divisibil ity--clearly distinguish haircuts from

national defense in economic terms (and the reader is aware of the number of other

differences that are specific to the commodities discussed). They also imply that the

marginal cost of an additional haircut is positive--it is greater than zero. Haircuts

fall into the category of commodities which have come to be known to economists as "private goods" or "private commodities." In terms of their public good--pri vate good

characteristics, then, national defense and haircuts are exact opposites, but in terms

of their product--service characteristics, they are the same. Let us demonstrate this.

Both Are Services--Not Products

The "services" (Army, Navy, Air Force, Marines, and Coast Guard) jointly produce

our classic "public commodity" of national defense. (Even our colloquial terminology

fits here.) But national defense also fits our economic definition of a service.

That is, national defense is consumed immediately upon its being produced. It 1s related

to the fact that it is a "public commodity." The important characteristic which we are

12
referring to here is that it is being consumed each instant that it is produced.

National defense is undiminished by its being consumed by a given consumer, but that is

because it is a public qood--a public "service."

A haircut is also a service. It is consumed immediately upon being produced, but

we have seen that it is a service which has other economic characteristics, those of

appropri abi 1 i ty and divisibility, which allow it to be characterized as a private qood

or private commodity as well as a service.

Another distinction needs to be made, and hopefully will be useful. National

defense is not a product--thouqh many products are used in providinq the service of

national defense. All the products could remain in place and the service still fail to be provided. As the old sayinq goes "Eternal vigilance is the price of . . .." Similarly, a haircut is not a product, but many products are used in providing the

service of cutting hair. The existence of all the products used does not lead to the

provision of the service. The products, however, when appropriately used contribute to the providing of that service.

B. Considerations of Investment in the Innovative Process

The normal procedure for an investment is illustrated in Fiqure 1 in which the

square represents an investment outlay of, say 51,000, for the purchase of a product

(in our case an automation product). The arrows indicate positive cash inflows from the

investment--al so assumed to be SI ,000--occurring at time periods following the investment.

These cash inflows are assumed to be attributable to the investment in the automation

equipment.

Fi gure 1

.

Simplified Investment Diagram

1 SI, 000 SI, 000 31,000

I ^ ^

0 12 3

Investment Outlay

Positive Cash Inflow

SI ,000

In this illustration there are three inflows each of 31,000 which suggests that the

investment is clearly worthwhile. In accordance with the principle that "a dollar in

hand is worth two promised in the future," each of these later cash flows is worth

something less than the full 31,000 amount; they must be "discounted." Our assumption

is that the three 31,000 flows occurring annually represent an annuity with an overall

value at present of 32,500. The calculation which leads to the present value of these

future flows is Equation (1).

(1) 31,000 X 2.500 = 32,500

(annual flow) x (annuity factor) = present value.

13
The "annuity factor" is the factor corresponding to a particular rate of discount,

in this case approximately 10% annually, and a given number of years, in this case three.

This logic works both ways, that is, the $2,500 at interest for three years at 10% would

earn enough to provide three $1,000 annual payments--an annuity of $1,000 per year for

three years. Assuming that additional investments by the organization in question could

earn 10% annually, its managers should be indifferent between receiving $2,500 today or $1,000 per year for three years.

The situation depicted represents a normal, simplified investment analysis. The

initial $1,000 investment is worth making; it yields cash flows with a present value

of $2,500.

IMPACT OF THE DELAY

T+ie situation depicted in Figure 2 is closer to the actual experience for investors

in research, development and innovation. Usually they are required to make investments

at time zero which are followed by a significant elapse of time before inflows begin.

Figure 2.

Diagram of Investment with x-Year

Lead Time Preceeding Period

of Positive Cash Flow

A- $1,000 $1,000 $1,000

0 X x+l x+2

$1 ,000

x+3

The recovery of the investment indicated occurs again by the three arrows, representing

individual $1,000 cash inflows, but this time beginning x-years later. In accordance

with the principle that dollars in the future are less valuable than the same number

of dollars today, the delay in recovery of the positive cash flows further lessens their

present value. The assumption in Equation (2), is that the delay in recovery is two

years (x=2) and leads to the outcome expressed:

(2) ($1,000) X (2.500) i^Hrn 1 = $2,000

(discount x (annual x (annuity = present value

factor) flow) factor)

Here, the interposing of an extended lead time (two years) in the example has led in the

reduction of the present value of three $1,000 flows by a net amount of $500 ($2,500-

2,000). Nonetheless, the investment is worthwhile; $1,000 invested leads to $2,000 in

present value of returns.

UNCERTAINTY IN THE PROCESS

A more realistic illustration is that presented in Figure 3 in which the future

cash inflows are not certain, but instead have only a (.5) probability of occurring. If

they do occur, the positive cash flows will occur in the years immediately following the

initial outlay and will amount to $1,000 as before.

14
Figure 3.

Diagram of Investment With 0.5

Probability of Payoff

Q

5) ($1,000) ^

.5) ($1,000) ^

5) ($1,000)

0 12 3

$1,000

With the .5 probability of success the expected outcome annually from investments of

this type would be approximately $500 per time period. This leads to a result as indicated in Equation (3).

(3) 5) X ($1,000) X (2.500) = $1,250

(probabil ity

of positive

f 1 ow)

(annual

f1 ow)

(annuity = (expected present

factor) value)

The $1,000 leads to an expected value of future inflow of $1,250 and would probably be

undertaken. It may be possible to raise the probability of positive outcome through

careful management of this project or the expectation can be made virtually certain

through diversification of projects. (Oil companies drill for oil, in several locations,

simultaneously to reduce the uncertainty in their operations. Thev can qenerallv count

on a given number of good wells, though thev cannot know in advance which locations

will be dry holes and which will not.

j

TIME DELAY PLUS UNCERTAINTY

If the lead time and the uncertainty both are operative, the investment could be

expected to break even and the investor would be indifferent whether to undertake it or

not. In situation 4, Figure 4, the delay in payoff reduced the value of the outcome to

' 25QQ

= (-8) times the original value; and the uncertainty would reduce it to $1,000

[(.5) (2,000)] as shown in equation 4.

Figure 4.

Diagram of Investment with 0.5

Probability of Inflow After Two Year Lead Time

a

(.5) ($1,000) (.5) ($1,000) (.5) ($1,000)

i -k- it

(4)

X (.5) (1,000) X (2.500) = 51000

(discount x (probability of x (annual = (expected

factor) positive flow) flow) value)

This is an expected outcome, not a certain outcome. Since the investment outlay is

certain, a "risk averter" might decide that the outlay outweighs its uncertain return

and thus he might not undertake the investment.

15
CAPTURABILITY OF BENEFITS

Most private firms face an innovation investment situation which is more complex

still. Not only is there uncertainty of outcome from an investment outlay for research,

development and innovation, but further, there is uncertainty whether the firm making the

outlay can capture for its own use the benefits of its outlays. This situation is

illustrated in Figure 5.

Figure 5.

Diagram of Investment With 0.5

Probability of Pay-off and 0.5 Probability

of Capture of Payoff

(.5) (.5) ($1,000) (.5) (.5) ($1,000) (.5) (.5) ($1,000)

0 12 3

$1,000

'

Here the assumption is that there is only a fifty percent chance that the positive

inflow, should it occur, will accrue to the benefit of the firm making the outlay. This

leads to the expected value of each annual cash flow only one half that depicted in

Figure 3. That is, the expected outcome for each positive annual cash flow only one half that depicted in Figure 3. That is, the expected outcome for each positive annual

cash flow is only $250. The calculation of the net present value this implies is

presented in Equation (5).

(5) (.5) X

(probabi 1 ity

of return x to investing

firm)

(.5) ($1,000) X (2.500)

(probability

of

posi ti ve flow)

(annual

cash

flow)

$625

(annuity

factor)

(expected

present

val ue)

Now for the first time the investment outlay has an expected present value of outcome

which is less than the outlay. In all previous cases the investment expenditure was worthwhile. In situation 1, the expected net present value was ($2,500-1,000) = $1,500.

In situation 2, despite a long lead time, the expected net present value outcome was ($2,000-1000) = $1,000; again, clearly a desirable result. In situation 3, with the

introduction of the probability of a failure from the investment, the expected net

present value of outcome is $250 greater than the investment amount of $1,000. Again,

such an opportunity would probably be undertaken. Even in situation 4, with the time

delay plus uncertainty, the investment would break even.

In situation 5, we find that the expected payoff to the firm making the investment

is only $625. This clearly would not justify an investment in the amount of $1,000;

the net present value of the expected outcome is negative. However, under the assumptions

which we have been using, an additional expected annual outcome of $625 is implied to accrue to firms other than the investing firm. That is, there are benefits external

to the firm making the initial investment. This expected payoff to firms external to the investing firm is an amount indicated in Equation (6).

(6) (.5) X (.5) X ($1,000) x (2.500) $625

(probability of

return external to investing firm)

(probability of (annual (annuity (expected

positive X cash x factor) = present

flow) flow) value)

16
The full payoff to society is expected to be ($625 + 625) = $1,250 (as in situation 3).

However, from the point of view of the decision maker the payoff is only $625. Another

way of stating this is that, "The payoff is firm, but not to the firm."

In situation 5, the investment is undesirable from the point of view of the private

organization, though desirable to the society as a whole. Since the decision to invest or not invest is left to the private organization, the investment would not be made.

Some social mechanism is therefore warranted (required) to insure that an investment

of this type ij^ made; its economic payoff to the society exceeds its overall economic

costs. This is one major justification for the intervention of governmental bodies in

the private decision-making process for research, development and innovation.

THE REAL THING

Most realistic of all is a situation which combines the features of all those

discussed thus far. This is the situation suggested in Figure 6.

Figure 6.

The Research, Development and

Innovation Process in Three Phases

Benefit Captured

Failure By Other Firms

F i rms

Research Phase

(Basic)

Pilot Plant

or Demonstration

(R&D)

Product and Market

Development (Innovation)

17
For innovative projects it may be necessary that all three investment phases

suggested in Figure 6 be successfully completed before there are any benefits realized.

In such cases three investment outlays have to be made before benefit to the firm can occur at all. As these investments are made, their outcome remains uncertain. Lack of success at any stage in the process can render the overall effort financially unrewarding

for the investing firm: If the basic research does not produce a successful outcome, the

project would be ended; if it is successful, the pilot plant or demonstration phase may

not proceed as desired and the project could be terminated; or the first two stages may

be successfully completed, the investment in product development undertaken, but the

benefits captured in whole or in part by a competing firm.

The complexity of the innovative process and its uncertainty present an additional

basis for governmental involvement. Efforts to perfect the process through creative

institutional arrangements, through provision of information or improvement in the flow

of information, or through other mechanisms to remove frictions or reduce uncertainty

are generally undertaken by governments throughout the world.

18
Report of Workshop Panel 2

on

Planning and Managing the Introduction of

Computer Technology and Automation in Service Industries

Panel Participants

John A. Birch

David P. Harbin

Michael J. Kremer

* Frank W. Paul

Roy G. Saltman

Leander W. Smith

* Vernon E. Wilson

Department of State

Insurance Systems of America, Inc.

National Institutes of Health

Carnegie-Mellon University

National Bureau of Standards

IBM Corporation

University of Missouri

Assisted by Jut Chopra, Synectics, Inc.

* Panel Leaders

19

PLANNING AND MANAGING THE INTRODUCTION OF

COMPUTER TECHNOLOGY AND AUTOMATION IN SERVICE INDUSTRIES

I. MISSION STATEMENT (Chart 1)

Develop and identify the common problems and significant differences in terms of

nature of people, management tools, organizational structure, educational needs, and

technology requirements that capture the essence of what is required to introduce

computer technology and automation so as to increase the productivity of the service

industries

.

II. ENVIRONMENTAL CHARACTERISTICS

Characteristics of the Service Industries (Chart 2)

The service industries (Si's) are characterized by a diverse group of firms which tend

to be geographically distributed in a random way, are labor intensive, and have little

capacity for research and development. A majority of Si's operate on low resources to

invest in a specialized one-dimensional way, with little incentive for the introduction

of automation because the benefits are difficult to capture by the innovator or entrepreneur. The Si's tend toward regulation or licensing of some type with either

a high or low level of educational needs to enter the business.

The basic SI structure is perceived to be inefficient in terms of operations, with the

output trends difficult to quantify and measure. Si's usually involve a high

relative risk factor of business innovation and their structure makes it difficult,

in a gross sense, to take advantage of large scale economics.

The small size permits Si's to respond to change of the market place, but can not

respond to technological innovations. The businesses tend to have single, rather

than a diverse set of, objectives.

Both profit and non-profit Si's exist, with the entrepreneur associated with the

former and the craftsman with the latter. The profit motivated Si's tend to exploit

technology while the non-profit organizations desire a status-quo situation. The

non-profit or craftsman perceives that technology is a threat to his way of

delivering a service to the consumer.

The size of Si's increases with technology enhancement with an attendant decrease

in the ability to have personalized customer feedback.

Si's are people dependent and their structure makes difficult the migration of

personnel from industry to industry. This creates a situation where obsolescence

in talents may occur.

Motivations of the Service Industry (Chart 3)

Si's serve a basic need for the welfare of society. Service industry business

is motivated by a mix of profit and non-profit economics. Some Si's are characterized by a base level of profit motivation beyond which motives tend to

be self imposed or of an ego-gratification nature.

Customer Set of the Service Industry (Chart 4)

The customer of Si's tends to be more emotional than logical in his desire for

service in an often inelastic supplier market. The customer set imposes a fairly

flat demand on the Si's, requiring a constancy of work force, with Si's labor force

compensation tending to vary rather than employment force. The customer perceives

2 1
TASK GROUP 2 CHARTS

MISSION STATE^m

Develop and loEr^iFY:

1. Common Problems and Differences

2. Nature of People

3. Management Tools

^. Organizational Structure

5. Edxational Needs

6. Technology

Required to Introduce Computer Technology and Alttomation to

Increase Productivity of the Service Industries

22

CHART 1.
CHARACTERISTICS OF SERVICE INDUSTRIES

Tend To Be:

° Diverse Group

° Geographically Distributed in Random Way

° Labor Intensive

° Low Capital

° Low in Capacity for R & D Innovation

° Specialized in One-Dimensional Way

° Low Incentive for Introduction of Automation

(because)

° Benefits Difficult to Capture

° Subject to Regulation/Licensing

° Perceived Inefficiency Using Standard Productivity ^Ieasures

° Unable to Take Advantage of Large Scale Economics

° Potential for Quick Response to Change (small size)

° Single Rather than Diverse Objectives

° Two Kinds of Orientations:

Profit (Entrepreneurial)

Mot-Profit (Craftsman)

° Increased Size Brings Decrease in Personalized Service

CHART 2.

23
NQTIVATIONS OF THE SERVICE INDUSTRY TEND TO RE :

Serve Society Welfare and Needs

Profit and Not Profit Economics

24

CHART 3.
CUSTOMER SET OF THE SERVICE INDUSTRY TFND TO RF:

Emotional Rather Than Logical

Non-Central Source of Goods

Little Way to Shop or Compare Service Functions

25

CHART
the SI as a non-central source of goods and subject to social changes which create

new markets and demands fo*^ new Si's. Current users of Si's also have little way

in which they can shop or compare service functions in the market place.

It should be pointed out that the panel report has selectively dealt with planning

and management functions in the context of a model which does not include in detail

a response to all of the details in its assigned mission.

Of these major characteristics the following were deemed to be of particular importance

in planning and managing the introduction of computer technology and automation into

the service industries:

1. Low level of availability of Capital for R&D.

2. High degree of inertia in the system.

3. The large non rational component in the decision making process.

4. A wide geographic distribution of providers.

5. Low pay off for entrepreneurs.

6. High degree of individuality and specificity in information systems used.

7. Little opportunity for economics of scale.

The matching characteristics of a plan must then present:

1. External initial risks capital or a new and visible reward for the entrepreneur.

2. Deliberate phasing of start up.

3. High level of intensity in participation by industry and the consumer

in both planning and management.

4. A universal language and availability of information within the industry.

5. A specialized service for each industry.

6. An aggregation of interests to induce economy of scale (increased

productivity)

.

Several options for introducing technology were discussed and included:

1. Regional problem solving center.

2. The development of productivity models which illustrates the principle

and can sell services.

3. Build a "new town" using the most advanced technology which appears

acceptable.

4. Do a model city project with a technology theme.

5. Focus upon the development of a national data base for one or more

of the service industries.

6. Develop an educational system which highlights the "do it yourself"

potential which exists in the service industries through the use of

technologies.

7. Develop information dissemination services for each service industry.

26
The panel selected the Problem Solving Center as a theme and incorporated with it some

of the other concepts. While the panel agreed that a basic function of the government

was "to serve the common good," no specific governmental role was described in this

model . ,

A Problem Solving Center might have the following set of functional relationships

and responsibilities (Chart 5).

From an organizational and operational point of view it might be set up as follows:

Funding options (Chart 6)

A. Start up funding in these industries will often need federal sponsorship

because of the low potential for raising risk capital within the industry.

This could be in the form of grants, contracts, interest subsidies or

loan guarantees. It could be a combination with probably a different

arrangement advisable for each industry.

It was agreed that any subsidy should have a time limit and be on

a phased basis which leads to a free standing, financially stable

organization.

B. Operational funding would vary in accord with the potential of the

industry, but the options include:

1. Tax or governmental support.

2. Subscription services ( x 1 year for a service)

Industry

Consumer

3. Fees for specific individual services.

4. Endowment and contributions.

The control options seemed to be standard (Chart 6):

A. Ownership

1. For profit with stock holders and a corporate structure.

2. Not for profit

3. Non profit.

B. Pol icy direction

No matter what the supervisory body might be it was agreed that the Board of

Directors should be representative of the potential or actual consumers of the

services. Within that stipulation the board could be:

1. Elected representative from selected groups.

2. Appointed or elected representatives from a planned

mix of governmental/private/educational groups.

3. Selected co-op style.

4. Appointed by special interest.

5. Self perpetuating.

27
UJo1—1 > LlJ O LlJ 1—1

OO > z.

UJ LU

00 >•t—I

oo CJ3 >-

ZD Li. CD O

CC CSL LU

s: 2:

ZD 1300

•z. z. o 0 <_)

Q-I—o

1—1

1— 0 q: (—I 0 LU 00

LU z. Q 1—1

CO

m'ART 5

28
FUNDING OFTIONS

A. Start Up Funding

B. Operational Funding

° Tax or Government Support

° Subscription Service (Industry & Consumer)

° Fees for Service (Industry s Consumer)

° Endowment & Contributions

CONTROL OPTIONS

A. Ownership

° For Profit

° Not for Profit

° Non-Prof IT

B. Policy Direction

° Elected Representatives

° Planned Mix (Government/Private/Education)

° Selected Co-op Style

° Appointed (Special Interest)

° Self Perpetuating

CHART 6.

29
From a management point of view the following tactical considerations were endorsed by

the panel as worthy of further development (Chart 7):

1. A mission and initial objectives should be tentatively developed

and an appropriate corporate structure initiated.

2. The Corporate structure should then undertake the following, somewhat

in this sequence:

a. Refine and codify the mission and objectives.

b. Develop a funding strategy--Ini tial Capi tal , operati onal

funding principles--(Anow at least two years lag time).

c. Secure staff with a high level of acceptance in the service

industry and established expertise in the specific undertakings.

d. Start the development of the long range plan for an information

system which can lead to the development of a total data base.

e. Design a business plan which identifies an applicable package

with a high return and a low negative impact upon the industry

and its customers.

f. Identify groups or individuals in the industry with an apparent

need for the service who are receptive to the strategy and

wish to be identified as innovators.

g. Stage the introduction of new and parallel packages so that

products are in existence at various levels of maturity--

Maximize modular approach to allow multiple use of efforts.

h. Develop supporting plans or strategies to assure resources to industry which will allow or expedite execution of the plan,

including:

--training and education of personnel

--management tools

--access to available technology

--market analysis

Additional considerations must include two thoughts. First the issue of credibility

is of such crucial importance that considerable effort should be dedicated to

meaningful association of the Problem Solving Center with institutions having high

visibility and acceptance in the field.

Second, some meta-admi ni strati ve structure will be necessary to introduce a higher level economy of scale though cooperative effort between service industries.

Initially this may take the form of conferences or symposia. Risks might be:

Professional jealousy

A self-serving organization

Possible forced use of a single hardware, firm

Compromise, quantity--poor management

Expectation unreal istic--poor communications.

30
1

SERVICE 'CI

HMM*

j

Jr

'REGIONAL CfMTER

ml

r

1

DATA

Mod e t

il

11

11

MopEu- Subset of? the

I KJDosTRy

(I

lA cncA L BuS/ivjgss Pl/ik;

CHART 7

31

Report of Workshop Panel 3

on

Institutional Barriers to Innovation and Diffusion

in the Service Sector

Panel Participants

J. J. Alexander, Jr.

Robert A. Davis

Robert C. Duvall

* Sumner Myers

* Paul Polishuk

Laurence Schmid

Securities Industry Automation Corporation

IBM Corporation

MARTA (Metropolitan Atlanta Rapid Transit

Authority)

Institute of Public Administration

Office of Telecommunications, Department of

Commerce

MARCOM Applied Systems

Assisted by Jo Fuller, Synectics, Inc.

* Panel Leaders

33

"INSTITUTIONAL BARRIERS TO INNOVATION AND DIFFUSION

IN THE SERVICE SECTOR"

It is impossible to identify and assess the relative importance of institutional

barriers unless you first understand barriers in the broadest sense. Similarly, service

innovations cannot be treated as a meaningful concept unless they are understood within

the context of all innovation. Thus, our panel began its work by identifying barriers of

all types, in order to establish a framework for pinpointing institutional barriers and

comparing them to other types.

In discussing barriers to innovations, our panel had no trouble listing dozens of

different types; some of these barriers will be mentioned in more detail a little later.

Our specific barriers and their categories do not represent a comprehensive listing, but

they do indicate the wide range and variety of barriers which can be identified even in

the short time available to us. We were able, however, to form a significant conclusion:

the relati ve importance of specific barriers can be establ ished . Our panel quickly agreed

that the best method for deciding the relative importance of barriers is to quantify and

enumerate--in other words, to deal in numbers.

However crude, numerical data permits a higher level of analysis; to demonstrate the

point, our panel obtained some preliminary data from an actual study of barriers, being

conducted by the Institute of Public Administration and the Denver Research Institute.

The data, presented below, are simply a count of barriers (expressed as percentages)

encountered by 200 producer's goods innovations. These figures are relevant to our discussion of service innovations, because producer's goods innovations generally are productivity-oriented, and many would be used in the provision of services.

PERCENT OF INNOVATIONS BLOCKED BY TYPES OF BARRIERS

(Sample: 200 producer's goods innovations)

BARRIER PERCENT

Management (internal) 17.3

Organization and Staffing 6.1

Market (external) 25.4

Capital 16.2

Law and Regulations (excluding 13.1

anti-trust and patent)

Patent 4.6

Anti -trust 1.9

Technological 10.8

Other 4.6

100.0

35
From the data presented here we can begin to discern significant indicators.

No type of barrier appears to be overwhelmingly predominant. Despite the many technological problems which must be solved for any innovation, only 10.8 percent of new innovations ultimately are blocked for technological reasons. Internal management

performance and organization and staffing together constitute a major class of obstacle

with management performance outweighing organization and staffing competence by almost

three to one.

Other findings bear great significance for policymakers; the high frequency of

regulatory barriers points out a type of barrier especially amenable to government

treatment. Many of these cases concerned innovations which were blocked by uncertain or unpredictable government regulatory policies; other cases centered around standards which

could not be met . ., . ,

At last, we can progress beyond the old arguments arising from lack of hard data;

figures like those presented here can tell us a great deal about what is happening to innovations by clarifying the relative importance of different problems. We are able to adopt productive lines of inquiry into specific problem areas, and we can begin talking

about looking for solutions to key problems which are being identified.

Every innovation must overcome some barriers, and this is acceptable, because these

barriers help protect the innovator against costly mistakes; after all, not every innovative idea is workable and cost-effective. It is true that good ideas also may be

blocked, but barriers like the ones we listed may not play the decisive role in killing

good ideas. A theme which became stronger as our panel continued its deliberations is

that a really good innovation will beat down the barriers to its use.

The history of barriers shows quite clearly that barriers, particularly institutional

barriers, disappear for really good innovations. Acceptance of the automobile was over- whelming, despite many early barriers to its success, including absence of paved roads,

scarcity of gasoline, lack of repair and service facilities, and indeed, an entire society

geared to horse-drawn transportation. This leads us to another point: in addition to

comparing the relative inportance of barriers to one another, we must try to understand

tiie importance of barriers rela":"'ve to '"'^e IniTovation itself.

Our panel described the crucial relationship between barriers and the innovation

itself by saying that, at the point of decision, the net effect of institutional barriers

is inversely proportional to the potential value of the innovation as perceived by the

user. This statement is summarized by the formula:

^ ^ where

pd p.v.

B represents the effect of barriers at the point of decision; and

pd

p.v. represents the perceived value to the user.

In other words, if a potential user sees an innovation he deems important to have, he

will work to eliminate or bypass the barriers which separate him from his goal.

The formula above relates to the user of innovations, but it can be applied easily to the developer as well. A host of decision-makers affect the fate of every innovation,

and each one perceives the innovation's value in his own terms. Developers, whether

management, sales personnel, or engineers, must perceive value in two ways. They must

anticipate the potential value which will be placed on an innovation by the users who

might buy it. Equally important, developers must assess the value this innovation

represents to their own company by applying criteria including profitability and other

familiar factors. As with the user, the developer also perceives a value for an innovation, and the effort he will make to overcome development barriers depends a great deal

upon his perception of the innovation's value.

36
Our panel has succeeded in carrying this analysis a step further, by examining

perceived value in relation to degree of innovativeness. We can show that the very nature

of a particular innovation can affect a user's ability to perceive its value. Specifically,

decision-makers often experience difficulty in perceiving the value of radical innovations

where their experience does not extend. These same decision-makers find it easier to see

the benefits of innovations adapted from proven processing and products.

A spectrum of innovativeness is depicted below starting at the low end of the scale

with diffusion of innovations which are not new to the world, but are new merely to a particular user. An example of this type of innovation is the "Dempster Dumpster" trash

collection method currently in use all over the country. To the few people not yet using

this system, it represents an innovation; they can see from others' experiences precisely

how it would work for them, and what sort of value it offers. This is an innovation at

the low end of the innovativeness spectrum, and also at the low end of the scale which measures difficulty in perceiving value.

At the upper end of the spectrum, we find the area of technological discontinuity,

where an innovation is really new. An example of an innovation at this end might be the

Xerox 914 in predevelopment stages. What is so clearly a valuable innovation now was not

so obvious a few years ago; few people now remember that the 914 generally was regarded as an unpromising prospect. Two exhaustive market surveys by different consultants each

concluded that the 914 would fail to find acceptance. They cited its size* cost, and a variety of other problems, but they failed to anticipate two key factors which made the

914 a success: first, it was marketed on a lease/hire basis, rather than sold outright;

second, it was more than just another means of making copies, because it made those copies

faster . The value of this fast speed could not be appreciated until it was tried; when

the 914 was demonstrated to users, the value of the innovation finally could be perceived.

The high innovativeness produced a high difficulty in perception of value, and this

difficulty was overcome only by familiarizing users with the profitable applications of

this new technology.

As an example of an item at the middle of the spectrum, the panel looked for an innovation which required moderate innovativeness in the form of adaptation of an item to

a new use, new setting, or new environment. The example selected was "slippery water."

a polymer process which was adapted to fire-fighting uses. The value of this innovative

adaptation was only moderately difficult to perceive because it was easily demonstrated.

As soon as officials were shown that a stream of slippery water could be thrown farther

than a stream of ordinary water, these decision-makers quickly realized the value of this

innovation.

The following chart illustrates the points made above, showing that as one moves up through the spectrum of innovativeness, the trend is towards greater uncertainty, more

argument, and greater difficulty in perceiving an innovation's value. At the top of the

spectrum, a genius may be required to see the potential value of an innovation.

It becomes evident that the degree of difficulty experienced by decision-makers in

perceiving the value of an innovation constitutes a barrier to the success of that

innovation. This "percei ved-val ue barrier" is not just another among the dozens of

specific barriers identified here and elsewhere. It must be remembered that an attractive

innovation seems to beat down barriers before it, while another innovation, of less

obvious value, will find barriers to be insurmountable. All other obstacles are a function of the primary perceptual barrier, which acts to diminish or increase the strength

of secondary barriers. Furthermore, the effect of the value-perceived barrier acts on the other barriers in a uniform fashion, magnifying or reducing them all. A decisionmaker who really wants a particular innovation will minimize all obstacles to it, but

a decision-maker confronted by an apparently valueless innovation will amplify any reason

for dropping it.

For service innovations, the primary barrier principle is especially relevant,

because the abstract nature of services requires more imagination to see the potential

value in a new idea or product. The service sector appears to be in particular need

of remedies to the perceptual barrier, although this primary barrier operates throughout

37
the public and private sectors, blocking innovative products and services alike. This

barrier is especially critical because it favors low-degree innovati veness while

selectively obstructing ideas which are more original and creative.

An understanding of the percei ved-val ue barrier creates a potential for better

policymaking whenever we seek to improve the rate of innovation. All our efforts should

not be addressed to finding remedies, one at a time, for secondary barriers, if there is

a better way of attacking them all simultaneously. This leads us to the recommendation

that we should begin thinking of ways to improve the critical decision-maker's perception

of an innovation's value.

This recommendation is more than mere rhetoric, and we can see some places where

action would be especially fruitful. For instance, an important item for consideration

is when and how to use pilot models and demonstrations. The government (and, incidentally,

the Ford Foundation) are unsure about this. The venture capital community makes the case

that inventors don't know how to develop credible data--but couldn't a project be designed

to develop more credible data? The DRI-IPA innovation study uncovered cases where

demonstrations failed because the innovations were too unlike old-style ways, and the users were asked to comprehend too much too soon. Other demonstrations did not convince

users because they felt they had no stake in the success or failure of the demonstration.

Still unsolved is the problem of why seemingly everybody except the potential user can perceive with perfect clarity the value of an innovation; obviously, technological transfer

requires conceptual transfer as well. Better design of demonstrations, new techniques of

user education and better information flow are just examples of the many priority items

for improving the implementation rate of innovations. Many of the effects of barriers to innovation can be bypassed or overcome if more attention is given to jumping the critical

percei ved-val ue barrier, by improving the ability of decision-makers to see the potential

worth of a new idea. After overcoming this primary obstacle, we should see more

innovations beating down those secondary barriers, which will melt away as more decisionmakers actively seek out innovations they find attractive.

38
Difficulty of Perceiving Potential Value

Along the Spectrum of Innovativeness

Low

Difficulty

flODERATE

Difficulty

^I6H

Difficulty

r

Ldw Innovativeness

At "Diffusion" End

EX: Dempster Dumpster

Require Innovative

Adaptation to Hbi Setting

Ex: Slippery H2O

Peter Drucker's

"Discontinuity End"

Really New

Ex: XEROX 9W

a Predevelopment

Takes "Vision"

—Even GeniusTo See it Here

Some will Argue

Here

Everybody Sees

IT Here.

(I) INNOVATIVENESS

39

Report of Workshop Panel 4

on

Improvements in Computer Technology Needed to

Match the Service Industry Marketplace

Panel Participants

Robert H. Anderson

Walter M. Carlson

James A. Dei Rossi

* Robert Johnson

Brian Mansir

* James Murphy

Alain Nicolaidis

* Wil 1 iam F. Rhodes

Raymond Sangster

Joseph M. Wier

University of Southern California

IBM Corporation

National Bureau of Standards

Burroughs Corporation

Xerox Corporation

Arthur D. Little, Inc.

French Embassy

Vienna Technological Services

National Bureau of Standards

Bell Laboratories

Assisted by William Cope, Synectics, Inc.

* Panel Leaders

41

"IMPROVEMENTS IN COMPUTER TECHNOLOGY NEEDED TO

MATCH THE SERVICE INDUSTRY MARKETPLACE

SUMMARY

This paper describes a method for relating the needs of the Services Industries to the possible capabilities of the computer and automation sector of the economy. The

method would require that informed opinion be solicited and expressed in formal terms.

It has several steps.

Step One would relate the Production Functions or driving forces: Technological,

Economic, Personal, or Administrative and Regulatory, to each subdivision (SIC Code)

within the Services Industry sector. Rational planning for Automation requires an appraisal of the relative importance of these motivating or production functions whose

impact varies widely within the Services sector.

Step Two relates the strength or importance of Key Reasons for Automation to each

Industry within the Service sector. Reasons include: (1) Jobs undesirable (or dangerous),

(2) Scarcity of Talent, (3) Need to augment human capability and (4) Operation is

difficult to manage and control. The selection of automation opportunities can be done

better if a carefully reasoned appraisal of the importance of each possible reason for

automation is made.

In Step Three, we consider four possible Aspects of Jobs. Our breakdown is:

(1) Sense (or acquire data and information), (2) Reckon (calculate or decide what to do), (3) Remember (associated with reckon, i.e., looking something up in a file), and

(4) Act. We believe that many repetitive jobs can be described in these terms. The

method requires that the relative importance of these four work components to each

Selected Service Industry be determined by expert opinion.

The Job Aspect categories were specifically selected so that they might be related

to kinds of devices that the computer and automation industry could supply. Once the

weights described in Steps One, Two and Three are assigned, cross correlation could show

how important better Sensing, Reckoning, Remembering or Acting devices might be to specific

jobs within Industries. This method should permit the supplier of automation services to rationally plan his product offerings with some clear picture as to where the products

would fit and as to the size of the marketplace for them.

The method is straightforward but the development of the expert opinions necessary

to quantify the important relationships described will require an organized approach

probably with a Delphi-like technique. The workshop members enjoyed the opportunity to discuss these matters and all of us look forward to further steps in this area. We

recommend that this method be seriously considered and sincerely believe that we have

made a useful step toward furthering the productivity of the Services Industry via

automation.

43
Our title "Improvements in Computer Technology Needed to Match the Service

Industry Marketplace" was rephrased into this question:

"What goods, services, and tools does the Service Industry sector of

the economy need from the providers of computers, software and systems in

order to enhance their productivity?"

We also considered a companion question with a somewhat different cast:

"What goods, services, and tools are available from the providers

of computers, software, and systems that could, if used, enhance

the productivity of the Service Industry?"

It should be noted that the thrust of this report is addressed to the first of these

two questions. j.

In either case, the emphasis starts with needs or requirements as perceived by the

Service Industry sector and proceeds to consider the goods and services available from

the Technology sector. We also found it useful to incorporate the much-used concept of

"systems" into the picture. .

In very simplistic terms, we have viewed the problem of matching needs as shown below:

NEEDS AS

PERCEIVED / MATCH x BY SERVICE ^ To ' INDUSTRY SECTOR

SYSTEMS WHICH

ARE ORDERED / SELECTED \

COLLECTIONS OF N FROM f

BUILDING BLOCKS

TECHNOLOGY BUILDING BLOCKS

SUCH AS COMPUTERS,

COMMUNICATION DEVICES,

AND PROGRAMMING SERVICES

Figure 1. Matching Needs with Available Technology

Recognizing the problems of definition and the need to agree on a philosophical base, we selected the findings of the Federal Council for Science and Technology as expressed by

the Committee on Automation Opportunities in the Services areas.* We have reordered these

and paraphrased them below.

1. Industrialization will require a division of man/machine roles.

2. A Systems Approach is essential.

3. Users of services are the critical factor, not the suppliers.

4. The "Burden of Effort" should be to find missing links and concentrate

on imorovinq them.

5. The "Burden of Proof" requires that price be considered in both human

and material terms.

6. There is an illusion of distinction between qoods and services. Much

is transferable and common between them.

7. Diffusion of automation is not an end in itself.

In our deliberations, we paid particular attention to 1 , 2 and 6. As to Item 1, we considered and characterized jobs in a way that we believe will help in the definition

of the man/machine roles. As to Item 2, we recoqnize the place of systems and systems

analysis and have portrayed that place in Figure 1. Finally as to Item 6, we drew upon

* Also known as the Davis/Goldmuntz Council.

44
our experience and the related experience of others to look for analogies whereby

manufacturing industrial experience with automation could show the way for progress in

the Service Industry sector.

We were further guided by the provocative questions posed to this Conference by

John Stewart**. We have paraphrased his questions below:

1. How can the knowledge generated at and exhibited by this Conference

be applied to the Service Industries?

2. How can the learning curve in the Service Industries be improved?

3. How can the hard and soft sciences be coordinated?

4. How can the technology be explained to decision makers?

In particular, we addressed ourselves to Question Four. We felt that we could best

contribute by designing a process for searching out and assessing automation opportunities.

This process is described below in terms that we believe are meaningful to decision makers

and we sincerely hope that this process will prove useful to them.

Guided by these findings and questions, we sought to develop a practical method for

the identification and assessment of automation opportunities. Our method requires data

in detail about jobs and Service Industries. We make no apologies for this because we

are all aware of the harm that comes from hasty conclusions and superficial analysis in

the sphere of automation. We do believe, however, that the requisite data can be obtained

with a reasonable effort. It is our sincere hope that the method herein proposed will be

useful to those who must make choices and back the efforts needed to reach our productivitv goals.

The essence of our proposed method is shown in various forms and figures. We have

suggested a rating scale from 0 to 3 to indicate the strength of the various interrelationships.

In keeping with our general scheme of characterizing needs first, we selected a representative list of the Service Industries for consideration. This list is based on the Standard Industrial Classification (SIC) categories used by the Department of Commerce

and corresponds largely to the list used in Mr. Kendrick's work on post-war productivity

trends.

We next set up a classification designed to reflect the pacing aspect or "production

function" that might pertain to each industry in our group. For this classification, we

used E. Blum's four categories. Thus our first tool is shown in Figure 2.

Our recommended use of this table would be to use a scale of 0 through 3 to indicate

the importance of each "production function" to each industry. The selection of values

should be done by those with expert knowledge in each industry.

This table when properly completed will have a value of its own. If, for instance,

a particular industry is strongly driven by Administrative and Regulatory forces, then

planning for automation within that industry will probably require a careful assessment

of regulatory trends.

As the next step in our method, we consider the job-related reasons for automation.

We found four circumstances where automation might be' justified (Figure 3).

1. The job is undesirable (boring, dangerous) to the performer.

Executive Director, National Commission on Productivity.

45
u

M

o

o

o

B

wH

1-1 o

o

w

iz: o

>M

H

H

CO

Figure 2. The Importance of Certain Production Functions

to Various Industries Within the Service Sector

46
<3^3HOS<:e-imo!z;

Figure 3. Reasons for Automation Within Each

Service Industry

47
2. The job can be done by a properly trained person but these are scarce (talent scarce).

3. The job can be done better with a better tool (augment human capability).

4. The whole activity or collection of jobs is hard to control or manage.

As a first approximation, a scale of 0 to 3 could be used to reflect the importance

of each reason to each industry. More refined scales based on actual job analyses might

be weighted by the proportions of jobs in each industry relating to each reason.

Our next cut at this characterization of need looks at the functional aspects of

jobs. We selected four such aspects which we believe can usefully characterize many

ordinary jobs.

These are:

1. Sense. Includes the acquisition of data and information.

2. Reckon. All processing of this information by human mind or machine.

3. Remember. Includes the filing ana retrieval of information in pertinent

forms.

4. Act. May include sending a message "information" to others.

We chose this characterization for two reasons:

1. We believe that it can describe many of the jobs whose content would be

altered by automation.

2. We believe that these terms have analogs with various systems and devices

that Technology can provide.

We propose that a matrix of these four functional aspects versus the Selected

Service Industries should be constructed. Its form is shown in Figure 4.

We suggest that values from 0 to 3 be assigned by expert opinion for each of the

blocks in Figure 4. Here, however, we recognize a real difficulty; namely, each industry

has several kinds of jobs and each job may have a different sense-reckon-remember-act

profile. Thus for some or all of these selected industries, it may be useful to examine

the activities or jobs that they require. To this end, we have selected certain

categories of activity as shown below.

Distribution (i.e., direct

delivery to consumers)

Payment (i.e., completion of

transactions, including third parties)

Marketing

Production (i.e., creation of

capability for service delivery)

Critical distinctions

in Service Industries

48
49
Non-specific to

Service Industries

5) Production Planning and Scheduling

6) Finance, Administration, & Control

7) Personnel

8) Capital Facilities

The place where the

crucial action programs

get started

9) Research, Development, and

System Design

Although each of these activities probably can be found in each Selected Service

Industry, there will be some activities that will be important to all and some that will

specialize to certain industries. To determine this, we propose the use of the form

displayed in Figure 5.

Here again we suggest a 0 to 3 scale. The values selected for each box should

reflect the cost impact of the activity within each particular industry. We expect

that all of the activities are probably present in each industry to a greater or lesser

degree but we are trying to focus on the costly activities where we hope to find

opportunities for gain.

This table will serve two purposes:

1. It will permit the user to build up the tables described earlier.

2. It will show the extent of common elements or activities within

the totality of Service Industries.

We suggest that a cross table may be useful, namely one to show how these

activities are related to our sense-reckon-remember-act categories. Its form is

shown in Figure 6.

V Again our 0 to 3 scale may be used.

EXPECTED RESULTS

When the tables are properly filled in, one should examine the results to determine the cross correlations. Basically we could examine these correlations.'

Job Aspect

Sense

Reckon

Remember

Act

Reason for Automation

Job Undesirable

Versus \ Talent Scarce

Augment Human Capability

Difficulty of Control

50
51
Figure 6. Profile of Job Aspects Versus Certain

Activities

52
Reasons for Automation

Job Undesirable

Talent Scarce

Augment Human Capability

Difficulty of Control

Act i VI ty

1 Versus

V

Distribution

Payment

Marketing

Production

Production Planning and Scheduling

Finance, Administration, & Control

Personnel

Capital Facilities

Research, Development and System Design

Reasons for Automatio n

Job Undesirable

Talent Scarce

Augment Human Capability

Difficulty of Control

Production Function

Technological

Versus 7 Economic

Personal

Administrative and Rtgulatory

Job Aspect

Sense

Reckon

Remember

Act

Activity

Distri bution

Versus / Payment

Marketing

Production

Production Planning and Scheduling

Finance, Administration, & Control

Personnel

Capital Facilities

Research, Development, and System Design

53
There are others that may be useful. The end product of this work should show the

importance of the job aspects (sense, reckon, etc.) to the Service Industry sector.

This information will be of great value to those who are to provide the systems work

and technological building blocks that the Service Industry needs.

As of today, all of us seem to feel that the greatest shortcomings are in sensing

and remembering, i.e., in the ready capture of data and in its easy retrieval. While this

may well be true, we lack the quantitative base for efficient product planning that the

Technology sector should have to guide its own developments.

RELATIONSHIP TO TECHNOLOGY

Since we do not have the results that our method will provide, we had to surmise

as to the developments that are needed by the Service Industry sector. Nonetheless,

the panel did examine certain areas and made the following provisional catalog of

probable needs as set out in Figure 7 and Figure 8.

RECOMMENDATION

That the methodology described herein be applied to determine in a more reliable

fashion where the needs are so that the necessary goods, services, and tools can be

developed by the private sector. The data collection and correlation tasks described

herein should be started as soon as practicable. We would recommend that a suitable

government activity sponsor this work and that it be done by a joint Federal -Uni versi ty

task force with suitable representation from the Service Industry sector. We believe

the Technology sector is anxious and able to provide products once a reasonable need

and hence a market is shown to exist and described in reasonable detail.

54
Mental Function

Category Technology Needs Satisfied

Sense Terminals: $100 sale price level

Improve reliability of printing terminals

Interactive displays with communications

Standard electrical interfaces

Improve people-to-people

communication

Mass interconnection

availability necessary

Sense Sensors: Family of sensors to measure

physical effects: temperature position

pressure electrical

counts etc. especially needed with this is a set of

standard interfaces for this family.

Medical/cl inical

Meter reading

Product maintenance

(built-in fault

indicators)

Burglar alarms, fire

alarms

Product people locators

(geographical

)

Reckoning Computer Improvements Needed:

Methods of handling faults

Major reduction in cost of maintenance

Methods to write bug-free programs

"Too hard to communicate

with computers"

Remember Displays: Resolution, contrast, quality

and quantity and equivalent to a typewritten page.

This is the measure

of what people need

and want if we are

to achieve mass usage.

Act Actuators: Family of standard interface

aLLUaLUri> UU L'llLrUl llitrLcib, VdlVco,

solenoids.

Same service industries

Figure 7. Needed Improvements in Product Technology

55
Improvements Needed Needs Satisfied

Information System Technology Improvements Needed:

Means to represent information

structure

Means to provide secure, private

information systems

Information retrieval

People-to-people communications

International Library

Elimination of "reinventing the wheel"

Social System Technology Improvements

Needed

:

Means to measure the decisionmaking activities of people

Means to measure the effectiveness

of pedagogical processes

Means to measure the effectiveness

of government

• 1 I _i_ 1 11*111 Means to measure the job

satisfaction of people

OTHER SYSTEM CONSIDERATIONS

A theory for "national -dynamics-stabi 1 i ty" anticipating the day when the information

feedback loop is closed by providing instantaneous nationwide vote taking. (The

technology to achieve nationwide opinion collection is here today--and it's inexpensive.)

Those inventions required to better utilize the existing huge national installations

to serve the newer social needs:

i.e. y^Telephone network for nationwide voting

y Server' system for unified waste disposal

Liable TV for interactive communication

Means to bridge the"NIH"gap between research-output and business acceptance.

Need satisfied: To get industry to use the research technology available.

Figure 8. Needed Improvements in System Technology

56
Report of Workshop Panel 5

on

Government Roles, Policies and Programs for

Productivity Enhancement Through Computers and Automation

Panel Participants

* Bruno Augenstein

Bernard Chern

William W. Cooper

Frederick R. Cross, Jr.

* Frank Hersman

Herbert S. Kleiman

Gerald G. Smith

Robert A. Vitro

RAND Corporation

National Science Foundation

Carnegie-Mellon University

General Accounting Office

National Science Foundation

Battel le Memorial Institute

Control Data Corporation

Office of Telecommunications, Department of

Commerce

Assisted by Peter Bergson, Synectics, Inc.

* Panel Leaders

57

"GOVERNMENT ROLES, POLICIES AND PROGRAMS

FOR PRODUCTIVITY ENHANCEMENT THROUGH

COMPUTERS AND AUTOMATION"

The Workshop Panel 5 report took the form of an outline of general principles and

motivations of government, followed by three examples of possible government action as suggested by the Panel participants.

GENERAL PRINCIPLES

We sought to outline these in the following categories:

I. What are some central goal

s

and functions of government?

II. What are some rational es for government action?

III. In what areas do important government roles lie?

IV. What are some actions government can take?

V. What are some first steps for specific government actions, as exemplified

by three cases?

I. Goal

s

and functions

Questions:

1. How can we leave the major action burden in the private sector?

2. How can government work effectively as sponsor and partner?

3. How do we identify areas where government should play a major or joint partner

role (with the private sector) to increase productivity?

Suggestion: Government should play such a role in any area wherein we can increase productivity and wherein also government already has a legal and/or

regulating responsibility.

E.g.: a) Where productivity increases involve or impact issues of public

health or safety;

b) Where productivity increases involve or impact issues of

institutional, market, or organizational defects;

c) Where productivity increases involve or impact issues of

conservation of material, energy or environment;

d) Where productivity increases involve or impact issues of work

obsolescence, manpower retraining, new kinds of personnel skills,

etc., requiring new legislation or policy decisions.

4. How do we exclude government intervention (of a non-benign type) in areas

in which the private sector can achieve the objectives?

5. How can the government communicate its willingness and intent to motivate the

private sector?

59
6. How do we single out "leverage points" in government wherein it is a major

buyer or supplier of servi ces--hence where impact is largest?

7. How do we use government's regulatory/legal power and role to assure the private

sector of action in a beneficial way?

8. How do we ensure government action in a positive, benign, non-hostile role

towards private sector efforts to increase productivity?

9. How, by government action, do we break a log jam or create momentum in

productivity increases?

10. How can government be involved early (i.e., government must be pro-active)?

11. What are the means by which government can improve productivity in service

areas by providing pressure to change?

12. How can modern technology be employed in Federal services to establish a demonstration of producti vi ty- increase possibilities?

13. How can government be anticipatory rather than ex-post- facto regulatory?

14. How can government identify and act on major trends - i.e., how are needed

changes identified, anticipated, and channeled towards positive ends, and

managed by functional objectives?

II. Some rational es for government action

1. Support development of national competence level in some technological areas

2. Intervene when there is a disaggregated market or where industry cannot

provide R&D

3. Open the present governmental monopoly of some services, where competitive

industry can be more effective

III. Areas where important government rol es lie

Focus where there are obvious productivity increases needed (e.g., health,

education, transportation, urban/local government).

IV. Some actions government can take

1. Use economic mechanisms, such as tax incentives; tax credits for productivity

gains; regulation of rates in transportation; manipulating/utilizing government

purchasing power; direct aid or grants; application of import/export restrictions;

restrictions via patents, copyrights, licensing--these uses should be pro-active

as well as reactive.

2. Use institutional mechanisms, e.g., regulation/licensing of service professionals

such as garage mechanics; setting of national standards, like NBS; anti-trust

mechanisms or the converse, joint ventures currently prohibited by anti-trust;

information and technological services, technology transfer on the national

level as with agriculture research stations; recasting of or modifying existing

legislation pertaining to labor and work training.

3. Utilize tax credits, etc., to stimulate industry toward innovati veness in consumer services sector.

60
In the backdrop of these fairly general statements, we wanted to get into a number

of specific areas in order to identify existing problems and propose some initial

recommendations or solutions. These are selected areas, and don't pretend, obviously,

to cover all possible desirable routes or options. There was a panel consensus, however,

that these are particularly important for a number of reasons which will be clearer when we get into them.

An Example of Specific Government Action - No. 1

STATEMENT OF GOALS

Productivity of local government is an important national issue, and one which

should receive particular study and action in the light of revenue sharing, other

New Federalism policies, and a growing national consensus that public problems are best

handled at the level of government closest to the people. It must be a main concern

of the Federal Government and industry for reasons not only of "self interest," but

because of their pronounced effect on the quality of life of the bulk of the country's

citizens.

There is a marked need for productivity improvement (by any of the definitions

used in this conference) at the local level and state levels if the taxpayer is to receive his "money's worth," and if the other sectors are to contribute services in

such a way as to improve the quality of our national product and wealth. From an "industry" point of view, local and state governments together constitute one of the

largest (12 x 10^ employees) and one of the fastest growing industries in the U.S.

Improving productivity of existing services is valuable but there are also whole

new functions and whole new approaches that also ought to be considered along with

possible new institutional arrangements if the full benefits from productivity increases

are to be realized.

To provide a hospitable climate for local government productivity experiments and

operation, the local jurisdiction will need to improve communication between the citizen

and his government. This implies a need both for improved data and for diligent efforts

to inform citizens of alternatives and the consequences of innovative productivityinspired programs. New institutional arrangements will also have to be developed to establish the framework for innovation between existing institutions not only of a government-to-government variety but also of a government-to-industry and qovernmentto-uni versi ty variety. The land-grant college and county agent system established many

years ago for a rural economy offers one example of the kinds of institutional arrangements necessary to bring about increased productivity. Efforts will also be necessary

to upgrade the personnel systems of local government and the technical competence of

local officials so that they can effectively participate in planning, monitoring, and

implementing the new technologies that will be necessary to bring about greater

productivity in local governments. Thus there is a need for better education and

extension programs; the design of model experiments, including their evaluation and their

dissemination; the development of new institutions (such as Public Technology, Inc.);

and the upgrading of old institutions.

The Nation has seen, and will have increasing experience in, improving productivity

at a level of state and local Government. Some highly imaginative research sponsorship

in, especially, the area of management and technological innovation and use could have

a very large payoff.

The workshop believes therefore that the following recommendations should receive

priority attention at this time:

(1) Since neither adequate performance nor productivity measures or standards

for local government service operations exist at this time, efforts should be made to develop these by a suitable body at the earliest possible time. As accepted measures

61
become available, these should be routinely collected by an appropriate national body and

given widespread public dissemination so that the citizens of the United States have good means for measuring the quality of their government.

(2) Experiments in upgrading the productivity of local governments should be

planned and implemented on a national scale by suitable government bodies, evaluated

and the results actively disseminated and publicized. The carrying out of such experiments will require the development of new funding programs, which should involve participation by all levels of government.

(3) In many cases the upgrading of local government services involves a complex

technical undertaking beyond the resident skills of some local governments. Where this

is true, sui tabl e technical assistance, manpower sharing, training and educational

programs should be developed so that all U.S. citizens may share equally in the benefits

of productivity increases.

(4) Local governments should be encouraged through the development of new institutional arrangements, such as the proposed "Big City Consortium," to identify their common problems, develop specifications of their requirements, and aggregate their

purchasing power. Such arrangements then will create the markets that will unleash the

best efforts of U.S. industry to assist local governments in enhancing productivity.

(5) If the Nation does make a true commitment to raising productivity, new

national planning mechanisms will be needed to plan, monitor, and evaluate the results of

productivity experiments and experience, and to constantly review the development of new indicators and statistical measures of progress in enhancing productivity of local

government. The National Commission on Productivity might effectively perform this

function if given an appropriate mandate and funding.

An Example of Specific Government Action - No. 2

OBJECTIVE - Support private industry in efforts to increase productivity.

ISSUE - What kinds of problems does private industry face in increasing producti vity--

particularly in service sectors?

a. Often market is fragmented, disaggregated

'

' b. There can be substantial obstacles in risk , time scale , or technical

•

' competence , leading to inadequate R&D to provide innovations.

- c. There is often a failure of market accessibility to assure reasonable - protection to provide a return from a risk investment.

d. There is inadequate maintenance of overall technical competence.

e. There is a general failure to be competitive in a world-wide technology--

hence an impact on the ability to maintain trade in the international arena.

IDENTIFICATION OF AREAS - How do we identify initial high priority areas for

governmental action?

Criteria - Industry is important .

- Government has a role and presence in it now.

- Government has plans and programs a 1 ready in these areas

- Therefore build on and amplify such programs for early effects

62
- Hence, choose critical areas where government is a1 ready

purchasing services which need to be improved .

SOME EXAMPLES OF SUCH AREAS

Health Services - e.g., administration and management of health care facilities;

development of automated test and diagnostic instrumentation, to reduce costs; correction of maldistribution of services and better

utilization of available medical personnel, via information and

communication networks; etc.

Transportation - e.g.» development of automated personal rapid transit, to reduce inner city congestion and pollution; development of

improved intercity freight and people movement, by controlled

high speed automated vehicles; etc.

Education - e.g., development of improved CAI equipment; interactive

access to information sources at any grade level; etc.

Manufacturing - e.g., improve and innovate automation of discrete parts

Automation manufacturing--which provides tools and equipment spanning

the entire range of services and provision of services--

resulting in better or lower cost products, of more uniform

high quality.

HOW TO RESPOND TO NEEDS - How can we respond to such identified needs which are perceived by both government and the private sector?

- Assemble ad hoc groups spanning the supply and demand spectrum.

Include in these groups:

- Government representatives who can generate a specified

market demand ;

- Industry or technically qualified suppliers who can guarantee developments if an assured demand can be created;

- Private sector demand representatives (consumers) who will

be in a position to bui Id up market areas once an initial

demonstration of needs satisfaction can be shown.

- Government sponsorship can range from simply guaranteeing a specified market demand, to government sponsorship at several levels

of intensity: study; R&D; applications engineering; diffusion

of relevant technology (via cooperative joint ventures); and

assurance, by market trial, that the technology meets true needs;

against the assured purchase of end items .

63
An Example of Specific Government Action - No. 3

THE UPGRADING OF SERVICE SECTOR SKILLS AND CAPABILITIES

Since the beginnings of the Industrial Revolution we have been seeking techniques

and methods for increasing the productivity of industry. The development of these

techniques and methodologies has resulted in those productivity gains we've experienced

during the ensuing years.

No comparable work has been done in the service area. The services spectrum has not

been the subject of equally effective effort. Consequently, the productivity growth

of our services segments has not paralleled that of manufactured goods.

The understandings we have come to realize in product manufacturing have been

accumulated over an extensive time. Left to itself, and with special note of scalar

relationships of services relative to manufacturing, it is doubtful that unique

productivity techniques for services will come into being on a time frame commensurate

with the nature of the need.

Therefore it is resolved by this panel that:

(1) Research and Productivity Technique and Methodology Development should

be supported by Federal grants. This research should be fundamental

problem oriented as required for utilization. This research should

culminate in curricula in our educational institutions and be disseminated

to potential users.

Further, it can be established that the processes of generating services have

counterparts to certain well understood manufacturing processes: Market and financial

analysis, system design, preventative quality control, management information, cost

accounting, reliability analysis, distribution, selling and billing functions are much

the same as those pertinent to manufacturing enterprise. More importantly, the application of computer techniques for such functions as scheduling, capacity optimization,

support service requirements, resource optimization and industrial engineering and/or

economic analysis are pertinent and may be directly transformable. Applying the

principles of these techniques to the services should yield productivity increases.

Therefore, it is resolved by this panel that:

(2) Federal grants should support research and/or analysis seeking to establish the applicability of current techniques and methodologies

to the services industries.

(3) The Federal Government is encouraged to aid in the development of

criteria by which performance standards for services can be quantified.

This effort should include services offered to and consumed by the

private sector, and also those provided by local, state, and Federal

Government and to the degree appropriate to ultimate citizen consumer

concern.

64
SUMMARY AND CLOSING STATEMENTS BY CHAIRMAN

This conference is a service industry. It is a microcosm. We have multiple goals;

we've had them throughout. It has been impossible totally to satisfy multiple goals, and

we've had to make trade offs. As we've made trade offs, each individual has perceived that

he has not been totally satisfied. We've had a "dynamic"; it is a process, and it has come

to some sort of a result.

The next step, under the rubric that we're operating in, is to take what is a service

activity and a service process and to translate it from a "service" into a "good." We

have to be able to inventory that which we have captured. At the coffee break, I was asked "Do the panel reports meet your expectations?" My response was "No, they're better."

They are better by a very considerable degree than I had expected and hoped.

My initial thought was that I would do something which the Synectics g^ilP^did with

our group. We had a lot of tension in our panel when we first sat down. lyjUiink that's

very unusual for a panel, but I wanted to report that fact to you. We did get a lot done

the first night. Initially, anytime somebody opened his mouth, somebody else jumped down

his throat. Then, since this guy was sitting there saying nothing and looking at us and

making us uncomfortabl e--that was the Synectics person--we decided that maybe we ought to try to bow to each other. So one person would say something and another person would say

"Hey, yeah, boy--that's terrific!" Then someone would tell a story and someone else

would tell a longer story. The net outcome of our panel's first evening together just

wasn't good. However, I called it yen/ productive on my questionnaire because the contrast

with what we were able to do the next day was absolutely fascinating. The way we got out

of our initial problem was to play the "I wish" AMHmi^<^m^

Now, I'd like to make a brief statement. It's my perception that not all panels went

through all the tools in the tool kit of Synectics. That tool kit is very complex and

interactive. The first step is to throw out flBMHiSBI ideas, fill the board with them,

capture them, because it's the ability to get your idea up there that is the first step.

There's a second step. The second step is to have a "client" person take one of those

ideas that he thinks has some value or some potential value, and come up with the most

outlandish possible scheme for implementing that idea; be vivid, for when something comes

up in a vivid way it begins to crystallize thinking. So in our approach we did, and we

had a good one. Tom Paterson was talking about fatigue in the skin of an aircraft. We

also had something up there on the wall which said "Signal the consumer that he has a problem." And it wasn't hard to think of a nice vivid way of giving a consumer in the

aircraft the signal--Zap!--Right out the window! Now that sounded absolutely crazy but we worked on that a while and I think we came up with something that was operational,

had problems, but had mechanisms for overcoming those problems. What I saw was a dynamic

in operation, and I'd like to share the dynamic with you.

My mechanism of operating, as you may have noticed, is to try to raise the potential

of the group in a voltage way. Frequently it succeeds. Ritchie Coryell said something

the first night and I immediately leaped to my feet and said "I am horrified by that

statement." Well, the first night Ritchie and I lived with the fact that I had jumped on his ego. Then there's a fellow named Smith here who jumped on my ego last night and I got

a much better idea of how this feels. We've all got egos and that's a problem. Yet

that's the very dynamic at work throughout this whole process.

I was trying to figure ways that I could communicate with you, and I thought, "Well,

why don't I stand up here and say what I would wish we had been able to do with this

conference." At the coffee break time I ran down the fantasies which had been going

through my cranium, along with some other important ideas, and absolutely frankly, I decided that most of my wishes have been met. Among the things that I wished for was that

we could get egos out of the way when information is available, so that we have the ability

to transfer that information without affronting the self esteem of individuals. I perceive that my method of delivering information creates vivid images in people's minds.

That may be good, but it also involves their egos very directly. When I looked at our

65
output, my conclusion was that this is alright. Because I did that, we skirted on the

verge of disaster, but maybe one has to go that far to energize a complex system. There's more than just the Synectics approach--there' s the dynamic that we have to achieve. We

have to establish the potential, the interest, and the willingness to know.

As I say, I thought our Wednesday night meeting was very productive. We didn't get a thing done, yet that was productive . We didn't define what a service was, but you know

that was productive. We didn't find what productivity was, yet that was productive. So I feel qood that wav. Riaht now, however, I have some less than good feelings, too, and I'm back 'in the soup— because how do I communicate these to you without running into the

problem of my ego and yours.

Let me go on with "I wish":

I wish that economists had the ability to provide what little they know in

a form that would communicate to people who have grown up in an experiential

system.

I wish that we had a way which would allow people to see that we live in

complexity with multiple goals.

I wish people would see that we don't have a necessary antagonism between

the roles of government and private business.

I wish that people could see that at no time in the history of organized

society has there been such a thing as a private enterprise system alone.

I wish people could see that businesses and other institutions have the

power to transform themselves when faced with real adversity or crises

and that sometimes it takes a crisis because changes can be extremely painful.

I wish that people could see that there are things which cannot be sold in

markets because they just don't have the characteristics that allow them

to be sold in markets.

I wish that people could stop fantasizing that the market is some form

that it is not, and recognize that if you try to deliver goods and services

through a mechanism which requires particular kinds of goods to work, the

first step in understanding is to know what the market really is.

There are things called public goods. You can't sell a public good in a market.

It is not appropriable to an individual. Nobody can get his hands around it, no individual can get all the benefits of it, you can't fence it in. If you can't fence

it in, you can't sell it in the market, and the market won't work. If you try the market,

it's going to fail, and you're not going to deliver the goods. I'm not saying that all

services are public goods but there's a high number of services which are public goods.

I wish that people could see that although Government on occasion and with

great frequency has mucked things up left and right in the past, just saying

that Government mucked up in the past doesn't solve the problem, and that some problems can only be dealt with by Government.

I wish people could see that railing against something which does not

necessarily have to exist in its current form is not productive, and that

they could more usefully ask how we can innovate in the use of our existing

imperfect institutions, some of which match and map in their characteristics

the problems and realities that are out there, in order to bring about this

productivity that we're talking about.

I wish people could perceive the level of managerial technology that comes through the interaction of management studies, economic analysis, technology,

the ability to simulate, the ability to create market-like incentives where

markets previously have never been able to work before.

66
I wish that people could see that we can create incentive mechanisms and

that the technology that is available today to us may be the mechanism

for allowing that to happen.

I wish people could see that we have the opportunity to utilize Government

to create freedom for managers to follow dispassionate incentives that they

can perceive and which tell them go left, go right, go fast, go slow, and

if they follow those incentives they are moving not just themselves but the

society as a whole towards its goal.

That's my vision. That's my biggest wish; I think that we here were on track.

My perception is that within the bounds of this conference, many of my "wish"

statements have essentially been fulfilled. The level of difference between what I have perceived as the output of earlier conferences on essentially this subject and the

output which I perceive here is enormous. There is a certain thrill that comes when you

see that there's something new coming out. I feel that way about our output, even if we can only communicate some 10 or 20 percent of it to others. I'm sure you feel the

same way. I think that we are almost at the point of delivering not just the service

of this conference, but a good that can be codified and broadly distributed. I do expect

that we will have a printed output, that it will be edited and distributed to every member

here and to the sponsoring agencies for their use to the degree that they need.

The fact that we could get this close to fulfilling my wishes reinforces my optimism.

I am an optimist. And it's the occasional thrilling experience such as this conference

that keeps me that way.

We stand adjourned.

67

ROSTER OF PARTICIPANTS

"CONFERENCE ON MAKING SERVICE INDUSTRIES MORE PRODUCTIVE THROUGH

COMPUTERS AND AUTOMATION"

New England College - Henniker, N.H. - August 12-17, 1973

J. J. Alexander, Jr. & Wife

Securities Industry Automation Corp,

55 Water Street

New York, New York 10041

Robert Anderson

University of So. Calif.

Information Sciences Institute

4676 Admiralty Way

Marina del Rey, Calif. 90272

Bruno Augenstein & Wife

Spectravi si on , Inc. 1144 Tell em Drive

Pacific Palisades, Calif. 90272

Shimon Awerbuch

Planning & Development Agency

City Hall

Mohawk Street

Cohoes, New York 12047

Jordan Baruch

Harvard University

Soldier's Field Road

Cambridge, Mass. 02163

Sanford Berg

University of Florida

3009 NW First Avenue

Gainesville, Florida 32601

Frank L. Bernstein & Wife

Auerbach Corp.

1501 Wilson Boulevard

Arlington, Virginia 22209

H. Bieber

Esso Research & Eng. Co. P.O. Box 51 Linden, N.J. 07036

John A. Birch

Department of State - SCI

4205 Bradley Lane

Chevy Chase, Md. 20015

Edward H. Blum

NYC - Rand Institute

545 Madison Avenue

New York, N.Y. 10022

Alfred Blumstein

School of Urban & Public Affairs

Carnegie-Mellon University

Pittsburgh, Pa. 15213

William Bradley

Puredesal Co. 1609 Hanford Street

Levittown, Pa. 19053

Walter M. Carlson

IBM CorDoration

Old Orchard Road

Armonk, N.Y. 10504

Bernard Chern

National Science Foundation

1800 G Street, N.W. Washington, D.C. 20550

W. H. Conner

Avcon, Inc. 1330 Summit Avenue

Fort Worth, Texas 76102

Wi 1 1 iam W. Cooper

Carnegie-Mellon University

Schenley Park

Pittsburgh, Pa. 15213

Ritchie B. Coryell & Wife

National Science Foundation

1800 G Street, N.W. Washington, D.C. 20550

Frederick R. Cross, Jr. U.S. General Accounting Office

1903 J.F.K. Federal Bldg.

Boston, Mass. 02203

Robert A. Davis

IBM Corporation

10401 Fernwood Road

Bethesda, Md. 20034

James A. Dei Rossi & Wife

National Bureau of Standards

Bldg. 225, Rm. B-226

Washington, D.C. 20234

69
Robert C. Duval 1 & Wife

MARTA Suite 1300

100 Peachtree Street, NE

Atlanta, Georgia 30303

Miss Linda Fout

National Bureau of Standards

Room A-205, Tech. Bldg.

Washington, D.C. 20234

Lawrence Goldmuntz

Economics & Science Planning Inc. 1200 18 N Street

Washington, D.C. 20036

David P. Harbin

Insurance Systems of America, Inc. 12 Perimeter Center East

Atlanta, Georgia 30346

Frank L. Hassler

Transportation Systems Center

Kendall Sq.

Cambridge, Mass. 02142

Mrs. Madeline M. Henderson

Institute for Computer Sciences and Technology

National Bureau of Standards

A-206, Tech. Bldg.

Washington, D.C. 20234

Frank Hersman

National Science Foundation

1800 G Street, NW

Washington, D.C. 20550

Werner Hirsch

University of Calif., Los Angeles

Dept. of Economics

405 Hilgard Avenue

Los Angeles, Calif. 90024

Edwin J. Istvan & Wife

Institute for Computer Sciences & Tech.

National Bureau of Standards

U.S. Dept. of Commerce

Washington, D.C. 20234

D. Ironfield

Office of Science & Tech., IT&C

Tower B. Place de Ville

112 Kent Street

Ottawa, Canada KIA 0H5

George T. Jacobi & Wife & Son

IIT Research Institute

10 West 35th Street

Chicago, 111. 60616 •

Robert Johnson • . •"

. Burroughs Corp.

Burroughs Place

Detroit, Mich. 48232

70

John W. Kendrick & Wife

The Conference Board

845 Third Avenue

New York, N.Y. 10022

Herbert S. Kleiman

Battelle Mem'l Institute

505 King Avenue

Columbus, Ohio 43213

Michael J. Kremer

National Institutes of Health, DRS

Bldg. 12A, Rm. 4051

Rockville Pike

Bethesda, Md. 20014

Jordan Lewis

National Bureau of Standards

Admin. A-724

Washington, D.C. 20234

Alan McAdams

Cornell University

515 Malott Hall

Ithaca, New York 14850

Harvey J. McMains

American Telephone & Telegraph Co. 130 John Street

New York, N.Y. 10038

Brian E. Mansir

Xerox Corp.

800 Phillips Road

Webster, New York 14580

Alexander Morton

Morgan Hall

324 Harvard Business School

Soldiers Field

Boston, Mass. 02163

James E. Murphy & Wife

Arthur D. Little, Inc. 35 Acorn Park

Cambridge, Mass. 02140

Sumner Meyers

Institute of Public Administration

1619 Massachusetts Avenue

Washington, D.C. 20036

Alan Nicolaidis

French Embassy

2011 I Street, N.W.

Washington, D.C. 20006

Tom Paterson

MARCOM Applied Systems

15233 Ventura Blvd.

Sherman Oaks, Calif. 91403
Frank W. Paul

Scaife Hall

Rm. 302

Schenley Park

Carnegie-Mellon University

Pittsburgh, Pa. 15213

Paul Polishuk

Office of Telecommunications

U.S. Dept. of Commerce

1325 G Street, N.W. Washington, D.C. 20005

William F. Rhodes

Vienna Technological Services

235 Commons Drive

Vienna, Va. 22180

Roy G. Saltman

Institute for Computer Sci. & Tech.

National Bureau of Standards

Tech., B-256

Washington, D.C. 20234

Raymond Sangster

National Bureau of Standards

Boulder, Colorado 80302

W. E. Sasser

Harvard Business School

Soldier's Field Road

Boston, Mass. 02163

Larry Schmid

MARCOM Applied Systems

15233 Ventura Blvd.

Sherman Oaks, Calif. 91403

Gerald G. Smith

Systems & Services Co. Control Data Corp.

8100 34th Avenue S. Minneapolis, Minnesota 55440

Leander W. Smith

IBM Corooration

Dept. 75K P.O. Box 10

Princeton, N.J. 08540

W. L. Stapleton

Government of Canada

112 Kent Street

Ottawa Ontario, Canada KIA0H5

John Stewart

National Commission on Productivity

New Executive Office Bldg.

Rm. 6215

Washington, D.C. 20505

Robert A. Vitro

Office of Telecommunications

Dept. of Commerce

1325 G Street, N.W. Washington, D.C. 20005

Wi 1 1 iam A. Wal 1 ace Rensselear Polytechnic Institute

no 8th Street

Troy, New York 12181

James Welch

Chemical Bank

55 Water Street

New York, N.Y. 10020

Joseph M. Wier & Wife

Bell Laboratories

Holmdel , N.J. 07733

Vernon Wilson

Room M404

University of Missouri

300 East Briarwood Lane

Columbia, Missouri 65201

71

"PRODUCTIVITY TRENDS IN THE U.S.

PRIVATE DOMESTIC ECONOMY"

John Kendrick

John Kendrick is Vice President and Director of Economic Research at the Conference

Board in New York. He is best known for his work in economic accounts and productivity.

Drawing upon this expertise, Mr. Kendrick presented in a series of tables the rate of

change of productivity in the U.S., by major industry divisions such as agriculture,

mining, manufacturing, transportation, etc. He also protrayed the economic growth of the

U.S. private domestic economy in terms of output (real products), inputs, and productivity

ratios.

73
. r 1 (:, ;!•
A Century of Economic Growth

U.S. Private Domestic Economy

Output, Inputs, and Productivity Ratio, 1869-1969'

Index Numbers. 1958 = 100

'The pre-lBB9 period is based on decatle averayos 1Bi.9-78 uini 1879-80

Source. John W, Kendrick, Postwai Productivity Trends in the United States I : 969 (New York. National Bureau ol Economic Researcri, 1973;

Productivity Trends in the

U S. Private Domestic Economy Table 1.

By Major Industry DIvlBlona Averaqn AnnujI Percentage Rales o( Change, 1889-1969, by Period

7889- 1919- 1948- 1919 194B 1969

Private domestic economy

6^31 product '5 Q do

Total i.i', !>)i produclivily 1.3 1 8 2.3

-Real prr)c1uct per unrt of capital 0.5 1 .6 0.2 Real pror'ucl per man-tx)ur 2 0 2 2 3.1

idustry divisions

/Roil F.r.'iHiir't ncr nriar-i-K/'M ir\ '^ntii'i piouuci per r Tidr 1-) KJur

/

Agriculture 0.5 2.1 5.7 Mining 2.0 2.9 3.8 Conlract conslruction 0.9 0.4 1.3 Manufacturing 1.3 3.0 3.0 Duiable goods 1.4a 2.8 2.8 Nondurable goods 1.3a 3.4 • 3.3

Tianspfirtation 2.6 4.0 3.2 Communications 2.8 2.4 5.4

Electric inri gas utililies 6.7 a 4.7 5.9 Trade 1.0 1.7 2.6 Finance and services 2.7 1.1 1.6

« 1899-1 81

9

Source; John VI/ Kendrick, Producdwly Trends In the United Slates (Princeton. NJ.,

Prinroton University Press, 1961); and Postwar Pmducbvity Trends in the United Slates (New Vofi- i\i;»lional Bureau of Economic Research, 1973)-

Productivity Trends in the U.S. Private Domestic Economy

By Major Industry Divisions Average Annual Percentage Rales ol Change. 1948-1972, by Sub-periods

Table 2.

Private domestic economy

Real product

Total factor productivity Real product per unit ol capital Real prcxJuct per man-hour

Industry divisions

(Real product per man-hour)

Agriculture Mining

Contract construction Manufacturing Durable goods

Nondurable goods

Transportation Communications

Electric and gas utilities Trade Wholesale

Retail Finance, insurance & real estate Services

Period

1948- 1969

3.9

2.3

0.2

3.1

5.7 3.8

1.3 3.0

2.8

3.3

3.2

5.4 5.9

2.6

3.1 2.6

1.9

1.1

r948- 7953

4.6

2.7 0.2 4 1

6.4 5.2

4.4 3.7 3.6

3.5

2.2

5.4

7.6

2.5 2 2

2.6 1505

7953- 7957

2.5

1.9

1.1 2.7

4.1 3.3 32

2,2

1.4 3.4

3.1 3.6

6.3

2.7 33

2.2

2.7

1.2

Sub-periods^

1957- 1960

2.7 22

0.2

2.6

5.9

4.7

1.5 2.2

1.8 2.9 3.0

7.6 5.4

1.9 2.9

1.2

1.6

1.1

7960- 7966

5.2

2.8

1.7 3.6

5.8

3.7 -0.5

3.6 3.8

3.4

4.8

5.7

5.1

3.9

3.7 3.8

2.6

1.7

7966- 7969

3.4

1.1 -0.9

1.7

6.7

1.8 -3.0

2.7 2.2

3.4 2.2

4.6

4.4

2.1 3.0

1.0 -0.4

0.4

7969- 7972 P

3.0

1.9 -0.5

2.8

1.9 0.6

0.6

2.4

1.4 3.8

3.7 5728

2.4 3.2 2.20

0

a = Sub-penods are measured tietween successive business cycle peaks. 1948- 1969 The linal sub peiod 1969-1972 ends wilh ttie last year lor which data are available as ol May 1973. Given the strong expanscn thuslar tn 1973. 1 1 seems clear thai 1972 was nol a fxjak year p

" preliminary

Source; John Vi/. Kendrick. Postwar ProducOvitY Trends in the United Stales (New York. National Bureau olEconomk; Research. 1 973); eslimalesenlondedlrom 1969 through 1972by ihe author.

The Conference Board RECORD JUL Y 1<)73

75

"PRODUCTIVITY DEVELOPMENTS IN THE SERVICE INDUSTRIES,

PUBLIC AND PRIVATE"

John M. Stewart

John M. Stewart was (at the time of the conference) Executive Director of the

National Commission on Productivity. Mr. Stewart specialized in the management

problems of technically-intensive businesses. His focus has been productivity improvement,

production analysis, international marketing and long-range planning. Mr. Stewart spoke

of the viewpoint on productivity as seen by the Commission and some of the difficulties

and problems. He recounted the results of a poll on productivity among managers and

employees, wherein many of the popular misconceptions were repeated, e.g., jobs are harder and unemployment higher when productivity goes up. A study has been made trying

to put measures on productivity in the Federal government which, Mr. Stewart believes,

can be improved.

77

PRODUCTIVITY DEVELOPMENTS IN THE SERVICE INDUSTRIES,

PUBLIC AND PRIVATE"

John M. Stewart

I would like to add to your discussions by conveying the viewpoint on productivity as seen by the Commission and some of the difficulties and problems. We don't have very

many answers to the problems —we are searching for some and I will try to describe some

of the paradoxes about productivity that Alan (McAdams) mentioned earlier this morning.

One of the first things we could do is start by examining industries. Probably a number

of you have seen these figures before. Defining what the service industry is and what

it is not is an enormous problem, but essentially there is a very pronounced shift from

manufacturing employment to service employment. The farm industry is down to about

5 percent of the working population and is getting smaller (Figure 1).

Manufacturing is about 22 percent or so of total employment. Generally speaking,

we regard the red shaded area (on the slide) as representing services in the private

economy and they constitute about 63 percent of employment (Figure 2).

I will talk about government, which is an enormous service sector.

I would like to describe how we spent our productivity gains over the last few

centuries and how we are spending them now. If we look at the U.S. in comparison to some

of the other trading nations (and John Kendrick mentioned this),we spend our productivity

gains in two ways. One is leisure--either in terms of shorter work weeks or a smaller

percentage of the population working--and the second is goods and services. If we look

at the U.S. vs. other countries we see that the U.S. has a higher GNP per capita than

Germany, France, Japan, and the U.K. (Figure 3). The U.S. also has the shortest work

week and the labor force in the U.S. is a smaller percentage of the total population

than in any other country. So in absolute terms, we are in pretty good shape. Part

of the reasons for the Commission's existence is the slowdown in our productivity growth

rate and the greater awareness by the public of the disparity between the Japanese rates

of growth and our own. While we have been growing at about 3 percent, Japan has been

growing at about 14 or 15 percent for the past several years and the members of the

European economic community have been growing in the range of 5 to 8 percent. That has

created some concern that the relative differential will mean a lower relative standing

for the U.S.

There are some common misconceptions about productivity. If you are going to talk

technology and hardware, it is very important to also understand software and the sociology

of the subject. In the studies that we have done, motivations and incentives are critical

to the application of technology, and I would hope that this week you would spend some time on these subjects. Three common misconceptions are: higher productivity is the

American way ; labor is against and management is for productivity, and productivity in

services is hopeless . These are statements that have been made fairly frequently to us over the last year.

In a Harris poll concerning productivity, we examined how managers and employees

view the subject.

The question was "Does increased productivity mean that people have to work harder?"

60 percent of the people believe affirmatively; 30 percent don't believe it is so; and

10 percent aren't sure. If you follow that question with "Is your job harder?" You

get exactly the opposite reaction: "No, my job is easier than my grandfather's."

For building streets, driving a Caterpillar tractor is easier than digging a ditch and

shoveling. As you interview individuals about what has happened to their jobs, they would

point out that their jobs have gotten easier, but they are absolutely convinced that by

and large higher productivity means that one works harder--thanks to Charlie Chaplin

and "Modern Times."

79
The Shift in United States Employment

From Goods to Services Will Continue

1970 1980

flANUFACTURING 28% 23%

UJIN 1 KAL 1 UJNo 1 KUL 1 lUlN cD

M T M T Mr 1

J. 11

A^D T PI II Tl IDC nbK 1 LUL 1 UKh D

7

J

C| IDTOTAI DJ/o

1 •:

,

ViHOLESALE & RETAIL TrADE 20% in

Government .. . 16 17

Services " --v- ;;i : 19

Finance. Insurance. Real Estate 5 5

Transportation 6 5

Subtotal ' - " ' ' 61% 67%

. > TOTAL 100% 100%

U.S. Employment by Sector 1970-1980

Figure 1

80
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COD. > 23

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82
Does an increase in productivity mean higher unemployment? About

50 percent of the people believe that, in fact, higher productivity does

mean higher u nemp 1 oymien t (Figure 4). In an industry with no additional

demand, and an increase in productivity, employment does go down; but, some of the industries with high rates of productivity still grow in

employment because of rapidly increasing demand.

Who benefits a lot from productivity? This, perhaps, gets to some of

the difficulty that many of us have in incorporating new techniques.

Seventy percent of the people agree uniformly that stockholders benefit

quite nicely as productivity goes up (Figure 5). There is less certainty

that the country, as a whole, benef i ts--and roughly 80 percent of the

people, be they manager or union member, believe that employees do not

benefit as productivity grows, even though the growth in real wages has

paralleled productivity growth for many years, and even though increased

productivity has resulted in the shorter work week, a lower percentage of

the population working, and a higher real GNP.

We asked also who has above average productivity and who has below

average productivity. As you can see (Figure 6), foreign manufacturers,

particularly Japanese manufacturers, are perceived to have very high

productivity, as do doctors and nurses. Company management and TV repairmen

are seen to have approximately the same level of productivity. I'm never

sure which conclusion to draw from that! I'm sad to report that government

workers are seen to have the lowest productivity of all. We will talk a little bit about that in a minute.

In management there is a strong feeling that labor is against and

management is f o

r

productivity. In fact, as one looks at the scatter

diagram, one sees that there is very little pattern among union and

non-union industries.

Many people believe that improving productivity in services is

hopeless. But during the past two years an OMB/GAO/CSC study started by

Senator Proxmire, as Head of the JEC (Joint Economic Committee) has been

trying to put measures on productivity in the Federal government. There

are obvious problems in doing this. For example, should one give credit

to the Defense Department for getting us into wars or out of wars; should

one give credit to the Federal Reserve for expanding or contracting the

money supply? At the present time, there are some 600 measures--some crude,

some refined--on more than 100 operating units of the Federal government.

These measures over the past 5 years show roughly a 2 percent gain.

Productivity in government can be improved!

Incentives and motivations are important. Productivity within the

Federal government has a relatively low priority. It is more important for

a Secretary (whose average tenure is 22 months) to work on policy issues.

This means that time after time the internal efficiency of the department

takes low priority. There seems also to be relatively little interest in

identifying the effect of the government productivity in the private sector.

Ten months ago, four elected officials and four labor officials came

to our office. They explained that additional revenues would not be

forthcoming from the real estate base in this country. The tax rate was

as high as it could be and therefore revenues would probably only grow at

1 percent per year. This is an impossible situation for an elected

official because the expectations by the taxpayer were running at higher

than 1 percent per year. At the same time, the unions could not settle for

a 1 percent pay raise per year. Both had concluded that some form of

productivity bargaining made sense and are so engaged. They are working to

move people around to give them opportunities through retraining.

83
84
85
86
Although there is not precise information on the variation of

productivity among cities, there are wide variations in garbage collection.

As you notice, there is almost a five-fold difference in the twice-a-week

collection on a per man basis (Figure 7). The two-city variation, 30 miles

apart, shows a 3-to-l difference. The lower city has not developed labor

and management relations to the point where introduction of new techniques

and new equipment is easy. One can see also that once- and twice-a-week

collection make quite a difference. But, these data are not routinely

available in public works departments.

There is also a variation among police departments. The Urban

Institute has summarized for us the general quality of the data and the

problems that exist in gathering better data.

Health costs have risen about 13 percent per year. Last year a survey

indicated that only half the hospitals had budgets, and there is evidence

that in hospitals 2 miles apart the cost of doing simple tests, such as blood tests, varies by 100%.

We have been looking at transportation for the food industry. The

problem, as many of you know, is that for the past 20 years transit time

across the country has nearly doubled. Rates have gone up by 50 percent

and spoilage has gone up sharply. This means that food is of lower quality

as it reaches the East coast. We are encouraged by a joint project among

labor unions, railroads, growers and food chains to try establishing a unit train coast-to-coast to improve transport, service. It appears to us from our work with farmers, food processors, railroads and food chains that

much of the gain will come from the inter-sector differences rather than

the intra-sector differences as they have in the past.

I will commend to you the restaurant industry if you are interested

in service. This is an industry with 21/2 million people. In New York

a survey indicates a turnover rate of 300 percent. There is a wide

disparity of technology appl ied--f rom Marriott, which has a very well

organized effort, down to local diners which do not. Restaurants are a good example of a disaggregated industry with low technology. Very low

skill levels are a problem that this group could face. What technology

can be applied economically to this industry?

Let me summarize by saying that (1) the environment is neutralto-unfriendly concerning productivity, (2) there is a considerable

misconception about who wins and who loses, (3) there is a clear shift

towards services where we are much less certain about how to keep

product i V i ty . improvi ng and (4) there is a poor development of productivity

measures and poor coordination among hard sciences and soft sciences.

Something that would be quite useful would be the answers to the following

questions:

1. How can the knowledge we have concerning service productivity

be applied more widely now?

2. How can we avoid the slow learning process in disaggregated

industries in the future?

3. How can the process be speeded by combining the hard sciences

and the soft sciences in the large and growing service sector

of the economy?

And finally, technically, one of the questions I hope you address

this week is "How can those of you who understand technology, better

inform the decision makers in corporations, the government and unions to use technology in improving productivity?"

87
88
NATIONAL COMMISSION ON PRODUCTIVITY MEMBERS

BUSINESS LABOR (CONT'D)

Stephen D. Bechtel , Jr.

President

Bechtel Corp.

Berkel ey Burrel

1

Pres i dent

National Business League

Edward W. Carter

Chairman of the Board

Broadway-Hale Stores

Archie K. Davis

President

Chamber of Commerce of U

M. Peter Venema

Chairman of the Board

Universal Oil Products Co

R. Heath Larry

Vice Chairman of the Board

United States Steel Corp.

James M. Roche

Member of the Board

General Motors Corp.

Walter B. Wriston

Cha i rman First National City Bank

LABOR

Lane Kirkland

Secretary -Treasurer

American Federation of Labor

Congress of Industrial

Organizations

and

John H. Lyons

President

International Association of Bridge,

Structural and Ornamental Iron

Workers

George Meany

President

American Federation of Labor

Congress of Industrial

Organ i zati ons

and

Leonard Woodcock

President

International Union, United

Automobile, Aerospace and

Agricultural Implement Workers

of America

PUBLIC

Honorable Beverly Br i ley

Mayor of Nashville/Davidson County

William T. Coleman, Jr.

Dilworth, Paxson, Kalish, Levy

and Coleman

I.W. Abel

Pre si dent

United Steelworkers of America

Wi 1 1 iam Kuhfuss

Pres i dent

American Farm Bureau

C . L . Dennis

Pres i dent

Railway, Airline and Steamship

Clerks, Freight Handlers, Express

Station Employees

Frank Fitzsimmons

President

International Brotherhood of

Teamsters

Paul Hall

Pres i dent

Seafarers' International

Union of North America

Edward H. Levi

President

University of Chicago

Arjay Miller

Dean

Graduate School of Business

Stanford University

Honorable Arch Moore

Governor of West Virginia

John Scott

Master of the National Grange

89
NATIONAL COMMISSION ON PRODUCTIVITY MEMBERS (CONT'D)

PUBLIC (CONT'D)

W. All en Wal 1 i s Chancel lor

University of Rochester

GOVERNMENT

Roy Ash

Director

Office of Management and Budget

Peter J. Brennan

Secretary of Labor . Frederick Dent

Secretary of Commerce

John T . Dunl op

Director of Cost of Living Council

and Chairman of the National Commission

on Productivity

Virginia Knauer

Special Assistant to the President for

Consumer Affairs

George P. Schultz

Secretary of the Treasury

Herbert Stein

Cha i rman Council of Economic Advisors

John M. Stewart

Executive Director

National Commission on Productivity

August 13, 1973

90
SUMMARY OF FCST FINDINGS

Lawrence Goldmuntz

Dr. Goldmuntz is Director of OPTEL Corporation in Princeton, New Jersey. He was formerly on the staff of the Office of Science and Technology, Executive Office of the

President, and while there served as Executive Director of the Federal Council on Science

and Technology's Task Force on Automation in the Service Sector. Representing that

capacity, he summarized the results of the work of the Task Force, and its panels on Health Care, State and Local Governments, Education, Postal Service, and Transportation.

The common factors among their conclusions, as described by Dr. Goldmuntz, fell under

general findings, opportunities for automation, factors which inhibit the diffusion of

automation in service areas, and recommendations.

91

SUMMARY OF FCST STUDY FINDINGS"

Lawrence Goldmuntz

Panels of the Task Force on Automation in the Service Sector investigated Health

Care, Government, Education, the Postal Service, and Transportation. Each panel arrived

at its conclusions independently, considering only factors pertinent to its own area of

responsibility. Nevertheless, these independent efforts resulted in a remarkable degree

of commonality among the conclusions. A meaningful pattern of common factors follows:

I. GENERAL FINDINGS

Automation and Productivity: The diffusion of automation throughout the service

sector is not an end in itself. Rather it is only desirable insofar as it contributes

to the net basket of goods and services enjoyed by Americans. The preponderance of

evidence indicates that automation can and does make such a contribution through

increasing the productivity of goods-producing or service-rendering organizations.

II. OPPORTUNITIES FOR AUTOMATION

The speed, efficiency, and accuracy inherent in automation devices make possible a wide range of potential improvements in the delivery of service. The opportunities

for automation to contribute can be found in most stable and routine aspects of each

service sector.

1. Automated Record Storage: The need for storage of large volumes of information

is a common feature of each service sector examined.

2. Automated Processing of Information: In addition to record keeping,

opportunities exist for automation to improve the handling of information

within a service organization.

3. Automation as a Tool of Management: Automation can also provide service

managers with powerful analytical tools for running their organizations.

4. Automated Real-Time Services: The effectiveness of real-time emergency services

such as police and fire protection or ambulance service can be enhanced through

automated control systems. Opportunities for automation also can be found in

routine real-time services.

III. FACTORS WHICH INHIBIT THE DIFFUSION OF AUTOMATION IN SERVICE AREAS

The factors which enable or discourage the application of automation technology

are best described as patterns of conditions rather than in terms of single important

variables. These patterns of conditions include:

1. Productivity Measurement. The ability to measure productivity is the sine

qua non for improving it. Yet no entirely adequate means of measuring productivity exist in three of the five areas examined: health care, government

and education,

2. Clarity of Goals. Clear and unambiguous objectives of the service organization

are critical to the improvement of productivity whether by automation or by any

other means. Where goals remain diffuse or contradictory, automation can do

little to assist in bettering the quality or efficiency of the service.

93
RECOMMENDATIONS

Recommendations concerning the introduction and diffusion of automation in the

service sector must be made within the context of productivity improvement throughout

the total economy. Two factors demand this more universal approach. First,

automation is best employed in consonance with other means of productivity enhancement

rather than in isolation. Automation should be viewed as a means to an end, greater

productivity, and not as a goal in its own right. Second, the distinction between

service and manufacturing activities tends to be rather arbitrary.

94
"DO WE KNOW WHAT TO EXPECT FROM RELAXATION

OF REGULATION OF SURFACE TRANSPORTATION"

Alan K. McAdams

Dr. McAdams is an Associate Professor of Managerial Economics and Finance at the

Graduate School of Business and Public Administration, Cornell University. He reviewed

the reasons why the question is posed, why the regulation of surface freight transportation might be relaxed. According to Dr. McAdams, regulation prohibits comDetition and

thus prevents efficiency. He recommends learning from tests of relaxed regulation of

surface freight transport in environments similar to those in the U.S., e.g.. Great

Britain, Canada, Australia, and small scale experience in the U.S. itself. According

to Dr. McAdams, the evidence supports the theory that an improvement in the allocation

of resources should result from the relaxation of regulation.

95

DO WE KNOW WHAT TO EXPECT FROM RELAXATION

OF REGULATION OF SURFACE TRANSPORTATION"

Alan K. McAdams

This talk is directed at the question "Do we require further study in order to

determine the probable impact of possible relaxation of regulation of surface freight

transportation?" Before addressing that question directly, though, it may be helpful to review reasons why that question is at issue. Why might we want to relax the regulation

of surface freight transportation by the Interstate Commerce Commission (ICC)?

WHY RELAX REGULATION?

Research in the recent past has documented the degree of waste that has resulted in

surface freight transportation, and its proximate causes. Today's bill for the pure

economic waste in surface freight transportation is estimated at $4-9 billion annually.

The main cause of this waste is (un-) economic regulation of the industry which prohibits

competition and thus prevents efficiency. How has this come about when the stated

objective of regulation is the protection of consumers, small towns, and small businesses

from the power of monopolists to exploit them and discriminate against them?

The answer is that if monopoly power ever existed in freight transportation (and there

are disputes on this issue), it was a phenomenon of the railroads in the second half of

the 1800' s and early 1900' s, but is nonexistent in freight transportation today-- except

as a direct result of ICC regulation. Surface freight transportation is inherently

competitive today. Instead of allowing competition, the ICC has enforced price fixing--

price fixing has been based on the "value of the service" provided (and thus is highly

discriminatory) rather than on the cost of providing the service (which many railroads

haven't bothered to try to even find out)--plus a host of other practices that have

prevented each mode of transport from competing with the others.

Railroads move over fixed roadbeds from particular terminals in one location to

terminals in another. Efficiency comes with long-haul shipment of reasonably large

quantities. Terminals, interchanges, and switching raise rail costs. Costs soar at sidings and in yards when individual boxcars are picked up, delivered or assembled into

extra-long trains. That's rail technology.

Rail rates which might allow the roads to take advantage of their natural

efficiencies are refused by the ICC. "They would have negative impacts on truckers

serving those routes," i.e., rates are based on the costs of the high-cost producers.

Truck technology is an entirely different matter. There are few if any economies

of scale. The truck is the ideal vehicle for short distance shipment. Highways are ubiquitous. The internal combustion engine could assure small, out-of-the-way localities

of low-cost service at reasonable rates--if trucks were free to serve them competitively.

Trucks were brought under regulation in the 1930' s not to control monopoly--there

are no economies of scale or other bases for monopoly inherent in trucking--but to control

the competition they were providing to the railroads. To put trucks on an "equal footing"

with railroads, the ICC required them also to operate only over fixed routes, between

specified, fixed termini, through particular "gateways" (e.g., in moving from North

Carolina to Boston you must proceed only through the "Pittsburgh gateway"), frequently

only to carry particular commodities (". . . only tacos, and tacos only between your

termini."). A "grandfather clause" allowed truckers in operation on particular routes

in the 1930' s to serve those routes, but only those routes. All other potential

competitors (or potential competitors for other routes) must petition for a certificate

of "public convenience and necessity," grantable only by the ICC and only after much

expense and delay and with high probability of refusal. They are not allowed to change

their routings, to pick up and deliver at other than the specified points or otherwise

97
respond to changes that have occurred since the 1930' s. Entry restrictions are combined

with legalized price fixing, prescribed accounting and costing procedures to reinforce

the other absurdities of truck regulation.

In short, the ICC has forced the disadvantages that accrue inherently to railroads on

to regulated trucks. To these it has added all those disadvantages it had been able to

devise in four decades of regulation of railroads. Trucks are required to traverse

inefficient routes with diversions of up to 30%, to proceed partially unloaded and in

many cases to return empty. Trucks carry long-haul loads which are more economically

carried by train, while trains are required to continue to service uneconomic short-haul

routes.

To avoid the high costs of regulated trucking many large shippers have gone to

unregulated private trucking, although private trucking almost necessarily involves

empty backhauls. The flow is from factory to warehouse, warehouse to store, and the ICC

prohibits private trucks to carry cargoes for anyone but the single firm. This virtually

assures excess capacity and inefficient use of private trucks. Small operators, on the

other hand, are stuck with the higher cost of regulated common carrier transport--which

become higher-cost-still since its most lucrative traffic has been forced into private

haulage.

All this has been thoroughly documented, most recently by Professor Thomas Moore of

Michigan State University in a summary analysis of the earlier studies. These same studies were tested last year by the research department of the American Trucking

Association which challenged many of the findings. The record of the challenge and the

responses to it is found in the Hearings of the House and Senate Committees on Regulatory

Reform in the Spring of 1972 (especially the House Committee). These Hearings show that

the major conclusions remain intact.

Perhaps the most insidious result of regulation has been the stifling of initiative,

innovation and action through delay and bureaucratic entanglement. The manager's ability

and desire to manage has been destroyed, especially in railroads. The phenomenon is

called by Wilson the "Dead Hand of Regulation" and by Meyer the "Regulatory Syndrome."

Managers abandon the substance of what should be their jobs to become ensnarled in

legalistic wranglings and procedural minutia. Top positions in management go by default

to those who by temperament and training are best suited to such trivia —generally

accountants and lawyers rather than operating managers.

The lack of innovation can be seen in particular instances: The braking system

in railroading is essentially the same today as when it was introduced in the 1800'

s

(the Westinghouse air brake). It causes damage to cars and cargo each time a mainline

train is brought to a stop (it could better be termed a "breaking" system). The

coupling mechanism is of similar vintage and even in its "automatic" form is very labor

intensive today, particularly to hook up the air hoses for the "breaking" system.

The technology of the boxcar is antiquated.

By contrast containerization for shipment of general cargo is well advanced in

Canada and in ocean shipping even in the U.S. But containerized shipments were forbidden

by the ICC for U.S. railroads in the 1930's.

The effects of regulation have been documented, but do we know what the impact of

relaxing regulation would be?

What Can Be Expected?

Let's review the information available on the impact of relaxation of regulation and

especially the significance of the experience with relaxation of regulation in other

economies such as those in Australia, Canada and the UK.

One way to go at this problem is to set out an idealized approach to the development

of information on the topic. The next step would be to compare the amount of information

98
currently available with that which could be gathered through the ideal informationgathering approach. This is done below. My conclusion is that the information in hand

is close to what one could expect from an ideal data-gathering and testing effort. At

each step the evidence points consistently in one direction.

An Ideal Process

The first step in the process of analysis is to state what it is we want to test.

We want to test the following proposition:

Relaxation of regulation of surface freight transportation in the U.S.

would lead to profitable, stable carriers capable of meeting growing

demands for service; efficient operations (with each carrier handling

traffic in accord with its own comparative advantage); prices related

to the costs of providing service; good service to all shippers and to consumers; and competitive wage rates for workers in the industry.

The proposition is based on theory and analysis: economic analysts today conclude

that transportation is not (or is no longer) a monopoly activity; there are few, if any,

economies of scale. We have just documented the hypothesis that competition is currently

inhibited by regulation which results in cartel-like inefficiencies. The implication

is that through relaxation of regulation, competitive results might be achieved. The

conditions required for competition appear to be met: there are a great number of

existing and potential competitors, especially in trucking. Railroads compete with other

forms of transportation in most parts of the country. Most railroads appear to have

achieved whatever scale economies are required for efficient operation (though coastto-coast rail lines could prove to be very desirable). In the absence of regulation,

there appear to be few, if any, natural barriers to entry into the transportation industry

(except for new railroads). One might expect highly competitive, efficient results from

relaxation of regulation.

In summary, if the current market has been rendered inefficient through regulation,

then one would expect an improvement in the allocation of resources through the removal

of regulation.

The next step is to test it.

How?

The only fully valid test of this proposition would be to try it and see. That may

not be too practical as a first step.

A next best approach would be to make a series of small scale tests in other

environments as closely similar to ours as possible and then run a full scale test in

the environment most similar to our own. If results are encouraging, they might justify

small scale tests in the U.S. If these are all encouraging, then the full scale U.S.

test could be justified.

Each of these steps has been taken.

What's a Good Test?

It's important to note that a good test only requires relaxation of regulation

of surface freight transport in physical and economic circumstances similar to those

in the U.S. (a large, diverse, advanced. Western, private enterprise economy).

Conditions prior to deregulation do not have to be identical to those in the U.S., if

enough time has elapsed to allow adjustment to relaxation of regulation to have taken

place.

99
What Data Do We Want?

If possible, tests should be carried out with two kinds of data. First, data should

be gathered from a situation in which a change is made from the existing conditions to the test conditions and then observations made in succeeding time periods to see what

results occur (time series data). In other words: Relax regulations and see what happens.

This was done in Australia.

Second, data should be gathered and compared from different sectors (of the same economy, for example), some in which test conditions hold, and some in which nontest

conditions hold (cross-sectional data). In other words: Relax regulation in some states

(or provinces) and don't in others .

This was done in Canada.

Might Other Factors Be Important?

The speed with which change is imposed may be significant. Information from

different situations and different rates of change-over could be useful.

Australia deregulated trucking fully and quickly; Great Britain relaxed

regulation of trucking partially and slowly.

Perhaps the Best Test of All

If the conditions stated in our proposition represent significant change from the

situation as it currently exists, another opportunity for a real-world test of the

proposition is provided. Groups that would be advantaged from a change to the test

conditions should support the change. Groups that would be disadvantaged from the

change should oppose it. The degree of support and opposition should be proportional

to the degree of change that would be expected under the new conditions.

We are experiencing this test.

The final step is to evaluate the test data to see the degree to which they support

going ahead with the full scale test.

Substance of Information in Hand :

Our proposition states what we should expect from a deregulated transportation

industry under today's conditions. What has been the result of the various tests made

so far and what data are available?

Great Britain . Great Britain has gradually relaxed the regulation of its trucking

industry. Each change has been small, but most important, each has been followed by

additional relaxation of restrictions. These additional steps would not have been taken

if earlier steps produced undesirable results. Full deregulation has now been achieved.

Lower costs, lower rates and better service have resulted from each small step taken.

There has been no attempt to reimpose regulation. No "chaos" has resulted at any stage.

It should be noted that as economic regulation (costs, rates, routes, entry, etc.) has

been relaxed safety regulation has been strictly enforced. This makes good sense, but

the two should not be confused.

Canada . Canada supplies the best cross-sectional data. Regulation has been on a provincial basis. The outcome has been directly in accord with our proposition. Provinces

in which regulation has been most strict have had higher rates for trucking and less

efficient operations. Essentially unregulated provinces have experienced" lower rates,

greater efficiency and at least as good service. Especially important to note is that

100
"chaos" has not resulted in the unregulated provinces.

Austral ia . Australia represents a full scale test of deregulation of trucking. It is

important also because of the impact that deregulated trucking has had on the railroads

which have remained under the ownership of the individual provinces. (The high degree

of rail regulation which led to early negative results in Australia is a further substantiation of the converse of our proposition.) Full deregulation of trucking occurred

suddenly as a result of a court ruling. The impact has been dramatic.

The trucking industry of Australia has improved enormously since deregulation. Today,

and for the last two decades, the industry has been stable with several major truck lines

providing regular scheduled service between provincial capitals at something of a premium

in rates. Medium-sized lines compete with these larger lines, provide service among

medium-sized cities, and provide private trucking services to groups of particular shippers

at rates below those of their larger brethren. As potential entrants into the scheduled

portion of the market, they provide a constant check on the rates chargeable by the larger

firms. Small truckers, mainly owner-operators, provide the competitive cutting edge of the

Australian industry. They provide capacity to particular markets at demand peaks, move

around the country from excess to deficit service areas, and perhaps most important,

contract themselves to the large truckers. This latter point is perhaps the most

convincing on the economies of scale question. The large truck lines own only a nucleus

of trucks. The bulk of their capacity is provided through subcontracts to small truckers

and owner-operators--both of whom may use the name and colors of the parent line. If

there were real economies of scale, the large lines would not subcontract. The lack of a well developed highway network and the continuation of tight regulation of railroads did mean that a period of some turmoil resulted immediately after the court ruling, but the

situation stabilized after a year or two.

Three levels of service have grown up, each consistent with the characteristics of

demand in their respective markets. These levels, and the freight rates on trucking, have

been quite stable. The large truck lines provide scheduled service at a premium in rates

as common carriers. Medium-sized lines provide the equivalent of private carriage, peak

service over the major routes and some service over particular routes among noncapital

cities. The small truckers may, by special knowledge of particular areas or routes,

be able to achieve some limited geographic monopoly for a given rural area. However, even

here entry is free, so there is the constant threat of potential competition which keeps

rates reasonably low. Students of the impact of deregulation state that cost reductions

have been substantial. Trucking is a stable and profitable industry. Wages are

competitive. Entry and exit are free. Service is good. Shippers have a choice between

fixed schedules (with higher rates) and less regular service (with lower rates).

Chaos has not resulted. Our proposition has.

And Here's the Clincher !

In Australia, competition in trucking has had substantial and beneficial impact on the regulated railroads. Before deregulation of trucking the gauges of the railroads

owned by different provinces did not match! After deregulation of trucking they did.

"Value of shipment" pricing was abandoned by Australian railroads; competitive pricing

and efficient service were introduced. This suggests the power of competition in surface

freight. Perhaps it also suggests the likely direction of competitive impact. Freedom

in trucking can force the hand of even strongly cartel-minded railroads. It appears

likely that full deregulation of the Australian railroads could make their performance

better still

.

Canada has relaxed regulation of its railroads with dramatic results. Freedom of

the railroad managers to manage, plus full intermodal operation by a single carrier, has

led to "wholesale" carriage by rail, "retail" by truck and substantial containerization

of general cargo to facilitate the interchange. Improved planning, coordination and

efficiency have resulted in Canadian railroads.

101
U.S.A. U.S. experience with deregulation has not been widespread, but as further pieces

to the jigsaw, helps build the case. If foreign experience were not appropriate to the

U.S. we might expect those instances in which deregulation has been tried in the U.S. to

produce results different from other countries.

Trucking of unprocessed agricultural commodities in the U.S. is exempt from regulation.

Borderline areas have been regulated, exempted, re-regulated and re-exempted. When frozen

chickens and frozen fruits and vegetables were deregulated, rates fell and service improved.

When they were "re-regulated," rates rose and service declined. Shortly after being

exempted, truckers in these segments of the market found themselves able to drop their

rates from 10 to 30 percent--and provide better service than they had under regulation.

Stable patterns of business resulted.

In exempt trucking as a whole, entry is free and exit is free. Efficient operators

are profitable. This has been true despite the actions of regulators which prevent such

truckers from finding backhauls of nonagricul tural products.

Cross-sectional data in the U.S. is supplied also by PSA (though for air passengers,

not freight) and other California airlines; lower rates with better service results from

unregulated air fares. Again not conclusive in themselves, these results tend to support our proposition, and do not negate it.

Nothing in the data presented thus far contradicts the proposition stated at the

outset. Thus the stage is set for planning a full scale U.S. test.

We are all familiar with the provisions of the Transportation Regulatory

Modernization Act proposed by the administration in 1971 and 1972. They represented a moderate approach to relaxation of regulation. If regulation does what analysts say it

does, and if relaxation of regulation would move toward our proposition, we could expect:

1. Opposition, especially from the regulated truckers. Their monopoly power comes

from the cartel created by the ICC. Particular truck lines operate very

profitably and without the nuisance of price competition or threats of entry.

Removal of cartel regulations and permitting entry can threaten their monopoly

position.

And we got it.

2. Opposition from the Teamsters, who share (sometimes up to 100 percent) the

monopoly power of the truckers.

The Teamsters were also opposed.

3. Mixed feelings from railroads. They are not doing well now, recognize the need

for change, but have lived under a regulatory umbrella for decades. They would

have to take much greater responsibility for their own actions--while they could

become profitable and plan a very effective role in the future. On balance you

could expect their reaction to be mixed.

Railroad reactions were mixed, but privately at least some railroads were

favorable.

4. Negative reactions from some classes of shippers who are currently benefited

by railroad service which comes at a loss to the railroads. Some agricultural

groups and shippers located on little-used branch lines are in this category.

These groups did oppose the bill.

5. Other shippers, in general, should support the bill.

They did.

102
After looking the situation over, I've been impressed with the evidence which

(for this case, at least) supports the theory. It strikes me that it should almost

be saleable even to the Congress, and certainly to the public.

0

103
I

I
MINI-COMPUTER APPLICATIONS IN THE SERVICE INDUSTRIES"

Earl Sasser

Earl Sasser is an Associate Professor at the Harvard Business School. He

specializes and consults in the Management of Service Operations. His presentation

on mini -computer applications was designed around a case study of AVCON, Inc. (an

acronym for Automatic Vehicle Control). The two applications were an automated newspaper

delivery truck system and a hotel front and back office operations system. The

experiences of AVCON in trying to develop and market these systems were studied by the

conference participants and discussed for definition of the problems and recommendations

for further actions.

105

MEMORANDUM

To: Participants of the Conference on "Making Service Industries More

Productive through Computers and Automation"

From: W. Earl Sasser

Subject: Session IV, Tuesday Evening, August 14

This session, which explores mini-computer applications in two service industries,

is designed around the case study, "AVCON, Inc." The session will be split into two

parts. During the first part, small groups will meet to discuss the case; during the

second part, the entire conference will meet as a group for a discussion of the case. For some, the "case method" may be a new experience. Let me make some suggestions to help you get started.

1. Go through the case almost as fast as you can turn the pages, asking

yourself, "What broadly is the case about and what types of information am I being given to analyze?"

2. Read the case very carefully underlining key facts as you go. Then ask

yourself: "What are the basic problems this manager has to resolve?"

Try hard to put yourself in the position of the manager in the case. Develop a sense of involvement in his problems.

3. Note the key problems on scratch paper. Then go through the case again,

sorting out the relevant considerations for each problem area.

4. Develop a set of recommendations supported by analysis of case data.

Up until now, your best results will come if you have worked by yourself. The

next step is to meet with your discussion group, present your argvmients to the members of this group and hear theirs. The purpose of the discussion group is not to develop a consensus or a "group" position. It is to help each member to refine,

adjust and fill out his own thinking. It is not necessary, or even desirable that

you agree. It is an Important preparatory step for class discussion.

This case was developed by two of my students in the second-year MBA course. Management of Service Operations at Harvard Business School. The case was made

possible through the splendid cooperation of Mr. Halden Conner, President of AVCON,

Inc. while he was attending the Program for Management Development (PMD) at Harvard.

A great deal of credit must be given to the other employees of AVCON in Fort Worth

who supplied the student casewriters with additional information and exhibits, and

also to the Fort Worth Star-Telegram who worked closely with the casewriters. Mr.

Conner will be a participant of this conference and will serve as a resource during

our discussion and as a critic at the end of the session.

107
9-673-109

Harvard Business School

AVCON, INC.

Currently, the major goal in my life is to build a profitable, respected, and well-managed company. AVCON

will be that company. I am prepared to devote my time

and resources to that goal. My attendance at PMD this

spring signals the transition from my concern for our survival to my preparation for our success.

W. H. Conner, President

AVCON, Inc.

After stating his ambition, Mr. Conner described the short

history of AVCON. The story begins with Command Systems Corp., a small firm in Fort Worth, Texas, founded in 1969 to develop hardware

and software applications on mini computers. In the beginning, the

firm consisted of five technica] people who v/orked for the company

on a part-time basis doing contract development work. By 1971,

Command Systems had two major contracts. One was for $150,000 with

the Fort Worth Star-Telegram newspaper to develop an automated

paper delivery truck. The secona was a cost plus fixed tee contract

with Hotel Computers, Inc. (HCI), a small Fort Worth company which

hoped to develop and market a standard mini computer system for doing

front and back office operations for hotels and motels. HCI had a single contract with the Green Oaks Inn, a luxury motel in Fort Worth.

In 1971 management of Command Systems decided that in order to realize the potential inherent in the vehicle which they developed for

the Star Telegram, that they would need considerable marketing and management expertise as well as an inflow of capital. They approached Mr. Conner for help on all fronts. In January, 1972 AVCON, INC. was formed

and absorbed Command Systems. (AVCON is an acronym for Automatic Vehicle

Control.) Mr. Conner arranged for a $500,000 line of credit for AVCON.

In return he received 51% of the AVCON stock; 20% of AVCON was held by

the Star-Telegram and 29% by the principals of Command Systems. Bob

French, President of Command Systems, became the research director and

vice-president of AVCON.

The first three months of 1972 were spent in acquiring new personnel and developing a strategy for AVCON. Bob Rapp, an HBS graduate

and former director of marketing for a division of a pharmaceutical company, was hired as director of marketing and vice-president of AVCON.

The decision was made that AVCON was in the business to manufacture and

sell automatic vehicle control systems.

At this same time development v;ork continued on the HCI hotel

system for the Green Oaks Inn. Even though AVCON had decided that the

HCI project was outside of AVCON's primary area of interest. Bob French

This case was prepared as a basis for class discussion rather than to Illustrate either effective or ineffective handling of an administrative

situation.

Copyright 1973 by the President and Fellows of Harvard College

Rev. 7/73

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673-109

-2-

felt that the contract was a commitment Command Systems had made and

one which should be honored by AVCON. Mr. Conner agreed to complete

the work outlined in the contract, which was to install an operational

system in the Green Oaks Inn.

However, Mr. Conner was not pleased with the HCI projecf

because (1) it took resources in terms of personnel away from the

automatic vehicle development, thus detracting from AVCON' s primary

focus, and (2) when developed the hotel system would not belong to AVCON, but to HCI. "We're much less interested in a new venture unless we have the means of obtaining 51% of the firm" was Mr. Conner's philosophy. He felt "the company which controls the market dominates the one which controls the productive facilities or R&D. Marketeers make

the real money from an innovation, not R&D and production firms. As

a result we want AVCON to be able to gain the majority interest of

a firm before we get too involved."

In addition, the hotel project schedule had slipped because

of software development difficulties. Mr. Conner felt that this was

due in part to the development responsibility being split between HCI

and AVCON. Therefore, Mr. Conner was anxious to "get the project com- pleted as soon as possible" in order to fulfill the contract and devote

the full resources of AVCON to the sales and development of the automated vehicle.

The Automatic Route Control System

The automatic route control system evolved from an idea originally conceived by R.V. Holsinger, Fort Worth Star-Telegram Controller,

for correlating subscriber data with the position of a vehicle along a route in order to produce signals to throw newspapers at proper positions.

Command Systems Corporation formulated techniques and equipment configurations to implement Holsinger 's idea, and added the concept of con- trolling the actual driving of the route.

A simple method was invented which, in addition to maintaining an accurate measure of position along a route, provided a means of

automatically correcting position errors and of detecting deviations

from the specified route.

A development contract with The Star-Telegram was made through

Command Systems for producing a prototype system for the delivery of newspapers .

A special vehicle equipped with a paper folding machine was provided with the system. This unit was delivered to The Star-Telegram in

March, 1971 and Command cooperated with The Star-Telegram in designing

comprehensive operational tests. AVCON has a patent pending on the automatic route control system. The patent application was filed for the means developed for automatically maintaining a highly accurate measure

of vehicle location. Foreign patent possibilities will be evaluated and,

if feasible, filed.

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Physically, the system consisted of a standard truck, a position sensing device patented by AVCON, a mini computer with its

I/O devices, and miscellaneous control equipment. There was capacity

in the truck for several thousand newspapers (the exact number depending on the size of the edition). Large windows were installed on either side of the truck to enable two people to throw newspapers on both sides. Exhibit 1 is a picture of the vehicle.

A self-contained on-board computer directed the operation

of the vehicle over predetermined routes, and controlled activities

(such as the delivery or pickup of items) perforued along the route.

In effect, the sys'.em continuously determined the location coordinates

of the vehicle, compared these with the route coordinates, and then

issued audio, visual and/or printed instructions appropriate to the

location. All commands were issued within approximately ten feet of

the proper location. The system also detected route errors made by

the driver and prescribed corrective action. The roiites to be followed

and the actions to be taken were recorded on interchangeable magnetic

tape cartridges which may be updated daily, or as required, from a computerized central file. This system enabled a driver to operate

efficiently over a complicated route without reference to maps or lists

and without prior knowledge of the route.

It was felt that the automatic route control system was applicable to other industries which have operations carried out over predetermined routes. Examples include home delivery of consumer

products, distribution to retail outlets, laundry and dry cleaning

pickup and delivery, armored car service, parcel delivery service,

refuse collection, city bus systems, security patrol, and several

postal service and military functions.

• ' Several advantages of the system were outlined by Bob French:

In some applications, automatic route control may

effect large savings by reducing the number of vehicles

and drivers required to cover a given territory. Another

advantage is that drivers are fully interchangeable, because they can easily drive a new route with virtually

the same efficiency as an experienced driver. Time-consuming manual reporting can be eliminated, since the

system provides computer-ready data for accurate and

complete route accounting. Finally, automatic route control can help assure accurate and highly personalized customer service .

no
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Newspaper Distribution

Bob Rapp described in detail the system of newspaper distribution in the United States:

In the United States, urban newspapers have developed a unique distribution system. Everyone is familiar with the

figure of the paperboy as the final distributor of newspapers.

He is also the piimary seller of newspapers. In Fort Worth,

the Star Telegram sells only 20% of its copies through single

sales in newsstands. The newspaper delivery boy acts as an independent retailer, buying his papers below the newsstand

price from a distributor who in turn either is employed by

the newspaper company or is an independent contractor who

is a wholesale supplier to the newsboys.

Because of this system, newspapers do not maintain control over the distribution of their product. If one regards

newspaper publishing as a service and its product as timely

delivery of the news, this control becomes critical as no

one is interested in buying an old newspaper. The system

served well enough in the past partially because there was

a large supply of young boys who were willing to deliver

newspapers. Changing social and economic circumstances have

seriously eroded this supply and delivery is frequently done

by adults. With this change, several limitations of the system became apparent:

1) Young boys were willing to work for lower wages than

adults. This pressure for higher wages can and has resulted

in increased unionization amongst distribution and delivery

labor

.

2) Delivery and, in some cases, distributor personnel

are not newspaper employees and therefore the newspaper has

very little control over them with regard to quality of service.

In some cases distributors even want to charge different prices

for different delivery situations.

3) In general, newspaper publishers do not know who their

subscribers are. Some subscription additions and changes are handled centrally, but these are passed on to distributors and

newsboys. Newsboy-solicited subscriptions are not necessarily

known by the newspaper company at all.

4) Because of the above, and the perishable nature of the

product, the distributor/delivery system literally has a death

grip on the newspaper. A strike is extremely expensive, and

unlike a strike in the print plant, producing a newspaper is of no avail since there is no knowledge available on how management

could distribute it.

Ill
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The factors outlined by Rapp existed in 1968 in Ft. Worth.

They and the impending unionization of the Star Telegram distributors

motivated R.V. Holsinger to pursue his idea of developing an automated

delivery vehicle (ADV) . The initial tests of the delivery vehicle

developed by Command Systems were encouraging to the Star Telegraph and

full scale tests on several sample routes were conducted between October,

1971 and May, 1972. The tests were stopped one month prior to the re- newal of the union contract in June, 1972.

During the course of their tests several problems were identified and solved. Changes in mapping techniques and subscriber lists were made. The central support, provided by an IBM computer, presented

some difficulties, but these were overcome. At an operational level,

it was found that by rotating the throwers in the truck, that a rate

of 600 papers per hour per thrower could be maintained. Fatigue was

not a problem if the throwers switched sides periodically. Further

results were: a larger opening in the truck was required; a backhand

throwing motion with the hand corresponding with the side of the truck

was most effective; a 175-pound thrower was more effective than a 135-

pound thrower.

The tests revealed the basic operating characteristics of

the system. In a newspaper delivery district with 2,491 individual

family dwellings and 250 apartment units at a density of 120 feet

along the route per dwelling, the truck was able to average 13.7 mph,

passing 19 dwellings per minute and having a house appear to the

thrower on each side of the truck every 6.2 seconds. The truck com- pleted the 28.5 mile route in two hours and nine minutes.

Based on this and data from other tests, AVCON was able to estimate that 53 trucks were necessary to service The Star Telegram

circulation area. Exhibit 2 shows how this estimate was obtained and

a schedule for truck departures on the evening routes. AVCON felt that

the tests and their development of a delivery schedule proved technical

feasibility of automatic delivery vehicles.

The system could also be justified on a cost basis. Exhibit

3 shows the components of current distribution costs for The Star Telegram. Exhibit 4 shows the annual operating cost for one ADV, including

allocated central system costs. The purchase price of the truck was established at $45,000 ($5,000 for the truck, $40,000 for the electronics).

Using the above data. Exhibit 5 demonstrates that The Star-Telegram could

reduce its circulation costs per thousand from $49.00 to $38.53 the first

year the system is installed, and to $35.00 in the second year.

AVCON prepared a sales contract and presented it to The StarTelegram on June 2, 1972. AVCON proposed to sell The Star-Telegram ADV's

at the rate of five per month as long as the trucks could perform the

deliveries at the rate of thirteen newspapers per minute. The routes were to be chosen jointly by the parties. The Central Subscriber Data

System (CSDS) was priced at $120,000, but the payment schedule was tied

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to the delivery of ADV's at the rate of $6,000 per ADV. That Is,

the CSDS would be fully paid when twenty ADV's were bought by The

Star-Telegram. AVCON agreed to map each route for $1,500. AVCON

reserved all rights to improvement in equipment and/or procedure

which might be developed. Maintenance was to be provided by AVCON

for six months. All components of the system were to be covered

by a one-year warranty. The contract was conditional upon acceptance by the union (formed in June, 1971) representing the circulation

department.

The Star-Telegram turned down AVCON' s proposal just prior

to the renewal of the contract with the union representing the circulation department. An official of The Star-Telegram explained the

decision.

We were reluctant to jeopardize our negotiations with

the union. Our labor lawyer advised us not to allow AVCON

to talk with union officials. The union had learned of our development efforts and had expressed their disapproval.

We might have been willing to take a chance with the

union, but we were not convinced by the tests conducted by

AVCON. The economics and the performance measures presented

by AVCON appeared optimistic to us. For example, we were not

convinced that we could match their delivery schedule. What

happens if we were a little late getting to press? What about

maintenance? What happens if something goes wrong with the

central processor? This is a new technology. You can never

tell what might happen.

The Star-Telegram decision came as a surprise to AVCON

management. Mr^ Connor described his reaction at that time:

The decision caught me a little off-guard because it was

the first time that we had received any negative feedback on our product. We felt that they had been quite pleased with

our tests to date. If only I had had a chance to talk with the

union, things might have been different.

This decision forced (AVCON management) to sit down and

discuss our next step. We decided that we would look on AVCON

as a start-up and decide whether we would continue or not. We

re-examined the market and decided to stick with the strategy

of selling ADV's to newspapers.

As a result of the re-evaluation of the firm's strategy, an extensive marketing campaign was launched. In late October, 1972, Bob

Rapp described the marketing efforts to date:

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Efforts to get before publishers, presidents, and/or

general managers were not actively initiated until late

August 1972. In discussing our approach to the newspaper

market with several newspaper personnel, we were told to go to the upper management level initially, if at all possible before approaching the circulation department heads.

It is easier to work "down" from the publisher or general

manager level than to even get to that level after obtaining initiril exposure at the circulation level. We also

learned that AVCON, in the opinion of many circulation people

from coast-to-coast, presents a "threat" to their job security. Most of thtse people have their publishers con- vinced that papers would never get delivered without the

circulation director or manager. If AVCON places all this

vital circulation data on computer and then automates the

home delivery of the final product, how important is the

circulation director in terms of handling emergency situations and other day-to-day problems?

Since late June, 1972, we have had four accounts we have considered "hot"—to the point of a "go,"

"no go" decision. These are the Atlanta Constitution , Donrey Media Group, Miami Herald , and the Sacramento Union,

The Oakland Tribune was very interested and planned to come

to^ Fort Worth until they experienced a major "shake-up" in

circulation (CD and 14 staff members were abruptly dismissed).

Two of these four (Atlanta and Sacramento) accepted the eco- nomic and operational feasibility of our proposal for implementation of AVCON's distribution system, but declined any

commitment to order until after January 1, 1973 due to major

changes being made within their plants which necessitates

their full attention at this time. Exhibi't 6 is the proposal

submitted to the Atlanta newspaper in August.

For a product with worldwide marketing applications, our

total number of sales calls actually made to the newspapers

to date totals twenty-seven. (See Exhibit 7.) This might indicate that we have only "scratched" the surface of the newspaper distribution market. All of our initial contacts with

prospective customers were at the circulation department level

with very few exceptions. For the first two months of marketing

effort, .we made only three calls with noncirculation people.

Our first direct contact to the upper management level of the

Industry came in August, 1972 with the mailing of a general

letter with literature to publishers of papers ranging in circulation size from 50,000 to 250,000 daily.

114
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One of our earliest assumptions concerning the newspaper

market for AVCON was to not concentrate our marketing activities in the northeast quadrant of the coi.ntry, primarily due

to constant objections relative to the inclimate weather,

ghettos, high density of "high rise" complexes, etc. In doing

so, we may have excluded our prime market for s part of the

newspaper distribution system—the Central Subscriber Data

System, exclusive of ADV's. This approach, the marketing of

segments of the system as well as the total system, was not

actively employed for several months following the ICMA con- vention .

In October there was growing realization on AVCON's part that,

while the long-run potential of the system still looked favorable, the

ADV system was not going to be a revenue generator in the near future.

In assessing their efforts to date, AVCON management felt there were several reasons why the automated vehicle was not an immediate success.

First, the concept of controlling and routing vehicles by on- board computers was a brand new one. ADV was at the leading edge of technology. People really needed to be shown that the concept and the product were viable. Second, an automatic delivery system for newspapers implied

a large and fundamental structural change for the newspapers. Management

and labor problems, while not insurmountable, in the long run could not

be solved overnight. Third, much of the initial development money had

been provided by The Star-Telegram, yet it had not implemented the system.

The first question other newspapers asked was, "Why should we bet on a system that has been refused by the company that helped to develop it?"

Because of this, AVCON began looking in other areas to aee what potential

there was for their product in other industries.

In October, 1972 the management of AVCON realized that even

if other distribution markets were tapped, the length of time necessary

to "learn the business" in the industry and to make contacts was going

to be longer than AVCON could survive without having some positive cash

flow from operations or some additional outside financing. The management of AVCON felt that a three-year "gestation" period would be needed

for the development of the ADV market. Mr. Connor and the rest of management of AVCON still strongly believed in the viability of the product

and felt that the potential market for it was very large.

Hotel Computers, Inc. (HCI)

HCI was formed in early 19 71 by Tony Green, son of the owner

of the Green Oaks Inn, a luxury 300-room motel in Ft. Worth. He had

spent his summers working in the motel and had a thorough knowledge of

the operations. While attending Texas Christian University he had met

Alex Hoffman, head of the computer sciences department. In discussions

with Professor Hoffman, he became convinced that reservation management

and back office operations could be done on a mini-computer, replacing

115
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the current IBM card system with a resulting Improvement in cost effectiveness and efficiency.

Hotel Industry Attitude

In early 1973 there was considerable interest in hotel computer

systems as evidenced by a series of feature articles in Hotel and Motel

Management , a major trade publication in the industry.

According to industry sources both Hilton and Holiday Inn are planning Comprehensive computer systems for their properties. In

addition a number of electronics firms offer computer/programming

systems for hotels. Some of the larger companies such as Motorola

and IBM plan to introduce systems in 1973. Many of the smaller corporations such as Teltron, Total Systems, Hotel Reservations, Varian/Talix,

EECO, and Statacom offer off the shelf systems similar to the one produced by HCI.

However, Tony Green felt that while most of the above companies

had the computer-engineering competence to deliver a hotel system,

only HCI had developed their system by talking to hotel people.

Our system is built from specifications directly given

to us by people at the Green Oak Inn. Most of the other companies

making this type of system have designed around the way a hotel should

- operate ideally. Ours is designed to operate in the way a hotel

actually operates. I really think that most of the systems were

designed by people who have never even been behind the desk in a

hotel.

Current users of various computer systems gave the following

answers to the question "How do you cost justify the expense of a computer in your operation?"

The cost is less than the salary and overhead of one person

in the Reservation Department - and it provides a lot more data.

Our system is a time saver, not a people/payroll saver. The

whole advantage of the system is that it shows the property's

room status at that moment. Housekeeping can be managed much

more easily.

Although the system is fairly expensive, with the excellent

guest service provided plus better desk/housekeeping communications,

it more than pays for itself.

From not knowing true status at any given moment, too much

money can be lost; it's just that simple. We have to use an automated system.

Our system doesn't eliminate people - it eliminates wasted

time and delay.

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The visers also commented on the operational characteristics of

their systems:

The key to making the system work is extensive training of

personnel. Just getting used to the basic procedures overwhelms

some the first time around.

The company selling the product must be reliable. Anyone

who has ever used and relied on electronic equipment knows that

in order to be effective it must work 100% of the time. Otherwise it's just not doing its job. No hotel can afford a com- munications breakdown.

There is a natural resistance to the system from hotel

employees. People arc afraid that they will lose their jobs

or that the computer will show how inefficiently they have been

doing them. However, the system requires people for its information. Good employee relations and training are essential.

Hotel Operations and the HCI Concept

Hotel accounting operations can be divided into two groups:

front office and back office.

Front office operations are divided into three systems:

reservations, registration, and night audit.

The purpose of a reservation system in a hotel/motel is to

1) provide the service of guaranteeing a room to a customer for a specific date and number of days and 2) provide planning information

to management on the utilization of facilities. This second function

is quite important in planning for tours and conventions. Since most

hotels will accept reservations up to one year in the future, one could

think of a reservation system (automated or not) as a set of 365 files,

named for each day of the year, each file consisting of the names of

those who have made reservations for particular types of rooms for that

day. A further requirement would be an indication of whether of not a deposit was paid, therefore confirming the reservation for such things

as late arrival of a guest. The hotel uses these series of files in the

following ways:

1) add or delete names for a particular date.

2) look at the number of names and types of accommodations

for a particular date.

3) On a given date, use the reservation information at registration time.

The reservation system can be characterized as handling all

Information about a guest before he arrives at the hotel. The registration

system deals with all information and transactions while he is staying at

the hotel. The registration system should accomplish the following:

1) using the reservation system decide whether or not the

guest can be registered.

2) check on room status (made up or not) for assignment

purposes

.

3) open an account for a guest.

A) accumulate charges on this account.

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5) keep a current guest list by room in order to provide

message/phone service.

6) close the guest's account and ptovide him with a bill

at checkout time.

7) maintain information on the guest and his transactions

for the accounting systems.

Running concurrently with the registration system is the night

audit system. This system takes information from the registration system,

and other hotel operations (restaurant, etc.) and provides summaries of

the daily operations for management as well as posting information

to be used by the accounting system.

Back office functions include the normal accounting record

keeping, city ledger (accounts receivable), payroll, general ledger, and

inventory .

The HCI system was designed to perform all of the above applications.

The front office system was to be real time, that is, the files of reservations, registrations, guest charges, and rooms in the hotel were to be

kept current and immediately accessible by the system. Desk clerks would

utilize a CRT terminal at the front desk to check someone in or out, make

reservations and check on room status quickly and easily. All point-ofpurchase sites in the hotel such as restaurants and gift shops could post

charges immediately to a guest account over a telephone-connected terminal.

Automation of both the front and the back office is something new for hotels/motels. In the past, accounting functions were sometimes

done by machine, but very few hotels have any kind of real time handling

of guest billing. Large chains have reservation systems, but these are not in general tied in to the accounting system. HCI felt that computers

capable of doing this kind of work were available at a low enough cost

to justify automating and merging the front and back office operations

and that the time was ripe for this development. Tony Green sold

the Green Oaks Inn on this idea and raised $90,000 in capital by

selling stock in HCI to local businessmen. Green Oaks Inn contracted to buy the first system developed by HCI. In October, 1971,

HCI contracted with Command Systems for development of the Green

Oaks system. Command Systems was chosen because of their general

commitment to mini-applications and the fact that Alex Hoffman and

Bob French, the president of Command, were friends. The initial

contract called for the development of the system by Command at

cost in return for 20% of the stock of HCI. The anticipated costs

for hardware and software were $90,000. Work on the hardware com- ponents started and preliminary specifications were made. In November a full-time programmer was hired to supervise the programming.

The original shcedule called for a completion of the front and back

office applications by June, 1972.

Several problems arose which delayed the development. First,

the full-time programmer left in February, taking all of the work done

by him to that point and leaving no documentation of what he had done.

This was a real blow and set the whole project back several months.

Second, even when more programming personnel were hired, it was

found that the desi^.n speci 1 ications were not as complete and as accurate as was necessary to program the application correctly.

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This resulted in having to redo some of the initial systems analysis work

and considerable reprogramming. Because of the above and the fact that no one person was totally responsible for the whole development (HCI being re- sponsible for the specs. Command /now AVCON/ being responsible for hardware

and programming), morale deteriorated among those working on the project and

there were several personal conflicts between the people in AVCON and HCI.

Even with these problems, the front office system was up and running by

September 1972. There were still major problems with the back office system.

At this point HCI was beginning to run out of resources. The initial capital was close to being exhausted, even though in August the Green

Oaks Inn had accepted the system and had prepaid a year's maintenance on it

despite the fact that the system was not complete. Tony Green had hoped that

he could be marketing the system to other hotels while it VTas under development. He found that much of his time was devoted to working on systems

specifications with Green Oaks employees, a job he did not feel qualified to

do. As a result the marketing was not as far along as was originally envisioned.

In October HCI was in need of additional resources and turned to AVCON.

HCl's Arrangement with AVCON

The HCI decision came at a time when AVCON was looking for a new

product. The automation of the front/back office system did not require a fundamentally different way of doing business in a hotel. The product was one with which AVCON was already familiar, and could provide revenues relatively quickly. Also, it fit into the general policy of applications on mini computers originally adopted by Command Systems. However, one problem

vas that AVCON did not own 517= of HCI.

On October 20, 1972 HCI signed a six months' agreement with AVCON

for undertaking the company's management and marketing responsibilities. If

AVCON sold three HCI systems within the six-month period, it acquired the

right to purchase enough stock at par value to have control of HCI (approximately $50,000). All of the HCI stockholders were in favor of the agreement,

Tony Green joined the marketing staff of AVCON.

Development work continued on the Green Oaks system and by January

1973 the system was ready for testing. Exhibit 8 gives an accounting of the

development costs up to November 1972.

^feanwhile. Bob Rapp began the preliminary marketing analysis. He

Identified the market as hotels and motels with 200 to 800 rooms and 507= or better occupancy. The total system price is between $100,000 and $200,000

depending on hardware configuration. This is roughly in line with current

standard cost allocations of hotel accounting and control functions of about

$5-$10/room per month.

The Future

In early 1973 AVCON was once again evaluating its strategy for the

newspaper truck. One of their best prospects had just notified them (Exhibit 9)

that they would not be able to consent to a test with AVCON. However, the

hotel system was being successfully tested at Green Oaks Inn. Several industry

publications had noted the development and several letters of inquiry had been

received about the system.

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120
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Exhibit 2 AVCON, INC.

AN APPROACH TO DETERMINE THE NUMBER

OF A.V.D.s NECESSARY TO SERVE THE STAR-TELEGRAM CITY CIRCULATION AREA

Assumptions:

1. There are 212,453 dwellings in the area.

2. Tests on Districts 15 and 12 indicate the truck can

pass an average of 1418 dwellings per hour.

3. With first truck starting at 1:15 PM and last at

3:45 PM. (average press run) and 11 minutes allowed

for each truck to reach its starting point, the

amount of throwing time would range from four hours

and four minutes to one hour and thirty four minutes

assuming each truck finishes at 5:30 PM. An average

of all trucks would be two hours and forty nine

minutes (2.82 hours.)

Therefore:

Number of truck hours required would be 212,453 - 1418 = 149.83

Number of actual trucks needed would be 149.83 - 2.83 = 53.13 trucks.

I

121
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AVCON, INC.

673-109

A.V.D. LOADING SCHEDULE TO OBTAIN MAXIMUM PERFORMANCE

This table is based on following facts and assumptions:

1. There are 212,000 dwellings in area to be covered.

2. There are 97,000 evening copies in the area to be covered.

3. This is one paper to 2.186 dwellings.

4. Tests indicate approximately 100 dwellings per mile.

5^ Vehicle speed is 14 MPH by test and 15 MPH by assumption.

6. Therefore, one vehicle can cover 15 x 100 dwellings per hour. (1500)

7. This would mean it can deliver 686 copies per hour. (1500 - 2.186 =

686) (Also equal to 11.435 copies per minute.)

8. Press production averages 37,560 copies per hour or 626 copier per

minute

.

9. Average departure time for first truck would be 1:15 PM. Other

trucks follow at press production rate. (Times listed to nearest

quarter of a minute.)

10. Each truck is loaded with maximum number of copies it can deliver at

rate of 11.435 per minute to 5:30 PM stopping time.

11. An average of 11 minutes is assumed for truck to reach starting point

from dock on roll shop.

12. Five thousand car route copies are loaded on private vehicles after

7th truck departs. Another 5,000 apartment copies are loaded after

19th truck departs.

122
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Exhibit 2 (continued)

AVCON, INC.

673-109

SCHEDULE

Truck No. Departiire Delivery Number of

Time Time - Minutes Papers

1. 1:15 2hk 2,790

2. 1:19.5a 239.50 2,739

3. 1:23.75 235.25 2,690

k. 1:28 231 2,641

5. 1:32.25 226.75 2,593

6. 1:36.50 . 222.50 2,544

7. 1:U0.50 218.50 2,499

8. l:Uli.50 214.50 5,000 (car routes)

9. 1:52.50 206.50 2,361

10. 1: 56.25 202.75 2,318

11. 2:00 199 2,276

12. 2:03.75 195.25 2,233

13. 2:0U.25 191.75 2,193

li+. 2:07.75 188.25 2,153

15. 2:11.25 184.75 2,113

16. 2:11;. 50 181.50 2,075

17. 2:17.75 178.25 2,038

18. 2:21 175 2,001

19. 2:2i|.25 171.75 1,964

20. 2:27.50 168.50 5,000 (Car route Apts.)

21. 2:35.50 160. 50 1,835

22. 2:38.50 157.50 1,801

23. 2:Ul.25 154.75 1,770

2h. 2:hh 152 1,738

25. 2:46.75 149.25 1,707

26. 2:U9.50 146.50 1,675

27. 2: 52.25 143.75 1,644

28. 2:55 l4l 1,612

29. 2:57.50 138.50 1,584

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Exhibit 2 (continued)

AYCON, INC.

SCHEDULE - va^,e 2

Truck Wo. Departure

Time — ' '

Dp! 1 vpT*v* Time - Minutes

'* ———" — .—

Number

Papers — . 30. 3: 00 136 — . 1,555

31. 3:02.50 133. 50 1,527

52

.

3:05 131 1,498

33. 3 : 07 . 50 128 . 50 1,469

34. 3:09.75 126.25 n lit 1,444

35. 3: 12 124 1,418

36. O.I/ o c 3 : 14 . 2 5

1 O 4 "7 c 121.75 1,392

37

.

3:16.50 119. 50 1, 366

38. 3:18. 75 117 .25 1,341

39. 3:21 115 1,315

40. 3:23 113 1,292

41. 3:25 111 1,269

42

.

3 :27 109 1,248

4 3. 3:29 107 1 o o / 1,224

44. 3:31 105 1,201

45. 3:33 103 1,178

A6. 3:35 lOl 1, 155

47. 3:36.75 99.25 1,135

48. 3:38.50 97.50 1,115

49. 3:40.25 ^ 95.75 1,095

50. 3:42 94 1,075

51. 3:43.75 92.25 1,055

52. 3:45.50 90.50 1,0'

5

96,989

124
-18- 673-109

Exhibit 3 AVCON, INC.

STAR-TELEGRAM ECONOMIC FACT!

CURRENT

% MONTH YEAR CUMULATIVE

Customers Pay 100%

Newsboys Receive 38%

Star-Telegram Gross 62%

District Mgrs. Compen. 19%

Kickcatcher 1.5%

Supplemental Trucking 1.3%

Fringe Benefits 1.2%

Rack Sales Cost

$354,300

133,800

$4,251,600

1,605,600

824, 000

64,000

55,000

52,000

(282,000)

$2,646,000

1,822,000

1,758,000

1,703,000

1,651,000

TOTAL DISTRIBUTION

COSTS 61.2%

COST PER THOUSAND $49.00

$2,600,600

CIRCULATION FIGURES

Morning

Evening

Sunday

TOTAL

55,000 X 313

96,000 X 313

121,000 X 52

17,215,000

30,048,000

6,292,000

53, 555,000

125
-19-

Exhibit A AVCON, INC.

ANNUAL COST OF ONE ADV

673-109

ADV

Truck $ 5,000 4- 3 $1,667

Electronics 40,000 -f 7 5,714

$ 7,381

LABOR

1.4 Driver-Supervisors @$12,000 $16,800

(5 days, 2 days)

Crew Men

4 . 5 men x 3.5 avg . hrs . x 365

days X $1.60 9,200

3.5 men x 3.5 avg. hrs. x 313

days X $1.60 6, 134

Total Labor 32, 134

Operating Expense (38,600 miles x 6.54;) 2,504

Other Allocatable Expenses: 12,900

Central System $ 1 , 000

Collections 7,600

Fringe Benefits 3,300

Other 1 ,000

TOTAL COST OF ONE ADV $54,919'*

"NOTE: Add $1,915 for $1.80 per hour.

126
-20- 673-109

Exhibit 5 AVCON, INC.

TOTAL COST ESTIMATES

ASSUMPTIONS

1. 35 ADV's (87,500 Papers)

2. 1 CSDS

3. 10 Car Routes (5,000 Papers)

4. Foot Routes (5,000 Papers)

5. 58 Driver-Supervisors

6. 141 Weekday Throwers

7. 120 Sunday Throwers

8. 1 Supervisor for Car Routes

9. 2 Supervisors for Foot Routes

MONTH YEAR

1. ADV&CSDS $50,000 $ 600,000

2 . LABOR

Delivery

(a) ADV - Driver - Supervisors (58)

(b) Throwers

141 Weekday ($100/month)

120 Sunday ($20/month)

58,000

14, 100

2,400

696,

169,

28,

000 -

200

800

TOTAL TRUCK LABOR 74,500 894, 000

(c) Foot Routes 37% x $15,000 5,500 66, 000

(d) Car Routes 45% x $16,250 7,312 87, 744

(e) 3 Supervisors (Car routes

& foot routes) 3,000 36, 000

TOTAL DELIVERY LABOR $90,312 $1,083, 744

OTHER LABOR

CSDS Operator 1,250 15, 000

3. OPERATING EXPENSES

I ADV - (gas, maintenance) 5.5<t/mile

X 1 ,356,000 miles = $ 74,580

313 days X 4,000 1,252,000

52 days x 2,000 1 04 , 000

1 ,356,000 miles

127
-21-

Exhibit 5 (continued)

AVCON, INC.

673-109

INSURANCE

4. FRINGE BENEFITS

5. SUPPLEMENTAL TRUCKING

NORMAL ANNUAL OPERATING EXPENSES

ONE-TIME CHARGES

Mapping

Rolling Machines (12 x $7,500)

Building Modification

Public Relations

Legal Help with Union

Total First Year Cost

$45,000

90,000

30,000

5,000

15,000

$ 10,500

75,000

20,000

$1,878,824

$1,878,824

$2,063,824

ITEMS NOT INCLUDED ABOVE

1 . Sales Force

2. Mail Expense of Bills

3. Maintenance of Folding Machines

4. Storage of ADV's

COST PER THOUSAND

First Year

Second Year

$ 38.53

35.00

128
-22-

Exhibit 5 (continued)

AVCON, INC.

673-109

STAR-TELEGRAM

FINANCING OPTIONS

PURCHASE

35 ADV's

CSDS

TOTAL

($45,000 each) $1 ,575,000

135,000

TOTAL

$1,710,000

MONTH

LEASE PLAN

ADV $1 ,390 per month each ADV

Total 35 ADV's $48,650

CSDS 4, 166

TOTAL $52,816

TOTAL

$ 583,800

50,000

$ 633,800

(a) This plan assumes a 12-month commitment from the

Star-Telegram

.

(b) Longer commitment times would indicate re-evaluation

of lease costs.

129
-23-

Exhibit 6 673-109

AVCON, INC.

August 2A, 1972

Mr. Ferguson E. Rood

Research & Marketii'g Director

Atlanta Journal-Constiturion

Post Office Box 4689

Atlanta, Georgia 30302

Dear Ferguson:

As we discussed over the phone, I have enclosed some economic facts for your

review and analysis. These figures are intended to be ballpark figures and

should give you a good idea of the economic feasibility of our distribution

system. There is absolutely no doubt in ray mind that with carrier monthly

profit of $1.30 for morning and Sunday, and $.98 for evening and Sunday,

your paper sho-ald realize annual savings from $500,000.00 to $1,000,000.00

depending on the final number of our vehicles which you can economically

and operationally justify. I stress again that it is our desire to suggest

only enough vehicles which meet the criteria of economic and operational

feasibility

.

We have continually approached an economic analysis from the standpoint of

comparing current distribution costs with costs of our new distribution

system and from seeking a breakeven point in numl;ers of customers above which

it is more economical to utilize our system. I have followed that same pattern on the attached sheets.

Ferguson, at this stage I have not provided information on our central com- puter system because I believe your people are primarily concerned about

the economics of the throwing vehicles. However, I do want to stress that our central, on-line circulation information system would also have significant benefits for your organization. Huey was quite helpful in showing

me your curient set-up and while everything does seem to flow in an orderly

manner, our system would provide the extra benefits you and I discussed,

i.e., immediate starts and stops, blanket market coverage capability, re- duction of paper work, central computer billing, etc. Some of these features can be obtained with just the vehicle portion of our system, but all

of the benefits can accrue only with total implementation.

I hope you will see the economic outlook as brightly as I do and will want

to pursue a more detailed meeting between us to discuss and "dig-into" the

economic picture. The economics just look too good to let the project drop

without more careful analysis. Our offer still stands to have you or any

of your people visit us in Fort Worth to see the system in action.

Please call me after you have had an opportunity to review my figures.

Best regards.

Robert T. Rapp

Vice President-Marketing

RTR: dc

Enclosures

130
Exhibit 6 (continued) -24- 673-109

ATLANTA NEWSPAPERS, INCORPORATED

ECONOMIC ANALYSIS

AVCON, INC.

A. GIVEN

1. Home delivered circulation:

a. Morning 110,000

b. Evening 155,000

2. Carrier Profit per Montn per Subscriber*

a. M & S (40% X $3.25) = $1.30

b. E & 8 (30% X $3.25) = $ .98

*(Non-Motor Routes)

3. Papers are trucked at ANI's expense to carriers.

4. District managers are utilized to recruit, train, and supervise carriers.

B. ASSUMPTIONS

1. Automated vehicles will be used in morning, afternoon, and

Sunday deliveries.

2,. Vehicles can average throwing 2,500 papers in the morning;

3,000 papers in the evening; and an appropriate number of Sunday

papers

.

3. Collections will be made principally by mail with personal efforts

utilized to collect the small remaining balance.

C. ESTIMATED MONTHLY COST OF ONE AUTOMATED VEHICLE THROWING

morning; EVENING, AND SUNDAY EDITIONS

1. Vehicle Cost

a. Lease (60 months) $ 1,200

b. Outright Purchase and Amortization $ 650

2 . Operating Expense - Maintenance, Oil, Gas, Etc.

(5-l/2<; per mile x 3,500 miles)

3 . Driving and Throwing Labor

4 . Collections

5. Maintenance - Electronics

TOTAL ESTIMATED MONTHLY COST

$ 250

$ 2,500

$ 550

$ 25

$ 4,525

131
i5/\ S \-JD. BREAKEVEN POINTS

-25-

Exhlblt 6 (continued)

AVCON, INC.

673-109

M & S $2,262 - $1.30 = 1,740 customers

E&S $2,262 -$ .98 = 2,308 customers

Combined $4,525 - $2.28 = 1,984 customers

NOTE: Breakeven points are lowered if "current costs of

trucking papers to carriers are included. Also, if current District Manager expenses are included,

breakeven points are reduced substantially.

Straight depreciation of the vehicles rather than

leasing would also reduce the breakeven point.

E. ESTIMATED SAVINGS TO ANI

Assumption: 2,500 Morning

3,000 Evening

1 : ^v?0fl^'v.,. Appropriate Number Sundays

Current ANI System Monthly Cost

2,500 M & S X $1.30

3,000 E&S X $ .98

Trucking (Est.)

, . TOTAL CpST

$3,250

2,940

200

6,390

New System Monthly^Co'st

2,500 M & S

3,000 E&S

TOTAL COST

MONTHLY SAVINGS PER VEHICLE

ANNUAL SAVINGS PER VEHICLE

ANNUAL SAVINGS IF:

30 Vehicles are justified

L 40 Vehicles are justified

i 50 Vehicles are justified

$2,262

2.262

4,524

1,866

22,392

$ 671,760

$ 895,680

$1,119,600

132
673-109

Exhibit 6 (continued)

AVCON, INC.

CONCLUSION

1. The economic analysis, even allowing wide margins for

inaccurate assumptions, shows substantial economic gains.

2. More detailed discussions and analyses are justified as

a prerequisite to a full-scale proposal.

3. The entire system will benefit both the circulation and

the advertising sales efforts.

133
-27- 673-109

Exhibit 6 (continued)

AVCON, INC.

COST COMPARISON

CURRENT SYSTEM vs ADV

[2,500 (E); 1 ,425 (M); 3, 150 (S)]

CURRENT SYSTEM

2,500 X 313 X 4.8(^ $37,560

1,425 X 313 X 4.8(i; 21,409

3, 150 x 52 x4.8(i: 7,862

$66,831

ADV SYSTEM 55,000

Savings $1 1 ,831

Breakeven Point: About 2,060 Evening Circulation

Total Possible Savings;

$11,831 X 39(97,000 -f 2,500) = $461,409

Cost Per Thousand:

Old System - $49.00

New System - $40.00

134
Exhibit 7 AVCON, TNC.

-28-

NEWSPAPER MARKETING ACTIVITIES

673-109

June 5-6

Early June

June 12-13

June 24-29

July 11-12

July 14

July 24-26

July 31-Aug. 2

Aug. 3

*Aug. 4

Aug . 1

5

Aug. 21-25

Late August

Sept. 6

Sept. 8

Sept. 9 Sept. 14

Sept. 17-19

Sept. 18

Oct. 1-3

Oct. 2 Oct. 3

Oct. 4

Oct. 11-15

Oct. 25

GK called on Austin and San Antonio (2) papers

Literature mailed to Circulation Managers (50,000-

250,000)

RTR & GK attended ANPA Production Conference

in Atlantic City, New Jersey

RTRAVHC/GK/BF took booth to ICMA convention in

Los Angeles, California

RTR/GK called on San Antonio (2) papers and Harte Hanks

GK called on Dallas (2) papers

RTR/GK called on Ottaway (Corp.), Hackensack,

Philadelphia, Baltimore, and Chicago papers.

RTR/JW/GK called on Sacramento (2), Oakland, and

San Mateo papers.

GK called on Dallas Times Herald

Literature mailed to publishers (50,000-250,000)

GK called on Ft. Worth Press

GK called on Shreveport, Alexandria, Baton Rouge,

New Orleans, Lake Charles, Beaumont, Galveston,

and Houston (2) papers

RTRAVHC called on Atlanta and Miami papers

Mi a mi Herald (GR) in Fort Worth for demo (ADV)

RTR/JW/GK exhibited mock-up at SNPA Labor

Symposium in Dallas

RTI^/JW/GK breakfasted with Claude Capers and Bob Ballow

RTR/BF/GK called on Donrey Media Group in Las Vegas

RTR/GK exhibited at SOMA in Birmingham

RTRA^HC demo of ADV to Atlanta Constitution in

Birmingham

GK presented slide presentation and distributed

literature at Inter-State CMA convention in Wheeling,

West Virginia

GK phoned Bill Rinehart (ANPA) for references

GK had dinner in Nashville with Bob Ballow

RTR wrote Presidents of major newspaper groups

RTR/GK exhibited at Cal-We stern CMA in Scottsdale

GK made sales presentation to Oakland Tribune

*First direct- contact with newspaper management

FUTURE APPOINTMENTS

Nov. 4-7 GK/JW to exhibit at Texas CMA at El Paso

Nov. 10 GK to make sales presentation at Nashville Tennessean

Nov. 10 Harte Hanks (Corp.) to come to Fort Worth for system demo

135
Exhibit 7 (continued)

AVCON, INC.

-29- 673-109

Nov. 13 Appointment with Les Journaux Trans-Canada , Le Journal

de Quebec , London (Ont.) Free Press early part of the

week of Nov. 13-17, 1972

Nov. 17 Copley Newspapers in La Jolla, California

NEWSPAPER GROUPS (CORPORATE) CONTACTED

Name

Ottaway Newspapers, Inc. Karte Hanks

Donrey Media Group

Gannett

Lee Enterprises, Inc.

Copley Newspapers

Exposure

ICMA and personal visit

Personal visit

Personal visit/proposal

Letter

Letter

Personal visit with Systems

Consultants

RTR's letter to presidents of various groups. No response to date.

NEWSPAPERS CONTACTED

City

Austin (A-S)

San Antonio (E-N)

San Antonio (L) Dallas (T-H)

Dallas (MN)

Hackensack (R) Philadelphia (B)

Baltimore (S)

Chicago (T)

Sacramento (B) Sacramento (U)

Oakland (T)^

San Mateo (T) Ft. Worth (P) Ft. Worth (S-T)

Atlanta (C)

Miami (H)

Shreveport (J)' Alexandria (TT)

Person(s) Contacted

CD and CM

CD, Asst. CD, Pur. Agent

CD and CM

CD and CM

CM

VP-Marketing

CD and assistants

CD, Data Processing Dir.

CD

Publisher and CM

CD, CM, Asst. VP-Dir. of

Operations

CD, Data Processing Dir.

CD

CD and CM

Gen. Mgr., Controller, CD

CD, Sec'y-Treas. , Mkt. Mgr.

CD, Data Processing Mgr.,

President

CD, Director of Advertising

Publisher and CM

Type of Contact

Personal Visit

CD - Circulation Director

CM - Circulation Manager

VP - Vice President

136
Exhibit 7 (continued)

AVCON, INC.

City

Baton Rouge (A) New Orleans (T-P)

Lafayette (A) Lake Charles (AP)

Beaumont (E-J)

Galveston (DN)

Houston (C)

Houston (P)

-30-

Person(s) Contacted

CM

Gen. Mgr., Bus. Mgr.,

CD

CM

CM

CM

CM

Publisher

CD

Data Processing Dir. and

Controller

CM

673-109

Type of Contact

Personal Visit

Phone call

Personal Visit

Mail

Personal Visit

NEWSPAPERS EXPRESSING INTEREST AFTER JANUARY 1, 1973 *

Name

Sacramento (U)

Atlanta (C)

San Juan, P.R. (EI) Lee Enterprises, Inc.

Marketing Activity

Proposal

Proposal

Letter with literature

Letter with literature

Their Indication

to Avcon

Act on proposal

Act on proposal

Pursue investigation

Pursue investigation

*A11 four-prospects indicated they are in the midst of major revisions

of various departmental procedures and/or systems and, therefore,

will not undertake the implementation of any other major system changes

until after January 1, 1973.

137
i

-31-

Exhibit 8 AVCON, INC.

673-109

December 27, 1972

Mr. H. J. Jung

eSOl IV. Freeway

Fort Worth, Texas

Dear Mr. Jung:

76116

As prcirilsed et the December 20, 1972 KCI Board cf Directors meeting,

the cost of the Green Oaks Inn system through November, 1872 is provided below:

Cost % of Total

Avcon, Inc. Hardware Labor Services

Tony Green's " «

" Sub Contract " " '» Sub-Total Hardware Labor Services

Avcon, Inc. Softv.*are Labor Services

Tony Green's n « « Sub Contract " " " Sub-Total Software Labor Services

Hardware Costs

Other Cost

Total Costs

Bob French's direct labor services ere distributed on an equal basis

between the "Avcon, Inc. Hardware Labor Services" and "Avcon, Inc.

Software Labor Services" line Item.s. Consultants fees paid to Dr.

Hoffman in the amount cf $5,000 are distributed on an equal basis

betv/een the "Sub Contract Hardware Labor Services" and "Sub Contract

ScftVN?ere Labor Services" lino items. Tony Green's net salary costs have

also been equally, distributed between Hardv/ere Labor Seirvices and

Software Labor Services line items.

If ycu should have any questions regarding the above cost figures, please

call me.

$25,172.85 18 .5 2,180.85 2 .3 3,619.22 2 .6 $31,972.93 23 .4

$36,410.40 26 .6

' 3.180.85 2 .3 16.606.47 12 .1 $56,197.72 41 .0

48,204.36 35 .2

595.02 .4

$136,970.03 100%

Sincerely yours.

Jnmes P. V/right, Jr. Secretary/Treasurer

JPvV: pb

138
-32-

Exhibit 9 AvnON. INC.

673-109

February 6, 1973

Mr. Robert T. Rapp

Vice President - Marketing

AVCON, Inc.

1330 Summit Avenue

Fort Worth, Texas 76102

Dear Bob:

As we discussed over the phone the other day. Newspapers

will not be able to commit to a test with AVCON at this time. This

decision was made at our board of directors meeting at the end of

January.

Our decision was based on the limited availability of management time

in due to the commitment to supervise the installation

of a major capital investment. As we have discussed,

was the only property in which I would want to make sucn

a test based upon its labor climate, geographic location and excellent

management

.

This decision in no .way reflects a lack of interest in your concept or

in the total comnutment of AVCON to the successful completion of a test.

We at . ' are very interested in evaluating the potential of

your system and nope you are successful in testing your system at another

newspaper

.

Bob, I would like to personally thank you for the professional, straightforward manner in which you have presented your company and product. I wish you all the best of luck and, as potential customers, please keep us informed of your progress.

Sincerely,

Robert

Corporate Director

Special Projects

139

"CENTAUR

John J. Alexander, Jr.

Mr. Alexander is a member of the staff of the Securities Industry Automation

Corporation, which began operations in July 1972 in New York. SIAC has consolidated

and simplified the communications, trading, market reporting, and clearance and

settlement functions for the New York and American Stock Exchanges. SIAC's Central

Exchange Network Trading and Unified Reporting System (CENTAUR) is a major program for

automation services that consolidates various communications needs of the exchanges

into an effective single system. Mr. Alexander briefed the conference participants

on the status and future plans of CENTAUR.

141

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154
NEEDS, OBLIGATIONS AND OPPORTUNITIES FOR

PRODUCTIVITY AND QUALITY IN THE SERVICE SECTOR"

Gerald G. Smith

Mr. Smith is a Services Executive in the Systems and Services Co. subsidiary of

Control Data Corporation, Minneapolis. His message to the conference participants

concerned the problem of productivity and quality in services: quality must be designed

into a product; computers can aid in services productivity. Management is a service

and will benefit from computer technology. As Mr. Smith points out, the computer

holds great promise not only in the dissemination of knowledge but also the application

of that knowledge which brings about the productivity we enjoy. Computers save time,

and services are time critical. Mr. Smith urges the conferees to assist in the

application of technology to societal needs.

155

"NEEDS, OBLIGATIONS AND OPPORTUNITIES FOR

PRODUCTIVITY AND QUALITY IN THE SERVICE SECTOR"

Gerald G. Smith

This evening I would like to point my remarks directly toward the conference title,

"Making Service Industries More Productive Through Computers and Automation," with

particular emphasis on "identifying relevant business, government and societal needs and

opportunities" as referenced in the second paragraph in the "Foreword" section of the

conference brochure. There are needs, there are obligations and there are opportunities

for productivity and quality in much of our services sector. Business can serve these

needs and these obligations in ways not only beneficial to our society but also

commercially viable for them as entities within our system. This is particularly true

in the computer business.

I remember years ago witnessing a seminar leader perform an amazing feat. Turning

his back to a blackboard, he asked a member of the audience to quickly write the numbers

1-20. Just as quickly, he called for words from the audience, which were written on the

blackboard opposite the numbers. The entire process was rapid-fire, taking no more than

a minute or so. He then proceeded in random order to identify each word and its numerical

counterpart, or vice versa in random order as requested to do so by those present.

What seemed quite amazing at the outset became much simpler as he explained his

approach to this particular task. By associating the words called out with twenty things

ne performed during the course of each day, he in effect was actually living an experience,

and was able to recall it just as sharply as you and I would recall the happenings of this

day--via the associative mental process. His message was a simple and self-apparent one. What on the surface would seem to be a significant task, if not one of overwhelming

complexity viewed from one's traditional perspective, can become drastically simplified

by a designed approach appropriate to that particular problem. The problem of productivity and quality in services does appear and is in fact a very significant and

complex problem; still, it is possible to devise a "construct" that suggests ways in

which we might gainfully address that problem in the services industry.

Earlier in the course of this conference, we identified some of the characteristics

of a service product. We said in part that:

1. A service was consumed at the point and at the time of creation, and

2. It therefore could not be inventoried.

It would follow then, since the above is characteristic, that the service cannot

be subjected to inspection or traditional quality controls at the time of or subsequent

to its delivery. If it hasn't the substance of a product, such as we conventionally define

a product, with tires you can kick, or a taste, or an aroma or a box you can examine,

then perhaps we could better define service as a process .

Again, attempting to fashion a "construct" that better enables us to perceive ways

in which we can attack the central problem of productivity and quality in services,

let's walk around the elephant a bit, examining what begins to occur if we perceive of

service as being a process involving a paying customer, or a consumer.

Over the years, manufacturing of goods has been subjected to much basic work--work

which has resulted in techniques and tools for productivity and quality. In manufacturing

what is known as Work-in-Process is always a negative attribute as it concerns the quest

for productivity. The longer Work-in-Process exists and the higher the monetary value

of that Work-in-Process, the greater the adverse impact on the economics of the situation.

157
Assuming that in any given Service we have a process that does not consume itself

(which is the hoped-for state), material drops out of the equation and the output of

the process in a general sense can be symbol i zed as R x T = Output, (i.e., Resource x Time

utilized = Output of the Process).

Another analogy might be a chemical process, wherin by combining two or more unique

ingredients a process occurs whereby a separate and distinct substance results. In this

type of example, the quality of the chemical substance produced has more to do with the

quality of the ingredients utilized than of the process itself. At least the dependency

for quality at the input end is primary.

We've talked about service as something we consume at the moment it is created;

we have also discussed the absence of objective units of utility, and the fact that they

are not specified with necessary rigor. Even if we could so specify and measure the

"inches" of a service or its "pounds" such that they could be measured and inspected, we

all personally understand and have experienced the fact that quality cannot be inspected

into a unit; it must be designed into the product. The same can be said relative to a service. Even though quality can be defined, even though product can be measured at

the output end, the more important measures and quality controls are at the input end.

Using a common computer phrase, "Garbage in, garbage out."

Many of us have a bit of a problem talking about producing units we can't measure

with a quality that can't be verified after the unit is produced; hence, in our mental

approach to Services productivity and quality problems we continue to thrash about,

looking for those measures or units which would allow us a frame of reference within

the traditional "construct" experienced in the manufacturer of more tangible goods. But

this is a mental orientation problem and can be improved, just as the seminar leader

improved the result of the task addressed via his mental orientation in the 1-20

illustration I referenced earlier.

We have another mental or attitudinal problem, at least I believe most of us do.

We really don't want an engineered or designed utility, we want what we have or what

we consume to be crafted . I notice a great many antique stores here in Henniker. You

among us who are fortunate enough to have your wives with you, while antique shopping

you no doubt have heard various descriptions relative to the merits of craftmanship . We feel better if the chairs we sit on, the shirts we wear, the table at which we eat,

the house in which we live, are crafted products .

This urge or desire is a part of our tradition and has woven itself into the fabric

of our character, and even more importantly, into our mental orientation. We long for

those days of yesteryear when craftmanship was still a part of those goods we buy and

utilize. We regret that "service," whether it be in the hotel or the restaurant or wherever, seems to be a thing of the past. There seems to be a psychology that causes

the word "Service" to become a synonym to "Servitude."

No one need or should be embarrassed about their desire for fine, crafted products.

Neither should they apologize for expecting high quality of service, when you consider

today's restaurant prices. But to the degree these mental outlooks become barriers in

achieving a higher productivity and a higher quality in our Services spectrum, we need to

be aware.

The french fries at McDonalds are not crafted, they are engineered. The way those

french fries are placed in the sack we carry out is engineered. Despite variations in

temperament or even training on the part of the oper^ator, the sack filled with french

fries comes out looking and being the same. Do you miss it being crafted? In San

Francisco the other day I watched a Japanese chef dice onions. Fantastic!!! His hands were a blurr and the product of his rapidly flashing knife consistent to a fraction of

a millimeter, a real pleasure to watch, a work of art, a craft. But also, expensive!

I doubt that the world could afford hamburger onions produced by this prescribed process

alone.

158
Let's pursue the process "construct" and follow this line of thinking:

Service is a Process

Processes can be designed

Designed Processes can be made to produce consistent results

Consistency is the forebearer of quality

Process costs are proportional to the resource confined, and

the time for which these resources are confined in creating the

outcome of the process.

A successful Services process can be symbolized as:

Given a certain level of quality, if the product of the resource confined and the

time for which it is confined yields a consumer utility greater than the value placed

by the consumer on his dollar, we in effect have a services system in place.

From that "equation" (it really isn't an equation but it is sufficiently descripti'

for our "Construct") if we pick out and place specific emphasis on "time," we begin to see ways in which computer technology can aid in Services productivity.

The computer is the most significant "time shrinker" the world has ever known.

The horse-to-car transition was about one order of magnitude. It enabled man to travel

30 miles per hour more or less as opposed to walking 3 miles per hour previously. From

the car to the airplane, we went from 30 miles per hour to 300 miles per hour; as a result of these two technologies we moved something approximating 2 orders of magnitude

from walking. Cars go a bit faster today and so do airplanes, but in approximate terms

we are still 2 orders of magnitude away from walking.

In the last 18 years arithmetic--mathematics--has proceeded to a point such that

today in 1973 we can accomplish this function 100,000 times as quickly as we did

18 years ago. From 3 or 6 miles an hour to 300 or 600 miles per hour is a factor of

only 100.

It is also pertinent to point out that these arithmetical tasks (the computer has

reduced the science of mathematics to the equivalent of arithmetic for most users and

for most needs) are now performed 10,000 times more economically than 18 years ago as well as 100,000 times faster. Arithmetic is really the computer's bag.

One definition that might be given a clerical function would be "a function whose

logic is predetermined." What can be more logical than a computer? Clerical work is

really the computer's bag.

I don't know who this should be attributed to, I am sure to some old long-since

deceased philosopher, but I recall a statement that went something like this, "Civilization progresses in direct proportion to what man can accomplish without thinking

about it." Somewhere back in time the man that was lucky and had more than one day's

food supply in his cave thought about how to make the process easier, and came up with

a spear or a bow and arrow or an ax. Later as he learned to preserve his food, he

created still additional tools for the benefit of his society and ultimately ours.

There is a similar theorem as it concerns the production processes or the manu- facturing processes. "Progress comes about in the main by exposing pacing problems,

items or variances to levels of ability or authority commensurate with the nature

of the need.

R X T

Q

C$

159
V ^ P

Following the arrows of the above diagram. Visibility (V) yields Perception (P).

This in turn permits the application of Experience (E) and/or Judgment (J); this in turn

permits Applied Action (AA). If we have visibility of the result of those applied

actions, then through Understanding (U) we have the "closed servo system" from which

productivity and progress and quality are born.

Again, I'll not belabor the point but we are really describing a communication or information process, and the computer is perhaps the most fantastic of all information

collators and structured information output devices we yet know. It is the appropriate

structuring of such information that does give true visibility, which allows us to

perceive or to "see" and it is this ability to "see" that permits us to utilize the

experience and the judgment at our command in fashioning the appropriate action

cormiensurate with the nature of the need.

Given the computer's arithmetical capability, its ability to perform predetermined

logic (clerical) functions and its immense capacity for information and information

arrangement, we can easily and conveniently extrapolate to deductive decision making.

Whenever conclusions are reached based on arithmetic or comparative data, these con- clusions can be regarded as computer-based decision making. Today, many of our manufacturing plants procure, receive, assemble and ship material independent of human

calculation and decision making, based simply and straightforwardly on deductive

decision rules, a part of the computer program.

A final step becomes the more complex task of literally capturing human skills.

Here again this is a matter of fact accomplishment in the manufacturing sector

involving everything from automated design to computer-based manufacturing, engineering

or processing, to management method. We in our company have experienced setting up

complete facilities in underdeveloped countries: within a few months, manufacturing a state-of-the-art product with a workforce that literally is illiterate. These endeavors

achieve results every bit the equal of their U.S. counterparts simply because the

necessary skills for such accomplishment have been subscribed to computer-based processes

and actions.

The horizons revealed by looking at management as a process make these steps

possible within the manufacturing industry. Management is a Service. Even though the

problem is complex it can be partitioned and addressed with meaningful results attained.

In summary:

... Look upon Services as a process

... Design a good process

... Partition and computerize

, . . Arithmetic

.. Clerical

.. Information gathering, arrangement and distribution

.. Deductive decision making

. . Capture the ski 1

1

... Expect and foster evolution (It takes more than one day).

160
The total set of tools and techniques for productivity in manufacture of goods, and

quality in that manufacturing process, did not come into being overnight. Neither will

those associated with Services, but still a major tool for that evolutionary process is

at hand today, the computer.

I would like once again to reference the statement in the foreword section of the

conference brochure:

"Identify relevant business, government, and societal needs and opportunities;"

We talked about services productivity and the nature or characteristics of Services.

We mentioned that management is a service, fitting the definition or the characteristics

we have utilized in describing a Services product. There are many examples other than

of the type I have described, whereby the computer has in fact captured the skills

of an individual manager or a management team. That has been done, not universally, but

in part--with an adequate abundance of examples. What is a "management" that is

"captured?" What is it that those managers were doing? They were engaged in the

organization and utilization of human knowledge and skills .

When I was younger I wanted a competence and experience in many functional areas--

Marketing, Engineering, Operations, etc. The president of the company I worked in at the

time was quick to point out that most presidents don't accede to their lofty heights

through being better at anything or everything than any other one individual, but rather

in being able to recognize and utilize the knowledge and skills of many .

Any multi-function manager recognizes his task as being primarily the organization

and utilization of human knowledge and skills. The manager of this human resource must

perceive the nature of the problem or objective and then bring to bear the knowledge

and/or skills pertinent to further definition and solution.

Earlier we said that progress comes about in the main by exposing pacing problems,

items or variances to levels or ability or authority commensurate with the nature of the

need. We also referenced the cliche, "Civilization progresses in direct proportion to

what man can accompl ish without thinking about it." What we are talking about in both

instances are techniques and tools. Tools have always been the backbone of productivity.

The brochure, this seminar folder, writes of needs of services people for computers.

Really the need is for people to utilize the tool we have at hand, the computer. Let's

be specific and talk about the process of Education.

What if, while not interrupting or threatening the current structure of the

educational process that developes or creates our Ph.D. -type of creative individual,

within that qualification we could alter our aims to encompass these objectives:

"Bank" Knowledge and mental skills in computer storage/networks

"Train" an intermediate level for managing (using) that larger

inventory of knowledge rather than only what they themselves can assimilate, retain and refresh.

Earlier I referenced the brilliant dissertation by John Diebold concerned with

"The Social Responsibilities of Business" and how U.S. business can and does address

its social responsibilities. In this paper he laid out some very interesting facts.

One such fact dealt with knowledge. Mr. Diebold said, (and I paraphrase) "Knowledge

is increasing such that between today, and the death of today's baby, 97% of the knowledge

then existing in the world will be knowledge discovered during his lifetime."

Can you imagine a world where 1 iterally knowledge is being discovered at the same

rate as our lifetime is ebbing? To the degree that 97% approximates 100%, such is the case today. Despite the fact , that we can for example, make mathematical calculations

100,000 times faster and with 10,000 times more economic efficiency today than barely

18 years ago, we have not yet begun to realize the revolutionary powers of both induction

and deduction that this increase in human knowledge is putting into our hands and minds.

161
The computer truly is the first tool applicable to the productivity of man's

intellect. It is the fulcrum point from which we can lever our entire society—even

our civilization--upward, and then with the next thrust still ever higher again, understanding that once computer-captured, the knowledge and skill afforded by that knowledge

is retained and can be built upon again and again. Knowledge raised to the power of

Understanding yields Education. That in itself is vital. Much more important, however,

is the potential of knowledge raised to the power of direct application, yielding a productivity of man's intellect never before deemed feasible.

The problem of course is the approaching limitation imposed by dissemination and

distribution of knowledge as opposed to its discovery. Why can't we use a combination of

knowledge and skills we ourselves don't understand? Management does, especially top

management. These days a lot of engineers do just that, whether they are designing

aircraft or nuclear reactors. It is not my intent to be unduly critical, but perhaps I can be stimulating. Just as the ultimate purpose of a company must include profit, so must the ultimate purpose of knowledge include its application. Where is the research

for applying, through computer-based knowledge, what someone else already knows. All of

us use "tools" we don't fully understand. Sometimes we are fearful of it but yet we do

it all the same. The computer, properly utilized, holds great promise not only in the

dissemination or distribution of knowledge, but the actual application of that knowledge

as a tool of human intellect . It is the application of tools that have brought about

the productivity we enjoy. Education is still treated as an attribute, an element of

personal domain. With the rate of discovery of new knowledge, consider the added time

any young individual must begin to devote to just "keeping up." What a waste of time.

Computers save time.

Services are time critical in that the longer they confine any given resource, the more costly or less productive that resource, hence that service. Educational services

are time critical. Computers are here today and are available for utilization by

universities, medical centers and government as well as by industry. All the while we perpetuate the syndrome of knowledge for education, and education for knowledge, to the

expense and detriment of the application of knowledge for productivity. Is it possible

that educators might broaden their perspectives so as to perceive of themselves not only

as obliged to convert knowledge to education, but to assume a leadership role, a role of

responsibility in the dissemination, the distribution, and the application of such

knowledge to the benefit of mankind ?

The preponderance of this conference is made up of academic and governmental

professionals. There are very few of us here from industry. My perception is that those

people responsible for creating and bringing an availability of computers to a need, of

creating and bringing automation to the needs of society, are far more aggressive than

those who could utilize those tools for societal benefits .

As I said, I don't mean to be unduly critical, but I would like to in part return

some of the benefits I have enjoyed from this conference through perhaps influencing

or stimulating the behavior of each of us relative to productivity needs in the service

sectors. I am mindful of the vital needs for the application of computer-based technology

to the needs of the service industry--and most significantly, educational services.

After all, it is precisely that service that has been and still remains as the backbone

of a technically-based standard of living as yet unequalled in any other land. And

after all, isn't it fitting that the benefactor of technical achievement, education, in

turn finally itself benefits by its parentage? There js^ a way to increase the productivity of the educational process and of knowledge through more direct application to societal needs. We, everyone of us, should be a part of the satisfaction of that need

and we could be, if we just make up our minds to do so. The technology exists--now

the will must be applied.

162
"HUMANE QUALITY

Frank Bernstein

Mr. Bernstein is a member of the staff of Auerbach's Washington Office. He spoke to the conference participants of the essential ingredient of services, humane

quality. The "delivery encounter" of service should be well mannered and pi easant--the

goal, according to Mr. Bernstein, should be to serve more customers better.

163

HUMANE QUALITY"

Frank Bernstein

Quality is an essential factor, universally necessary in any endeavor, but of

perhaps greater significance in services because of the higher incidence of people

interplay. As quality control is mandatory in manufacturing hard products, and system

effectiveness must be determined in the development of complex systems, HUMANE QUALITY is an essential additional ingredient of services. Success in their delivery is synonomous

with its application.

Quality, as defined and described here, is considered in the old-fashioned sense of

just good manners. You may question the pertinence of discussing the need for good manners in the context of the conference's stated purpose.

Ed Blum, in discussing productivity in services dwelled on

EFFECTIVENESS

EFFICIENCY

and added EQUITY

which he did not include as part of PRODUCTIVITY, but rather as a POLITICAL factor,

or a FAIRNESS factor, "who gets what." I would add DELIVERY. If one accepts the

definition of Jordan Baruch, that a service is a good which is consumed at the moment

of delivery, then the "delivery encounter" should be well mannered and pleasant.

And computerized methods can be cold and impersonal --they lack soul, and on occasion

can be unfeeling and even cruel.

In automation design and in automation/manual combinations heed must be paid to the

DELIVERY INTERFACES COLLECTION, DELIVERY OF INPUTS , DELIVERY OF OUTPUTS .

This then is the ascribed nature of HUMANE QUALITY as applied here.

Is it quantifiable? Is it necessarily linear in its characterization and

appl ication?

We would all agree that in preparing and delivering services , customer satisfaction

is a key objective, whether in government or in the private sector. The goal should

be to serve more customers BETTER. But what are the bases for BETTER?

Perhaps there is a mixture of factors varying in tangibility:

HUMANE

^

BETTER w GOOD

^

QUALITY

QUALITY

^

SERVICES MANNERS^

CRITERIA & STANDARDS

IMAGE

GOODWILL

ATTITUDE

DEMEANOR

COURTESY

165
CONSIDERATE

RESPONSE

INDIVIDUAL

PRIVATE

INTEREST

PUBLIC

INTEREST

As Bill Cooper reflected: QUALITY OF LIFE is how people feel!

- it affects their responses

*'• - it has a real value in the market place

We should DESIGN SYSTEMS AND DELIVERY INTERFACES ACCORDINGLY!

166
"PARTICIPATORY GOAL SETTING PLANNING SYSTEM"

Shimon Awerbuch

Mr. Awerbuch is Research Director of the Planning and Development Agency of Cohoes,

New York. His presentation to the conference participants discussed a planning system

for community development, which included a model presenting decision-making information

to the community and its officials. Such information is necessary for rational decisionmaking. By holding certain components of the community system constant one can begin to study the complex system. For Cohoes, five simplified situations were selected and

information on demography, fiscal and socio-economic considerations, and utilization

of land were presented. Such presentations do not attempt to recommend one possible

situation over another, but rather give the officials enough information to make a decision.

167

PARTICIPATORY GOAL SETTIfJG PLANNING SYSTEM"

Shimon Awerbuch

Past planning has tended to be physical in nature (2)* Thus, the "Comprehensive

Plans" of the last decade failed to consider fiscal and socio-economic impacts of

development. The planning system discussed here considers these impacts.

Work began viith an attempt to define a "balanced comnunity" in terms of economic,

social and fiscal considerations (3). It soon became apparent that in order to formulate

such a "balance," many subjective decisions were required which could not be made by the

professional planners working in isolation from the community. For example, a municipality's tax base is usually improved by development of commercial and industrial land

uses. Since such land use is often considered a nuisance, only the community itself can decide how much industrial and commercial activity it is willing to "tolerate" in return

for lov/er taxes. Rather than subjectively attempting to define this "balance," work

proceeded towards a model which would present decision making information to the

community and to its officials (4). Based on such information, the planning process can proceed with sound basis for rational decision making. In other words, if one can show

what the demographic, fiscal, and socio-economic impacts of various forms of development

are, then the corjnunity and its administrators have proper basis for deciding what growth

form the city should pursue.

It is important that the planning tool that is developed be practical and v/orkable

with limited data. It must also be easy to implement, have a short "turn-around time"

to be of value to nontechnical individuals (4). This is easier said than done since the

urban system is, in reality, quite complex and involves numerous interactions and

"spin-offs" (6). But, by selectively holding certain components of the urban system

"constant," one can begin to study the complex system. This leads us to the definition

of the "extreme" scenario (8). For Cohoes, five initial simplified (extreme) scenarios

were selected (9): maximum residential development, maximum industrial development,

maximum commercial development, historic tourism, and the baseline against which the

merits and costs of these can be measured--the zero action or "do-nothing" scenario.

For each scenario, decision making information consisting of demographic characteristics,

fiscal indicators, socio-economic indicators and utilization of land are presented (10).

The first scenario presented is the zero action (12). As it implies, no effort is

made by municipal government to attempt to affect change, and present trends continue.

Analysis of demographic characteristics under "do-nothing" reveals that by 1980

the city's population will drop from a present 18,600 to 16,600 (13). More interesting

than the overall decline, however, is the fact that the proportion of elderly residents

increases considerably and that the population is moving towards older and smaller

household units (14). Examination of municipal fiscal structure reveals that increases

in the municipal appropriation coupled with a relatively stable tax base will result in

higher property taxes under "do-nothing" by 1980 (18-19).

The next scenario examined is maximum residential development, or "bedroom

community" (20). After making necessary assumptions, analysis reveals that such a growth strategy would increase the city's assessed valuation by $10.4 million from

a present value of S18.6 million (21). The demographic analysis reveals under maximum

residential development the population will increase to some 22,000 people, and the age

distribution will become "younger" (22).

Since the initial scenarios are well constrained and well defined, certain spin-offs,

such as increased corrmercial activity, can be calculated since the new families and

family income and propensity to consume locally are known (24).

*(Note: Numbers in parentheses refer to visual aids used in the conference presentation;

not all were reproduced here.)

169
DEFICIENCIES OF THE

MASTER PLAN CONCEPT

. . STATIC. NOT A REAL-TINE PROCESS

. NOT A USEFUL DECISION-MAKING TOOL

. PREPARED BY PROFESSIONALS IN RELATIVE ISOLATION

. . DISREGARDS INTERACTIONS AND EXTERNALITIES

CHART 2

170
"B A L A N C E tf' C 0 M M U NI T Y

POPULATION HOUSING

RESIDENTIAL COMMERCIAL

!

GROWTH SERVICES

OUTMIGRATIOrl I NM I ORATION

DENSITY

TAX

REVENUE

CHART 3

171
DEVELOP AN ANALYTICAL PLATJNING TOOL

. Demonstrate the Impact of Various Growth Strategies

. Simple to Implement

. Workable with Limited Data

. Decision FIaking Information

CHART 4

172
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175
SCENARIO ANALYSTS

DENQGRAPHIC : POPULATION SIZE

AGE DISTRIBUTION

NUMBER OF SCHOOL CHILDREN

FISCAL;

MUNICIPAL APPROPRIATION

SCHOOL EXPENDITURE

TAX BASE

ASSESSED VALUATION

FIXED REVENUES

CITY TAX RATE

SCHOOL TAX RATE

SOCIO-ECONOMIC : COMMERCIAL SALES VOLUME

JOB OPPORTUNITY

MEAN FAMILY INCOME

LAND UTILIZATION :TOTAL ACRES DEVELOPED

COMMERCIAL FLOOR SPACE

INDUSTRIAL FLOOR SPACE

RESIDENTIAL ACREAGE

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184
NAXim RESIDBiriAL DEVELOmB^:

miYSIS (OTINUffi)

CaflERCIAL SPIN-OF

(RETAIL)

—Number New Families —Fat^ily Income

—Propensity to Consume Locally

—Average Retail Sales per Square Foot of Retail Space

NB^ SALES GBCRATE)

New Retail Floor7

Space (Sq. Ft.) \

Dumber of

Iew Jobs X

New Retail

Space

OIART 2^

185
The analysis continues with an examination of municipal expenditures under maximum

residential development (25). This examination is facilitated because many of the

municipal expenses can be fairly well projected, given the constraints and assumptions

that have been built into the scenario. Likewise, increases in the school expenditure

can be calculated since the number of new students and the cost of education per student

are known.

Next, the new sources of revenue are computed (26). This is done on the basis of the

increased real value of property previously calculated, increases in state aid which are based on a precise formula, increases in county sales tax revenue which are apportioned

on a per capita basis, and new water sales.

A summary presentation of the fiscal structure under maximum residential development (27) shows that although appropriations are higher than under "do-nothing" the tax

rate is considerably lower due to the increase in total assessed valuation.

Discussion continues with analysis of a maximum industrial development scenario

under which the tax rates are still lower (28, 29, 30).

Finally, a summary of all preliminary results is presented showing the various

demographic, fiscal and socio-economic indicators for each scenario (31). It should be

noted that by no means does this presentation attempt to recommend one particular growth

form over another. Such a decision can only be made by the community and municipal

officials after careful consideration of the indicators in concert with their own priorities and desires. For example, although the tax rate is lowest under industrial

development, the community may not desire such a land use. Likewise, though the

population is highest under maximum residential development, the community may feel that

it does not want the city to grow in size.

Eventually, it will be possible to mix these initial simplified scenarios so that more realistic development options may be examined and evaluated in a participatory

setting (32). -

186
mm RESIDBITIAL DEVELOPMENT

mALYSIS (CONTINUED)

INCREASE IN PUBLIC EXPENDITURE

DUE TO DE^/ELOPMENT

1. Municipal

—Capital

Parks

Streets

Utilities

Etc.

—Operating

Public Safety

Snow Removal

Sanitation

Staff

Water & Sewer

2. Schools

—Fixed Costs

—Variable Costs

i

1

CHART 25

187
mxmm residential development:

ANALYSIS (CONTINUED)

PROJECTED REVENUE SOURCES

Tax Base — State Aid

-- County Sales Tax — Water Sales

CHART 26

188
189
CO

LU

[JJ

(=)

I

I I

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COai

_i

CO

6

Si

>-

CO

ZD —' I- X

CD

6

Z CO LU O

O 3 CJ ^

^ CD Q

U UJ ccz

UJ cr < •—

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cr

UJ

UJ

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CDIJ_ CO ^ UJ UJ UJ CD

ct: ><

^^co

<^

6-" O

P . CO I

oo

CNJ

CO

190
mxinun industrial DEVELOPMBfr

MLYSIS

Develop Suitable Vacant Land

Assessed Valuation

Job Opportunity

Demographic

Number of Families

Capture Rate

Residential Spin-Off

Commercial Spin-Off

Municipal Expenditures

Municipal Revenues

CHART 29

191
o o o

00

IT)

O» •

in

CO CM </> oO 00 • m

CM </> I

h—

CO s

6^

00H

00

CM

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CO to r-l • • • CM o in o

00 in iH

CM

H cn O CO o <

in

CO

in« CO

CO

J2i > H

CO

COO CTN • in ^ CM

r-H <0- ooo

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-CO- wH

>H >^ H <

p^;

H

><

q

H

P^

M

P^ CJ oO 00 • in

CM -co- oO 00 • in

CM <o- o

•H

+J

cd

P»>

CJW

CO

0)CO

CO

cd

FJ •Ho

•H

T-i r-l •H

vD

<}-

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f:o

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cd

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C-)

192
SUfflARY OF PRELiniKARY RESULTS

EXTREME SCENARIOS 1980

Category Zero Action

M

Maximum

RpsmFNTTAI

Maximum

Tisini ktrtai

DEMOGRAPHIC

PhDI II ATTHM ^T7[r rUrULAI I UN OiAc. ID

J

DUU LLj 99 (Tin DUU

I\rc ril CTD TDI IT THM

Ml iMDCD r\c s.r'\jrir\i NUrlDbK Ur OLrUUL ^ Tin

1 UTI r>DCM

FT<^rAI rioL/iL Mt! I TDMc:^ 1 IlLLlUNo/

Municipal Appropriation 5.0 5.8 5.5

Co/j hROVm)

School Expenditures 1.8 2.8 2.0

Tax Base 50.5 85.5 96.5

Assessed Valuation 19.2 34.6

"Fixed" Revenues 3.25 ^5 3.45

City Tax Rate/11000 $ 94 $ 67 $ 59

School Tax Rate/$].000 $ 92 $ 93 $ 58

SOCIO ECONOMIC

Sales Volume $59 Million + 5% + 5%

Job Opportunity + 75 + 2600

McAM FaMTI V TM(^nMC

(1970 dollars) $ 9000 +15% + m

TOTAL VACANT M DEVELOPED 280 ACRES 129 ACRES

CHART 31

193
PARTICIPATORY PLANNING SYSTEM

HV 1 UCMC LXIKtrlh LA 1 Ktrt LA 1 Ktrlt

Scenario Scenario Scenario

3Z

DFINE MIX

. Acres Res.

. Density

. Acres Com.

DBiOGRAPHIC

.ANALYSIS

ECONOMIC

ANALYSIS

. Tax Base

. Job Opport.

. Sales Volume

lUN. FISCAL

ANALYSIS

. Expenses

. Revenues

FINDINGS &

INDICATIONS

EVAUJATION

ISPdISAN ACCEPTABLE MIX?

CHART 32

194
NBS-1 14A (REV. 7-73)

U.S. DEPT. OF COMM. BIBLIOGRAPHIC DATA

SHEET

1. PUBLICATION OR REPORT NO. NBSIR 74-5152, Gov't Accession

No.

3. Recipient's Accession No.

4. TITLE AND SUBTITLL

Report of Conference on Making the Service Industries More

Productive through Computers and Automation

5. Publication Date June 1974

6. Performing Organization Codfe

7. AUTHORISE

Alan K. McAdams and Madeline M. Henderson

8. Performing Organ. Report No.

9. PERFORMING ORGANIZATION NAME AND ADDRESS

NATIONAL BUREAU OF STANDARDS

DEPARTMENT OF COMMERCE

WASHINGTON, D.C. 20234

10. Project/Task/Work Unit No. 600 1105

11. Contract/Grant No.

12. Sponsoring Organization Name and Complete Address (Street, City, State, ZIP)

The Engineering Foundation and

The National Bureau of Standards

13, Type of Report & Period Covered

r xna J 14, Sponsoring Agency Code

15. SUPPLEMENTARY NOTES

16. ABSTRACT (A 200-word or less factual summary ol most significar\t information. If document includes a significant

bibliography or literature survey, mention it here.)

The Engineering Foundation and the National Bureau of Standards, Institute

for Computer Sciences and Technology, co-sponsored this conference to bring

together persons actively concerned with the subject to identify gaps in knowledge,

needs and opportunities in the area, and to point up governmental goals and programs

to respond to such needs. This report contains the principal presentations and

the texts of Workshop Panel reports prepared during the conference.

17. KEY WORDS (six to twelve entries; alphabetical order; capitalize only the first letter of the first key word unless a proper name; separated by semicolons

)

Automation; computers; productivity; service industries

18. AVAILABILITY [XX Unlimited

1 For Official Distribution. Do Not Release to NTIS

1

' Order From Sup. of Doc, U.S. Government Printing Office Washineton. D.C. 20402. SD Cat. No. C13

1

^ Order From National Technical Information Service (NTIS)

Springfield, Virginia 22151

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22. Price

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195