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Networked Corporation


Cover Story: Information Technology Annual Report

NETWORKED CORPORATION

THE THE INTERNAL REVENUE service had a great idea a few years ago: Let millions of taxpayers simply phone in their returns. After successfully testing pilot systems, the agency is ready to go live in 1996. Some 26 million taxpayers who use the 1040EZ form will be able to call an 800 number, tell a voice-recognition computer their vital statistics--Social Security number, taxes withheld, and income--and, on the spot, the machine will say how much is owed or due. The system could save millions--and make tax day a bit less gruesome.

Seems like a great example of how the combination of clever computers and advanced networks can speed things up, eliminate hassles, and save money. And it could be. But because Congress requires that all tax forms be signed with a pen, taxpayers who use the new setup will still have to mail in paper returns--which will have to be processed the old way.

So you're probably thinking: That's the government for you--so mired in red tape that it can't begin to make use of high-tech networking. But think about your own company. Does your legal department let you accept a contract that has been sent by electronic mail? Can your employees fill out their expense forms on PCs, then get them approved and filed electronically? Does information flow freely throughout your organization to wherever it's needed, rather than up and down the hierarchy? Can customers dial into your computers to check the status of orders--instead of playing phone tag with somebody in your sales department? Is your company saving money by electronically linking up with a dozen suppliers in a just-in-time inventory network?

The answer is probably: Not yet. And it isn't because the telecommunications world hasn't dreamed up enough products and services. There are LANs and WANs, routers and brouters. There's SONET and ISDN and TCP/IP and ATM--a jumble of jargon representing huge advances in technology to move information anywhere it needs to go. The Electronic Industries Assn. estimates that U.S. manufacturers will ship $64 billion worth of communications gear this year, a 24% gain over 1994, while shares of 3Com and Bay Networks, makers of internetworking gear, are surging. Giant IBM believes its customers want groupware technology for networks so badly that it's spending $3.5 billion on Lotus Development Corp. to get it (page 96).

IBM is playing a costly but essential game of catch-up. From making widgets to posting electronic ads to collecting payments, businesses are going electronic, or trying to. That's why BUSINESS WEEK is devoting its first Annual Report on Information Technology to the Networked Corporation.

Even though networks are pervasive, the benefits they promise are maddeningly elusive. "The technology is here," says Daniel Shubert, director of client/server technical services for Electronic Data Systems Corp. "The problem is not with the technology, but with the corporate processes. Companies must fundamentally change the way they do business, and that's hard." In other words, you can't run a 21st-century networked corporation with 1950s rules.

Outdated management schemes aren't the only human factor holding things up. Around the world, politics has slowed attempts to liberalize outdated telecommunications regulations, leaving most countries with regulatory restraints that phone companies say restrict their ability to offer the most advanced services, such as video dial tone. And since most of the world's phone companies have yet to deploy modern digital transmission schemes, it's still tough to cobble together a high-speed network over large distances. Within a building, a local-area network (LAN) transfers data at "broadband" speeds--10 million bits, or 10 megabits, per second or more. Then the data hits the local and long-distance nets, and speed drops quickly, to 2 megabits at best.

And though digital technology has cut transmission costs, in the absence of real competition, local phone companies haven't passed on the savings, customers complain. "There has been a 20% to 30% reduction in network costs, but there has been no big decline in thecost to the customer," says Andrew Grove, CEO of Intel Corp. "Intel constantly badgers the phone companies to lower prices."

Congress is currently debating a deregulation bill that would allow competition among local and long-distance companies and cable-TV systems, as well as various and sundry new entrants. But several previous bills have been killed by gridlock (page 110).

Businesses can't afford to wait. In the 1980s, a handful of cutting-edge corporations such as Wal-Mart Stores Inc. and Federal Express Corp. showed how networks--when used to support novel business approaches--can change the competitive landscape. Now, getting wired to speed up internal processes and reach out to others electronically is an imperative. "The ability to do more and more commerce over a network is at the forefront of everybody's thinking," says George T. Shaheen, managing partner of Andersen Consulting. "What's going to happen--because we want it to--is that the network is going to take time, distance, and space out of the equation."

For those that don't get it, the future could be grim, warns Robert M. Curtice, director of Arthur D. Little Inc.'s North American Management Consulting Group. "Whole industries will restructure or disappear," he says. "For some companies, such as banks, if they haven't started doing [electronic commerce], it may already be too late."

In industry after industry, though, you'll find companies that are starting to reap big benefits from networking. BP America Inc., for example, the U.S. subsidiary of British Petroleum Co., is setting up a system that will process at least 40% of the 440,000 invoices it receives each year electronically. The switch will do more than save on man-hours and paperwork: BP expects to be able to eliminate duplicate purchases and negotiate bulk rates.

A networked corporation can do business anywhere, anytime, getting a jump on competitors that still conduct business the old-fashioned way. And it no longer matters where your best and brightest talent resides: Sweden's L.M. Ericsson has 17,000 engineers in 40 research centers located in 20 countries around the world, all linked into one network. Development teams in Australia and England work together on the same design, then zip off the final blueprint to a factory in China.

In many businesses, networks allow companies to vacate expensive office space because employees can get their work done wherever they roam (page 104). Andersen's Shaheen runs the Chicago-based consulting firm from his office in Palo Alto, Calif., and doesn't much care where his employees are--as long as they're connected to the network. ISDN (integrated services digital network), a high-capacity digital service available to residential phone customers, could be a boon to telecommuting.

Still, the biggest payoff from networking comes when companies use it to do better by their customers. Two years ago, Del Monte Corp. started getting daily inventory reports electronically from grocers. When stocks fall to a predetermined minimum level, the Del Monte network immediately issues a restocking order. Retailers need only keep some 11/2 weeks of inventory on hand as a result, compared with the four weeks' worth they used to warehouse to avoid shortages. "One week of inventory in a warehouse costs a retailer some $250,000 a year," says R. Vincent Livingston, manager of efficient consumer response for Del Monte. "The biggest thing a customer wants is to not have to invest as much in inventory."

Most corporations have taken the first steps toward such digital nirvana by installing LANs to connect their ubiquitous desktop computers. A decade after they started linking PCs, LANs are the central nervous systems of offices. They carry everything from E-mail to desktop videoconferencing. At their best, LANs support sophisticated client/server computing setups that not only supplant older mainframes and minicomputers but also allow staffers to do things the old setups couldn't, such as working on the same document simultaneously.

Getting to that stage is not easy. The complexity of putting all the technology together is enough to send managers screaming for pencil, paper, and stamps. For the network to operate smoothly, everything on it must adhere to consistent hardware and software standards and communications protocols. This goes beyond whether to buy IBM or Apple, Windows or OS/2. You have to worry about bridges and routers that connect LANs in different departments, modems and gateway computers that move data to the outside world, and the PBX that routes phone calls. All of these decisions are affected by how much capacity, or bandwidth, you want and the number of employees using the network.

The more cutting-edge the technology, the dicier the decision-making. For example, a new set of superfast digital-transmission technologies is appearing for wide-area networks (WANs). Asynchronous transfer mode (ATM) is particularly good at mixing voice, data, and video traffic at high speeds. Frame relay can send large files quickly by temporarily seizing extra bandwidth, and SONET, a technique that sends signals simultaneously over two different paths, raises the reliability of the net. Together, these three promise WANs that can hit speeds as high as 1 billion bits per second.

But mixing these technologies with existing networks means dealing with a host of vendors, each interpreting so-called industry standards its own way. A dozen suppliers offer gear built on the ATM standard, but it's rare to find two exactly alike. And, warns Howard Anderson, managing director of Boston-based consultant Yankee Group Research Inc.: "If you build it wrong, you'll be chasing your tail trying to correct it well into the next century."

There are a couple of ways around the complexity. One is "middleware," software that acts as a translator for all the different devices and programs that make up a net (page 92). The beauty of middleware is that it provides a way to bring older computers in on the scheme. "Green-field opportunities are very, very scarce today. You always have to deal with legacy systems," says Krish A. Prabhu, chief technical officer for Alcatel Network Systems.

Another option is to adopt the communications protocol of the Internet. TCP/IP, the shorthand way of saying transmission control protocol/Internet protocol, is now being worked into everything from mainframes to LAN equipment. Its near-universal use is making it the lingua franca of electronic commerce. And the World Wide Web, which provides an orderly way to go from one Internet computer to another, is rapidly turning into a virtual commercial district (page 100).

Or you can just sidestep the complexity altogether by leaving it up to somebody else. The network muddle is a boon to consultants and "outsourcers"--companies such as EDS that take over a company's entire network operation for an annual fee. Market researcher Dataquest Inc. estimates that the computer-services business will grow from $33.3 billion in 1993 to $65.2 billion in 1998, with the network-management portion increasing from 26% to 31%. Gregory M. Jacobsen, executive vice-president for outsourcing services at SHL Systemhouse Inc., points out that bringing in a third party also makes it easier for the chief information officer to rein in all those PCs. "The modern CIO is starting to recognize that outsourcing...is a way to win back control," says Jacobsen.

In the end, however, getting the most out of the network means giving up control. A key difference between companies that make the net work for them and those that don't is their approach to information. "You can't assume that people will share information on a peer-to-peer basis just because the network allows them to," says Yankee Group's Anderson. But until a company is willing to share information with workers at the sales counter or the shop floor, the most sophisticated network technology won't help the bottom line.

Communications Jargon That You Should Know

Here are some of the key technologies and standards that go into making a modern corporate network. Drop a few of these at parties and impress your friends.

ASYNCHRONOUS TRANSFER MODE (ATM) A high-speed digital switching and transmission technology that allows voice, video, and data signals to be sent over a single line at speeds ranging from 25 million to 1 billion bits per second (bps). An analog phone line transmits at about 2 million bps--at most.

BRIDGE A device that links two local-area networks together so they can share data.

BROADBAND Refers to any transmission at a speed higher than 2 million bps. A broadband network can carry voice, data, and video signals simultaneously. Remember: You can't be too thin, too rich, or have too much transmission capacity.

CLIENT/SERVER A method of computing in which one computer acts as a central repository for files and programs that can be shared by a number of "client" PCs connected by a network. Replaces a mainframe-centric setup.

ELECTRONIC DATA INTERCHANGE (EDI) A series of standards that allows computer-to-computer exchange of business documents, such as invoices, shipping orders, payments, etc., between different companies.

ETHERNET A set of local-area network (LAN) standards that allows networking products from different vendors to communicate. Introduced some 20 years ago, it is the most widely used LAN technology.

FRAME RELAY A transmission standard for sending data over public or private leased phone lines. Data is broken down and placed in frames, each the same size, for relaying.

INTEGRATED SERVICES DIGITAL NETWORKS (ISDN) Offered by local phone companies, this protocol turns a standard copper phone line into a high-speed digital link that can send voice and data simultaneously. With an ISDN line at home, you can pretend you're in the office using the LAN.

LOCAL-AREA NETWORK (LAN) A network within a building or a limited distance that links computers and peripheral devices, allowing them to share information and programs.

PACKET SWITCHING An efficient way of moving data through a network. A file is broken up into little packages that are sent by different routes through a network and then reassembled at the receiving end.

PRIVATE BRANCH EXCHANGE (PBX) An automatic telephone switch for an internal phone system. It replaces the old-fashioned office switchboard and manages the voice-mail system.

ROUTER A device that connects LANs that use different standards; essentially a more sophisticated type of bridge. What do you get when you cross a bridge and a router? A brouter, of course.

SONET Stands for synchronous optical network technology, but don't worry, no one ever uses the full name. A high-speed transmission architecture meant to exploit the huge bandwidth available on fiber-optic networks.

T1 A standard for digital transmission over phone lines. In North America, it can handle at least 24 voice channels at once using copper wires and transmits at a rate of 1.5 million bps.

WIDE-AREA NETWORK (WAN) An enterprise-wide communications network that allows signals to be transmitted from a LAN via a public or private line to other LANs in distant locations.By Catherine Arnst in New York, with bureau reports


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