Cases
Cases
Cases
Overview
This appendix presents seven case studies that illustrate various problems that
arise in MIS. Remember that most problems can affect many areas of a company. Any real-
istic situation will have many different problems or symptoms. It is important to search for
the causes of the symptoms. Chapter 3 presented some hints and techniques that can be
used to approach case problems and look for causes. One useful step is to try to classify the
level of the problem: operations, tactical, or strategic. Although many problems will affect
all three areas, the fundamental causes often focus at one level.
When you are searching for solutions to business problems and cases, it is often
helpful to examine what other companies have done in similar situations. The previous
chapters had several examples of cases and applications that might prove useful. Also,
business and MIS publications continually provide examples of problems faced by existing
Remember that business problems rarely have a single correct answer. There is al-
ways room for creativity and innovation. Just make sure that your solution will actually
solve the main problems. Also, think about the implications of any solutions. Will it cause
Virtually any MIS case could be solved with the simple statement that the firm
needs more computers. However, a one-line statement is not a very useful plan. In any
business setting, you not only have to find an answer, you must also persuade others (ex-
ecutives) that your answer is the best alternative. Additionally, a good solution will contain
an implementation plan—perhaps with a timetable that delineates each step of the process.
1
Crystalline Entities
According to the sign on the building, Crystalline Entities (CE) (a fictional company)
was founded in 1895 by Hugo Salazar. In reality, the company was started in 1957 by De-
nise Luzon to import crystal glass figurines and china plates for sale in the United States.
Hardly anyone who works at the company today remembers that Denise was really respon-
sible for the creation and initial success of the company, and that irritates John Balrun, the
current CEO. Denise retired years ago and the firm is now a publicly traded company with
annual sales of about $20 million. John has been CEO for seven years. All but one of the
vice-presidents have been hired within the last five years. The VP of finance, Martha Vani-
che, has been with the company almost as long as John. Because of turnover, most of the
342 employees at the corporate offices are younger and have worked there an average of
ing, accounting and finance, production and purchasing, distribution, and human re-
sources). About 15 years ago, CE bought several small manufacturers in Ireland and Spain.
These firms make up about 15 percent of current production. They are located in small
towns with low labor costs and are run independently by local managers. The local manag-
ers know their employees personally and emphasize quality production. Items that don’t
pass the quality inspections are either destroyed or sold to local buyers. The other 85 per-
cent of the production is purchased from a variety of companies around the world. Quality
is maintained by inspecting all shipments and by dropping suppliers who cause problems.
Although there are many products, there are three basic types of sales. First, many
of the products are given as gifts (especially for weddings and anniversaries). These pur-
chases are typically made through department and specialty stores. The second type of sale
2
consists of add-on and replacement pieces that complement or complete a set. Many of these
items are sold as special orders that are placed by customers through the department
stores. Occasionally customers will order pieces directly from CE. The third type of sale is
through various factory outlet stores. These stores are scattered across the country and
typically offer out-of-date items for 20 to 30 percent discounts. The stores are independently
owned, and CE offers them substantial discounts whenever they wish to drop certain pat-
Core Products
The core products are crucial to Crystalline Entities. By keeping costs down, and by
offering lower prices and special packages, CE uses the core products to capture market
share. As a result, the core products represent about 60 percent of the total sales, but only
15 percent of the profits. The special orders are considerably more profitable and make up
about 70 percent of the total profits. Miscellaneous products and impulse purchases make
up the rest of the sales. When CE experienced decreasing sales growth 15 years ago, the
decline not only hurt current profits but also sales for the next three years because of lost
Going back to the early days of the company, Denise decided that it was best to focus
on a few core products. To compete against the established companies she wanted to offer
good-quality crystal and porcelain products at a lower price than the competitors. Her de-
ception about the age of the company was deliberately used to build an image of an estab-
down, the company was organized to emphasize decentralized decisions. Products were or-
dered in bulk from overseas producers with low labor costs. The core items were stocked in
3
specialty stores and convincing managers to carry the CE products. When buyers became
convinced of the quality and compared prices to existing brands, sales increased. As sales
increased it became easier to convince additional stores to carry the products. Corporate
profits increased and the company expanded. About 15 years ago, the company ran out of
new markets and experienced major growing pains. Budgets were cut, staffing was slashed,
At some point, CE began experimenting with new designs and items that were
aimed at impulse purchases. The goal was to increase sales by capitalizing on the CE repu-
tation for good-quality products at reasonable prices. Today, there are two basic categories
of products: a core group of styles and patterns that is always in stock, and temporary or
experimental items and china or crystal patterns. CE guarantees that the core items will
always be available so that customers can expand their sets or replace broken items.
When the company experienced the decline in sales, management decided to recom-
mit the company to providing high-quality products at lower costs than the competition. As
part of that strategy, they decided the best way to hold costs down was to keep manage-
ment operations as simple as possible. Hence, the various operations were delegated to de-
and processing orders that are sent to the distribution department. Marketing also pro-
duces rough sales forecasts for the next quarter. These reports are based on comments by
salespeople and focus on categories of products (crystal, core products, experimental, special
orders, and miscellaneous products). The reports are sent to production and senior manage-
ment. New designs are sent to production and purchasing for final approval and to estimate
the production costs. Every month, basic accounting numbers on costs are sent to the ac-
counting department.
4
Business Function Responsibilities
Purchasing and production focus on quality and are responsible for finding low-cost
production facilities that can produce large quantities of standardized products. Production
reports and schedules are sent to the marketing department every month, with quarterly
summaries sent to management. Quarterly production cost and profit numbers are sent to
the accounting department for the quarterly financial reports. On the purchasing side, pur-
chase orders are sent to accounting, with monthly summaries sent to marketing. When the
manufacturer ships products, the company includes an invoice and also sends a separate
them in warehouses, and delivering the appropriate items to each store. Costs are kept un-
der control by billing retail stores for freight charges. Each warehouse manager has control
over which products are sold at a discount to factory outlet stores. When products have
been around too long, they are offered to outlet stores at whatever price they can get. Each
warehouse produces a quarterly inventory report and a monthly list of sales to outlet
stores. Both reports are sent to marketing, which sends them on to accounting. When prod-
ucts arrive at the warehouse, a receiving list is created that is sent to purchasing which
cross checks the list with the supplier shipping lists. Weekly reports of items shipped from
Finance and accounting create traditional quarterly statements that are distributed
to the other departments and to management. Accounts receivable send bills to customers
and records payments. All of the financial records are stored on the IBM AS/400. Analysis
of some of the reports and taxes are processed on the personal computers.
5
Existing Computer Facilities
As a result of the decision to simplify management of the firm, each department
tends to operate independently of the others. Basic financial and personnel data is collected
by accounting and finance to produce quarterly and annual reports. The MIS department
consists of three people who work in the accounting department. The midsize IBM AS/400
computer records orders from the department stores, basic payroll data, inventory, and
standard financial data. It produces traditional accounting statements and other basic re-
ports for the government. Accounting and human resources use the computer most often.
All of the VPs and most of the managers have personal computers on their desks
that are attached via a LAN to the AS/400, giving them access to the basic reports. The per-
sonal computers are also used to write memos and perform simple calculations using
Currently, around 1400 stores are regular customers of CE. They typically place one
or two orders a week for core products and miscellaneous new items. On average, CE re-
ceives about 800 orders a day for specialty items. Most orders are filled and shipped within
three working days. Orders are generally shipped from the nearest warehouse. There are
five warehouses scattered across the United States—all in low-wage and low-rent areas.
Occasionally, when a warehouse does not have enough items, the warehouse manager will
call the other warehouses and have them ship the product. Orders, shipment invoices, and
billing are handled by the computer. The accounting department uses the data to track ac-
counts receivable. Because of the volume of data, the orders and shipping invoices are
moved to tape backup every month and removed from the online system. Only the basic or-
der data (date, buyer, totals, etc.) are kept on the system.
6
The design department in marketing has a small network of computers to help the
group with art designs. Many of the patterns and colors are created with graphics packages.
Some people do initial designs on paper and scan them into the computer to experiment
with variations and different colors. Members of the design department actively use their
network to share ideas and pieces of designs. Although their smaller LAN is also connected
to the central computer, there has been little reason for them to use the central computer.
year, the designers introduce new patterns, and they want to place them in the core group.
It is a personal status symbol for the workers to have their designs placed in the permanent
collection. Yet, the company cannot afford to have thousands of different patterns in the
core group, because it would require a huge inventory. On the other hand, some items in
the core group have not sold very well for many years. Every year, there is a meeting
among all the VPs and departmental managers to decide which products should be included
in the core group. These meetings often degenerate into arguments and shouting matches.
Lately, John Balrun has noticed that the younger staff members and VPs seem to be joining
together and yelling at him and Martha. The accountants have supported the decision to
hold the core products stable and to hold costs down. The marketing department believes it
It seems that the arguments and political negotiations have started early this year.
Several managers have been circulating a memo complaining that the finance and account-
ing departments refuse to cooperate with the designers. Jan Dover, the head of the design
department, is complaining that the group can’t get sales figures for each of the new pat-
7
terns. They want also want to track sales of the core patterns during the last few years to
see which ones could be dropped. The designers are claiming that the accounting depart-
John Balrun initially dismissed Jan’s complaint, because there has been consider-
able antagonism between her and Martha. John suspects that Jan’s memo is just a political
ploy to gain attention before the annual design meeting. However, it seems that Jan went
to the MIS department with her request for additional information. The MIS department
complained to John—saying the staff are already overworked. They say CE will need a new
faster computer, a massive increase in disk space, and at least two new programmer ana-
John called a meeting with Jan, Martha, the head of accounting, and the MIS mem-
bers. At the meeting, the MIS group stated that it was impossible to provide the data re-
quested by the design team. The only data that was kept for more than a year were the ba-
sic financial and accounting statements. These statements provide summary values for
sales by category, but not for each design pattern. In fact, the only detail records that might
be available on backup tapes were production data and some inventory figures for the last
couple of years. After considerable discussion of the experimental patterns, it was decided
that it was impossible to obtain accurate sales figures. At best, the only numbers available
were orders and shipments to the retail stores. Occasionally, the CE sales people submit
informal reports on which items they believe are selling well, and which ones are sitting on
the shelves. Someone at the meeting suggested using final inventory levels at the ware-
house as an indicator of how well products were selling. However, the distribution manag-
ers have control over the size of the warehouse inventories. Sometimes a product sells well
when it is introduced and the managers load the warehouses, but then have a high inven-
8
tory at the end of the year. In other cases, the warehouse manager might have already
unloaded weak-selling items to a factory outlet at a discount price. To keep costs under con-
trol, the warehouse managers record outlet sales only by category, which is not itemized by
The designers now accept that the data they want is not available to make design
decisions this year. However, they have stated that they want to change the current system
so that they can make better decisions next year. John Balrun does not know where to
start. It appears that most of the data does not exist. Plus, it looks as if any attempt to
change the current system will go against the fundamental goals of Crystalline Entities:
provide quality crystal, porcelain, and china at prices below those of the competition.
Case Questions
1. Can MIS help Crystalline Entities? In particular, is it possible to get the data re-
quested by the designers?
5. Devise improvements that will solve the basic problems of Crystalline Entities. In-
clude an implementation plan.
7. Is it possible to satisfy the designers and keep the essential goals of the company?
9
Tennessee Valley Authority (TVA)
The Tennessee Valley Authority (TVA) is a quasi-public federal organization head-
quartered in Knoxville, Tennessee, that was founded in 1933. It provides electric power;
flood control; navigation; and agricultural, economic, and industrial development through
the Southeastern United States. It is the nation’s largest electric utility. It makes most of
its money ($5.1 billion in 1992) by selling electric power to regional power associations. It
provides power to more than 160 municipal and cooperative power distributors who service
more than 7 million consumers. In addition, special projects are funded by Congress
(amounting to $135 million in 1992). The 19,500 employees are divided into several busi-
ness units, including finance, power generation, marketing, and navigation. The IS de-
partment consists of 925 employees and has an annual budget of $100 million. Through re-
structuing, by mid-1995 the total number of employees had been reduced to 16,500.
power solely from TVA. Many of these contracts had extended time frames of 35 to 50 years.
Many of these contracts are now due for renegotiation, and other utilities are eager to ex-
pand their markets. Additionally, the federal government is encouraging competition in the
production of electricity. As a result, TVA has to become more cost conscious. As of 1994,
the Energy Policy Act of 1992 effectively frees customers to choose the electric company
they wish to use. Wholesale corporate utility customers can already buy their electricity
from a variety of sources. It is unclear at this time whether individual households will have
10
the option of selecting power providers. The act is primarily designed to provide multiple
ed as the head of the board. The day-to-day activities are governed by the general manager,
the comptroller, the general counsel, the chief budget officer and the director of informa-
tion. The separate business units are largely independent of each other. They have separate
divisional leaders, separate budgets, and different objectives that occasionally conflict. Also,
The TVA has an interesting history in terms of management and labor relations. Al-
though it is technically an agency within the federal government, its employees are not sub-
ject to Civil Service regulations. Congress decided that because of the technical nature of
the agency, it required highly trained employees, so it should be free to hire employees from
the national job market without the political considerations involved in the Civil Service
system. In 1940, TVA became the first U.S. federal agency to adopt collective bargaining.
By 1977, 99 percent of eligible trade and labor employees were members of a union. Even
management level and “white-collar” employees are members, with 87 percent of eligible
Employee promotions and raises are based on merit evaluations. As part of the employee
tency, merit, and efficiency. Hence, membership in a union virtually guarantees job tenure
11
Because TVA is a federal agency, an unusual problem has arisen. The TVA Act of
1933 that established the agency set a maximum salary of $10,000 for members of the
board of directors. More importantly, it stipulated that no employee could receive a higher
salary than the amount paid to the directors. Because this value was fixed by Congress, it
could only be changed by Congress by passing new legislation. Consequently, the value is
not changed often and the TVA has had trouble hiring and keeping professional employees.
As a result, the agency has a history of relying on outside consultants who are not directly
affected by the salary cap because they are paid for individual tasks.
tially had its own IS department. Computer hardware consisted primarily of large IBM and
compatible machines centrally located in the Knoxville offices. Data management and soft-
ware development were largely left to the individual business units. Most development of
software was in COBOL. The business units were happy controlling their own group of IS
employees. However, there was considerable duplication of effort. Additionally, the individ-
ual departments and their software tended to be maintained separately from other de-
partments. There were virtually no corporate standards, so hardware and software pur-
chased and designed for each business unit often required major modifications whenever
someone wanted to share data across departments. Overall, the IS staff was spread too
core MIS team. However, the operating divisions tended to mistrust the central MIS de-
partment. They had earned a reputation of being late and over budget with most projects.
The central MIS team was also accused of being heavily biased in favor of solutions involv-
12
ing centralized programs written in COBOL. It was generally accepted that the MIS team
would always advocate a solution that they knew best—regardless of the technical merits of
the alternatives. As a result, the business units often turned to outside consultants and
completely. For instance, in 1992, the finance department called on Coopers & Lybrand and
In 1991, TVA signed a five-year contract to purchase up to $60 million worth of per-
sonal computers and local area network equipment from Concept Automation Inc of Ster-
ling, Virginia. Part of the goal is to shift the company toward an open systems environment.
Managers who need PCs within the company will order them from TVA offices in Chatta-
nooga. The bulk of the purchases are expected to come from the headquarters in Knoxville,
but offices in Huntsville, Alabama, and Chattanooga are expected to buy several PCs
In early 1992, TVA took the first steps to implement an agencywide geographic in-
formation system. The authority awarded a $750,000 contract to ESRI for Arc/Info running
on Sun workstations. The goal is to create a $13-million Automated Land Information Sys-
tem over eight years. The goal is to provide better management data to foresters, biologists,
Centralization
In 1990, the head of IS decided to centralize the IS department to reduce duplication
and help control costs. This centralization offended the heads of the various business units,
largely because they saw it as a loss of control. In the process of consolidating the IS de-
partments, the head of IS also offended the IS workers because he was stressing a shift to a
13
database management system, signing a $16-million contract. The IS programmers and
analysts felt that management was “shoving Oracle down their throats.” The IS department
is represented by three different unions, which provide alternative channels for complaints
and grievances. As a result, the initial agreements with Oracle were investigated by the
TVA inspector general for alleged collusion and kickbacks. After three years of investiga-
rate treasurer to “clean up the mess” in the IS department. Yates noted that there were “a
Yates consulted with N. Dean Meyer and Associates, Inc., and with the IS workers
to help create a new IS structure that would satisfy the business units, please the IS work-
ers, and improve the competitive position of TVA. The new plan basically keeps the current
(centralized) structure. It organizes the IS workers into four categories: (1) service bureaus
various technical experts; (3) a consultancy of about 30 members who will help the business
units determine their needs as well as market the IS capabilities; and (4) A small number
of architects to define corporate standards. Yates also plans to institute a charge-back sys-
tem to bill the business units for IS services. He is concerned that they look at IS as a “free
good”; hence there would be incentive to overuse the IS department, instead of searching
In 1993, the MIS department began searching for a management software tool to
help them centralize the administration of all the workstations throughout the company.
14
For example, in 1993 there were more than 100 Sun high-end workstations and 400 smaller
Sparcstation 2 machines in use. Robert Khym, TVA’s manager of distributed systems soft-
ware support, noted that “The next step will be finding something that will integrate all of
In 1993, TVA began replacing its mainframe computers with Unix-based midrange
computers. Each of the 24 dams, 12 fossil fuel plants and 4 nuclear reactor plants operate
each site. There is limited information flow between the various sites, but TVA is in the
process of installing a wide area network to allow easier transfer of financial data. The ex-
As part of its consolidation plan, TVA signed a contract with PeopleSoft Inc. to use
that company’s client-server payroll software package. After some alleged problems about
making the package work with the IBM DB2 database applications, the TVA inspector
general’s office called a halt to the installation and began an investigation into the purchas-
ing process.
when power sales were growing at a steady rate and were expected to double
every 10 years. In the Tennessee Valley, the number of electricity customers
rose to over 2 million in the 1960s and about 30 percent of all the homes
were heated with electricity.
By 1970, TVA customers used nearly twice as much electricity as the na-
tional average. At that time, TVA was experiencing an annual growth rate
of about 8 percent in demand for electricity, and TVA’s forecasts through
the mid-1970s were showing continued high growth in demand.
15
In 1966, TVA announced plans to build 17 new nuclear plants in seven states. Many
other utility companies announced similar (though less ambitious) plans. The oil crises of
1973 and 1978, the Three Mile Island disaster of 1979, and construction problems and cost
overruns caused most companies to cancel the construction of the majority of nuclear
plants. A changing regulatory environment of the 1980s also encouraged electric utilities to
tion, purchase more energy-efficient appliances, and employ newer heating and cooling sys-
tems resulted in a significantly smaller growth rate in consumption. By 1984, after invest-
Of TVA’s nine remaining nuclear sites, three were operational in 1995 (Browns
Ferry 2, Sequoyah 1 and Sequoyah 2). After 22 years of construction, Watts Bar 1 was be-
ginning final testing and expected to be placed on-line in early 1996. One unit (Browns
Ferry 3) began operations but was shut down because of repeated problems. Four other
units were placed into “mothball” status, pending an analysis to determine whether they
should be continued, converted to alternative fuels, or shut down completely. Total TVA
spending on nuclear facilities is more than $25 billion, of which only $5 billion applies to
functional plants. TVA is the only U.S. utility still actively constructing nuclear plants. The
$25 billion constitutes the bulk of the $26 billion debt (mostly public bonds) of TVA, but the
nuclear plants generated only 14 percent of TVA’s total power supply in 1994.
tions. By its internal accounting methods, TVA is meeting this mandate; however, $14 bil-
lion of the nuclear construction debt is not being financed from current operations. In 1995,
TVA had a total debt of $26 billion, with financing costs of $1.9 billion a year (35 percent of
16
its power revenues). TVA faces a Congressionally imposed debt ceiling of $30 billion, and
TVA expects to increase its debt to about $28 billion by 1997—in part to cover final produc-
tion costs at Watts Bar, in part to cover interest payments on its debt. As a federal agency,
TVA cannot sell stock (like most traditional utilities), so all funds must be raised from bond
sales. Although these sales are not guaranteed by the federal government, some investors
believe that the federal government will not allow TVA to default on the bonds. Conse-
quently, TVA has a slight advantage over potential competitors in terms of interest rates.
TVA also anticipates the need for substantial expenditures to improve existing hy-
droelectric and coal-fired plants. Additional expenses will also be incurred in bringing all of
the coal-fired plants into compliance with the Clean Air Act. Based on preliminary esti-
mates, TVA anticipates spending between $1.1 and $1.6 billion between 1995 and 2015 (in
In public statements, TVA repeatedly emphasized that they have not raised electric-
ity rates in nine years, and they are trying to hold them stable for at least 10 years. None-
theless, TVA is not the lowest-cost producer in the area. However, for the immediate future,
As part of the Energy Policy Act of 1992, TVA is conducting an integrated resource
planning (IRP) process—largely to determine future goals, changes in production and op-
erations, and the least-cost means of providing power. TVA is conducting the plan with sev-
17
• Customer Service Options Team
• Environment Team
• Rankings Team
• Strategy Development Team
• Uncertainties Team
• Integration Team
Each of these teams is responsible for identifying problems, making forecasts, and
presenting and evaluating alternatives. Many of the teams use statistical and computer
simulation models to test assumptions and evaluate the alternatives. The final report will
In 1998, the TVA chairman became frustrated with negotiating with Congress. He
offered to drop all federal subsidies—in exchange for complete control of the company and
competition. On the other hand, several people have complained about the possibility of los-
ing federal subsidies for the administration of thousands of acres of land and lakes open to
the public.
prehensive investigation of TVA and its problems. The GAO’s financial comparison of TVA
with potential future competitors is particularly useful. Additional comments and statistics
Comparison of Key Financial Ratios for TVA and Neighboring IOUs, 1994
(figures in percent)
Utility Financing Fixed financ- Net cash from Accumulated de- Deferred as-
costs to ing costs to operations to precia- sets to gross
revenue revenue expenditures for tion/amortization PP&E
PP&E and CSD to gross PP&E
AEP 16 8 90 38 1
CP&L 16 7 132 35 2
DR 19 9 86 34 5
DP 16 7 81 36 4
ENT 20 13 121 32 2
18
IL 14 11 115 31 5
KU 15 6 54 40 4
LG&E 14 6 82 35 1
SC 18 9 92 31 4
TVA 35 35 57 17 47
IOU Summary
Average 16 8 95 35 3
High 20 13 132 40 5
Low 14 6 54 31 1
Notes: CSD: Common Stock Dividends; PP&E: Property Plant & Equipment;
AEP: American Electric Power; CP&L: Carolina Power and Light; DR: Dominion
Resources; DP: Duke Power; ENT: Entergy; IL: Illinova; KU: KU Energy; LG&E:
LG&E Energy Corp.; and SC: Southern Company.
19
Fiscal Year 1994 Key Statistics for TVA and American Electric Power
(Dollars in millions)
TVA AEP
System capacity (MW) 25,913a 23,670
System sales (in millions of kilowatt hours) 122,574 116,714
Net total assets $31,842 $15,713
Deferred assetsb $15,726 $259
Total debt $26,136 $6,309
Operating revenue $5,401 $5,505
Net financing costs $1,772 $887
Net fixed financing costs $1,772 $443
Depreciation and amortization expense $639 $572
aRepresents dependable capacity currently in service. It excludes about 2,230 MW of capac-
ity for Watts Bar 1 and Browns Ferry 3 that TVA plans to bring into commercial service in
1996.
bDeferred assets are included in net total assets. The deferred assets include about $8 bil-
Introductory Questions
1. How would you classify the operations and management structure of TVA? In par-
ticular, does it lean toward centralization or decentralization?
2. How would you classify the management information systems at TVA? How has the
authority changed between 1991 and 1994?
3. What are the advantages of each business unit having its own MIS department?
What are the disadvantages?
4. What did the MIS director attempt to accomplish in 1992? What went wrong?
5. How is Yates altering the MIS department and its mission? Will his plan work?
6. Create a five-year plan for the MIS department at TVA. Examine the potential prob-
lems you expect to encounter and how they should be solved. How can the MIS de-
partment support the new opportunities and changing environment?
7. How does the management environment at TVA affect your alternatives and imple-
mentation of solutions?
Additional Reading
Mitch Betts, “Utility Sparks IS Revamp to Plug Credibility Gap,” Computerworld, Decem-
ber 13, 1993, pp. 1, 16.
GAO, Tennessee Valley Authority: Financial Problems Raise Questions About Long-Term
20
Viability (Chapter Report, 08/17/95, GAO/AIMD/RCED-95-134).
Lynn Haber ,The electric company, LAN Magazine, August 1995, pp. 135-139.
John Moore, PeopleSoft customizes HR package for government use, Federal Computer
Week, July 31, 1995, pp. 45-46.
21
Greyhound Bus Lines
Greyhound Bus Lines started in Hibbing, Minnesota, in 1914, when Swedish immi-
grant Carl Eric Wickman began shuttling passengers to nearby Alice, Minnesota, using his
seven-seat Hupmobile. By 1930, the company put together a national network by acquiring
other small bus lines. The company then moved to Chicago and adopted the Greyhound as
Up to the early 1960s, Greyhound was very successful. However, increased automo-
bile ownership and decreased airline fares put considerable pressure on bus companies.
From 1960 to 1994, the industry’s share of interstate travel dropped from 30 percent to ap-
from high debt payments and two violent strikes (some bus drivers were shot at in 1989-
1990), Greyhound filed for bankruptcy protection. In late 1991, the company emerged from
plan. Neither Schmieder nor Doyle had much experience in transportation: Schmieder came
to Greyhound in 1989, Doyle in 1987. Their plan called for significant cost cutting, by drop-
ping routes, cutting workers, and cutting the fleet from 3700 down to 2400 buses. Their
plan also called for a new, comprehensive computer system that would handle everything
Wall Street was impressed with the new managers and their plan. Within a month
after emergence from bankruptcy, Greyhound stock was selling for $13.50 a share—twice as
high as expected by Greyhound’s own advisers. In 1992, the cost-cutting measures led to a
22
year-end profit of $11 million on revenue of $682 million, the first profit shown by Grey-
hound since 1989. By May 1993, the stock price reached $22.75.
Discord at Headquarters
Life at Greyhound during the years from 1991 to 1994 was schizophrenic, depending
on where you looked. Until Schmieder, Greyhound headquarters were in a Dallas high-rise,
near the bus terminal. The offices were spartan and filled with bus memorabilia. Schmieder
moved the company to an upscale building in the suburbs. He hired an interior-design firm,
paying it as much as $90,000 a month. Decorating costs included $50,000 of fixtures, cus-
tom cabinets, and $4500 for two chairs in Doyle’s office. Company funds also paid for season
tickets to the Dallas professional sports teams. The executives also flew first-class and
stayed at expensive resorts. There were also monthly bills for consulting firms and execu-
tive-search firms. One bill from Bain & Co. ran to $175,000 a month. Schmieder also ar-
ranged two “communication breakthrough” seminars with the Meridian Institute for
$560,000. Few lower-level managers were invited to participate in these sessions, and even
headquarters workers scoffed at the calls for teamwork and customer service that began
appearing in the corporate newsletter. In two years, Schmieder’s salary rose 57 percent to
In the meantime, workers throughout the company were squeezed by the cutbacks.
At corporate headquarters, employees scrounged vacant offices for supplies. Mr. Oller, a
marketing manager who worked for Greyhound for six months in 1992, observes that
“There were never-ending meetings about who was going to get fired.”
Several other corporate employees lasted a year or less. In the field, experienced
managers were routinely sacked to cut costs. Most of the terminals were staffed with part-
time workers and “customer-service associates.” These employees earned $6 an hour re-
23
gardless of their jobs, with little or no chance for a raise. Few of them had completed high
school. Turnover at some terminals ran 100 percent a year and 30 percent was common.
satisfaction, notes that the turnover rate did not bother Greyhound management, since “If
people stayed around too long, they would get too sour and cynical.”
workers making fun of customers and ignoring others. Ridership was falling. To cut costs
further, the number of buses and drivers was cut (down by half since the mid-1980s) and
routes were rescheduled. Bus drivers began complaining that they had to exceed speed lim-
was little need for a comprehensive information system. The company set basic schedules
and sold tickets at the station. If demand was high, the company simply added more buses
and drivers. If buses ran half-empty, it did not matter, because margins were high enough
With tight margins and a push for efficiency, Greyhound managers needed better
data. Existing ridership data was often months old; the company needed a system to track
ridership, plan schedules, and identify where it was necessary to cut prices to compete.
Management also wanted to be able to sell tickets in advance, enabling customers to re-
serve seats.
Elements of the proposed system are similar to the issues faced by the airline reser-
vation systems. In some ways, the Greyhound system would be simpler, because reserva-
tions and tickets would be sold only through existing terminals, or through a toll-free phone
24
number. The airline reservation systems provide additional support to travel agents. On
the other hand, a bus trip is considerably different from an airline flight. An airline passen-
ger traveling coast-to-coast might make one stop. A coast-to-coast bus trip would probably
make 10 or more stops. Each leg of the trip would carry slightly different travelers, as some
got on and off at intermediate destinations. Greyhound systems analysts estimated they
would have to handle as many as 1800 vehicle stops a day, more than 10 times as many as
an airline system.
Greyhound management assigned about 40 full-time people to develop the new Trips
reservation system. They were given a $6 million budget and slightly over a year to develop
the system. Systemwide rollout was planned for the summer of 1993. Thomas Thompson,
senior vice-president for network planning and operations, notes that “Every bone in my
A First Attempt
The base software for Trips was written by an outside firm. The system was a
nightmare. It required 40 hours of training for station clerks. Even then, the screens were
cluttered and disorganized, often requiring several screens and options to book a simple
ticket. The system also did not include all of the Greyhound destinations, so clerks often
Greyhound tested the system in Houston, Dallas, San Antonio, and Austin during
the 1992 Christmas season. The system crashed repeatedly, and it took twice as long to is-
needed to be redesigned from scratch. He also suggested that the planned summer 1993
25
implementation be delayed. But Doyle reportedly ruled out any discussion of delays, declar-
ing that “We made these commitments, and, by God, we’re going to live up to them.”
Thompson now believes that he should have pressed harder for a delay or that he
should have quit the company. Instead, he kept on, and all notes and references to his
comments were destroyed. Doyle denies that he destroyed documents or fought against the
decision, claiming that the designer team made the decision to continue.
In April 1993, Greyhound executives made public promises that the reservation sys-
tem would be operational by the summer. They also filed with the SEC for a public offering
of an additional 4 million shares of stock. The prospectus promised that the Trips system
would make it easier to purchase tickets, reserve space and improve customer service. An
My clear impression was that as long as we could have some form of reser-
vation system—as long as we could just book one reservation somewhere—
then by some means, we would be living up to our obligations.
Through June 1993, the team continued to revise the software. They also installed
the system in additional terminals. At the end of May, it was running at 50 locations. How-
ever, computer terminals routinely froze up. The company also changed its long-distance
phone carrier and established a toll-free phone number for reservations. In June, techni-
cians were seriously considering delaying system when Doyle walked into a meeting and
In July, the board of directors was told that Trips was ready to go. Announcement of
an increase in second-quarter earnings and strong ridership numbers resulted in a 4.5 per-
26
Rollout
On July 27, Greyhound activated the toll-free number service, which was to book
reservations through the now-200 terminals connected to Trips. The Omaha, Nebraska ser-
vice had 400 agents selling tickets, in addition to the agents at the terminals.
Systems designers were uncertain about what to expect, except they believed the
system would not work. It did not. The new phone lines handled 800,000 calls a day (up
from a traditional 60,000). Many of them were repeated attempts by customers to get
The computers in Dallas were swamped. Ticket agents sometimes had to wait 45
seconds for the computer to respond to a single keystroke. It often took five minutes to print
a ticket. The system crashed so often that agents resorted to writing tickets by hand. At
some terminals, passengers were told to stand in line so that their tickets could be reissued
by computer.
Passengers missed connections, were separated from their luggage, and often had to
sleep in the terminals. At the New York Port Authority building, competing regional bus
lines called in extra buses and lured away passengers. By September, technicians pulled
the plug on reservations west of the Mississippi river. On at least one weekend, they told
Somewhat surprisingly, none of this news seemed to reach analysts on Wall Street
(of course, most of them travel by air). On August 4, Greyhound stock was trading at $21.75
a share—that’s when Doyle decided to sell 15,000 shares that he had purchased with op-
tions for $9.81 a share. In the first two weeks of August, Schmieder also exercised options
27
On September 23, almost two months after the introduction of the Trips system,
Greyhound announced that ridership fell 12 percent in August and that earnings would not
meet the early forecasts. Greyhound stock fell to $11.75 a share in a single day. Thompson
was removed as head of the Trips development team. His successor lasted only until Janu-
ary 1994.
In May 1994, the Trips system caused problems again. Hoping to gain riders, Grey-
hound offered a $68 fare for any trip in the United States with a three-day advance pur-
chase. The price attracted thousands of customers. The Trips system crashed again. With
too few buses and drivers, terminals were packed with angry customers. Agents simply
In the first half of 1994, Greyhound’s operating revenue plummeted 12.6 percent,
with a net loss of $61.4 million ($4.19 a share). Meanwhile, the nine largest regional carri-
ers in the nation showed increased operating revenue of 2.2 percent. In July 1994,
Schmieder announced that Greyhound would abandon the long-haul business on concen-
trate on shorter routes. Three weeks later, he was forced to resign. Doyle also resigned.
Shareholders filed suits alleging that Greyhound’s public statements miscommunicated the
reservations executive, as chief information officer to oversee the Trips system and solve its
problems. In late 1994, the revised system was running at 248 locations. Training time was
reduced to 16 hours, but even Harslem sometimes has trouble using the system. The sys-
tem is finally beginning to produce ridership data to assist managers in planning and
scheduling. However, it still could not guarantee a passenger a seat on the bus.
28
Case Questions
1. List all of the things that Greyhound did wrong.
3. If you were running Greyhound, what could you have done differently to prevent or
minimize the problems?
4. Because no one can change the past, what would you suggest Greyhound do now to
solve its problems?
Additional Reading
Tomsho, Robert, 1994, How Greyhound Lines re-engineered itself right into a deep hole,
Wall Street Journal, 10/20/94, p. A1, A4.
Cristina B. Sullivan, Surveying the lay of the LAN: inventory tools help IS keep track of
what's on networked nodes, PC Week, August 14, 1995, pp. N3-N5.
David Stodder, The database knows, LAN Magazine, May 1995, pp. S37-S42.
29
Blockbuster Video
Blockbuster Video is to the video trade what McDonald’s is to fast food and Holiday
Inn was to the hotel industry. Blockbuster took an industry typified by mom-and-pop neigh-
borhood rental shops and went national. Blockbuster's stores are family-oriented, bright
yellow and blue, and well-lit. They do not have the back-of-the-store pornography section.
Blockbuster's growth has been so phenomenal that it claims to open a new store every sev-
enteen hours. Blockbuster also commands influence with the movie studios. Home video
expanded into CD-ROM and video games. It initiated a three-night, $3 rental program that
does not result in additional charges when tapes are not returned within 24 hours.
Blockbuster was started by David P. Cook, a Dallas computer expert who wanted to
develop a big, bright, computerized video superstore. H. Wayne Huizinga purchased a stake
in the company in 1987, became its chairman within months, and was the catalyst for its
growth.
Huizinga is the son of Dutch immigrants and began his career driving garbage
trucks. He started a garbage business in Miami that merged with his grandfather's in Chi-
cago. At one point he went on a buying spree and bought 90 garbage companies in nine
months. Ultimately, he merged all of his companies together into Waste Management Cor-
poration.
Huizinga applied the same fervor to the purchase and opening of video stores. At the
end of 1990, Blockbuster owned 787 stores and franchised 795. Even so, it represented only
11 percent of the market. As a result, Blockbuster Company executives planned to open 400
30
stores per year and double the market share over the following three years. Proposed sites
Because most families now have access to cable television, which is expanding its of-
ferings, video rentals may not have the strength they had in the past. Blockbuster's formula
for success has been successfully copied by others. Its 8000 titles once provided the widest
choice. In some markets, competitors such as Tower Video sell or rent the latest in home
video technology, including 8-millimeter videos and laser disks. At the Video Factory in
Buffalo, New York, clerks in Tuxedos escort shoppers to their cars under umbrellas when it
rains. In San Antonio, Texas, HEB Video Central Stores dropped the charge for new movie
Some video rental markets have reached saturation. According to Video Store
Magazine, a video store may have six rivals within a three-mile radius. In other markets,
Blockbuster videos have oversaturated the market. Cox Enterprises in New York and
Pennsylvania wants to sell 26 franchises back to the company or trade them for new loca-
Blockbuster’s growth has paralleled the growth of the VCR. Since the mid-1980s, the
growth of movie rentals paralleled sales of videocassette recorders. With the fall in VCR
prices, up to 65 million VCRs were sold in six years. With VCRs now in 70 percent of United
Today's customers are more interested in current hits than old movies. Old movies
cost less to buy and as a result, Blockbuster has invested heavily in this inventory. Even
the three-night rental policy detracts from having the latest movies in stock. Blockbuster's
customers rent the big hits on Thursday nights, leaving few of the big hits available for the
31
weekend. This leads many customers to “move beyond” Blockbuster because “it never has
movie rental business is location, location, location.” Blockbuster has been criticized for not
having the best locations. In 1990, Blockbuster ranked eighth in revenue on a per-store ba-
sis. Some analysts view Blockbuster's growth in revenue gains as the result of the addition
of new stores.
Although Blockbuster continues to assert that there is plenty of room for growth in
the industry, it is looking for new products and customers. To increase revenue, it is testing
film-processing and the sale of compact disks and audiotapes. It is moving into small-town
markets that have at least 20,000 people within 50 miles. It has also opened 51 stores in
will do just fine for the next several years. Whether they will still be around 10 to 12 years
Changing Technology
The video-rental market, of which Blockbuster is the dominant player, is estimated
to be worth $13 billion in revenue a year. Yet, some analysts have predicted that the rental
The barrage of new releases for videos or video games present additional
problems for Blockbuster Video. Although the constant introduction of new movies and
games present problems in terms of tracking for the video-rental organization, without it,
there would be no reason for individuals of all ages to return to the store. The key issue,
32
then, becomes not the limiting of the number of titles offered, but the development of a
mechanism to register, track, and evaluate the demand for the new videos and games. Hot
new games draw an immediate demand; however, the number of these games must be lim-
ited because they will go out of vogue just as quickly as they came in. If the past is an accu-
rate indicator, the speed with which games come into and go out of vogue is also increasing
significantly. Of particular importance is the fact that customers walking out of a store
without a video rental are particularly problemsome because they represent actual lost
revenue.
technology. Since it was established in 1986, it has grown to well over 5,000 stores and ex-
pected a $4 billion revenue in 1994. It operates in nine countries and in four languages.
Blockbuster Video enjoys a 20 percent market share in 1994, which makes it larger than its
next 550 competitors combined. It opens an average of 400 new stores every year, amount-
As the CIO of Blockbuster, H. Scott Barret’s goal is to keep the organization “tech-
and has publicly questioned the financial return on this additional investment. In his opin-
ion, many companies are pressured to implement client-server by the collective weight of
As a young company, Blockbuster could have written its information systems from
scratch. Instead, it has chosen to remain with legacy systems. Each of the company's 5,000
stores has a Microvax running Fortran code that provides a variety of services to DEC ter-
minals. Except for recently acquired music stores, “every store stands completely alone.”
33
Each Microvax is tied to a Digital cashier system, printers, a manager's workstation, and a
modem. Blockbuster Video is not online. Each store is called by the corporate headquarters
twice a day.
because it has too many combinations of products from too many vendors.
benefit offered by its legacy system, a consistent retail systems architecture. In 1994,
Blockbuster acquired a music store business that runs different systems and has different
requirements than do its video stores. The music stores came with five different PC-based
systems. Blockbuster Video wants to get back to a single system for all its stores. To stan-
dardize its retail systems, Blockbuster is working with Microsoft and Oracle to build a Win-
dows NT-based retail system that can be implemented throughout its stores worldwide. As
it migrates to client-server, Blockbuster will still maintain its traditional host architecture.
All processing will occur on the server; client computers will be relatively dumb.
Blockbuster is looking for other benefits from moving to client-server: reduced train-
ing; reduced support costs; and access to more advanced technologies, software, and graphi-
reprogrammable video game cartridge designed to end this revenue difficulty. During the
summer of 1994, 15 Blockbuster stores tested the system. The system consists of a network
that is able to store music, movies, games, and CD-ROM titles. Retail stores, such as Block-
buster, will hook up to a server and print the digital information. Sega hopes to use this
34
technology to boost the video-game rental and sales market by using the systems in Block-
buster stores, where consumers rent video games before making long-term purchasing deci-
sions. Industry analysts feel that video games are ideal for the proposed system, because
The NewLeaf system can stamp out any Sega Genesis game on a blank cartridge in
less than a minute. The new system eliminates the inventory problem and makes it possi-
ble for every customer to leave the store with a game in hand and money safely deposited in
The NewLeaf system takes the form of a personal computer kiosk that lets custom-
ers browse a multimedia catalog of Sega Genesis titles, complete with video previews of the
games. Customers choose the game they want and the computer prints out a ticket that
contains a bar code. If there are no prepared cartridges of the selected game, the clerk can
record a new one on a blank cartridge within 20 seconds from an in-store server that con-
tains the code for every Sega game. In conjunction with generating the game, the server
also prints a one-page instruction sheet. The entire transaction is to take less than a min-
ute.
The new system enables Blockbuster to adjust its stock dynamically. To further save
time, store employees will be able to prerecord the hit titles. NewLeaf’s server, designed by
its sister company, Fairway Technologies, can be updated at any time with new games by
the spot. This is particularly useful during the basketball playoff season. For example, Ac-
claim can update its NBA Jam game so the video characters are wearing the jerseys of the
35
NewLeaf has enlisted Sega to join the Blockbuster trial and is pursuing the individ-
ual Sega Genesis game publishers and Nintendo to try out the system. The advantage to
the game developers is the opportunity to make money on the rental market. Ultimately,
this could reduce sales to the marketplace, however. Today, Blockbuster buys copies of a
game and then rents it without paying additional royalties for each rental.
To interest the game developers, NewLeaf has promised to give publishers a per-
centage of the rental profit as well as regular reports on how often the games have been
rented. According to NewLeaf president David Lundeen, most game publishers are inter-
ested, particularly because the system will have built-in security features to prevent unau-
thorized copying. Some of the larger publishers have expressed concern, however, that the
system will level the competitive playing field because revenue generation is not equally
distributed across the games; a few titles generate most of the profit margins.
In Lundeen’s opinion, large publishers will make the most in royalties: “We're test-
ing to see what happens if you make games ubiquitously available at retail; what happens
on the first weekend after the launch of a hot game. How high is up?”
Lundeen hopes to expand the NewLeaf system beyond the rental market into toy
and electronics stores. He envisions stores being able to sell children their first game on a
rewritable cartridge for approximately $70. When children tire of the game, they can bring
the cartridge back to the store where a salesperson will use the NewLeaf system to repro-
gram it with a new game for a lower price, perhaps $30. The stores and game publishers
will make more profits through additional sales and lower materials costs. The game play-
ers will save money and be able to play more games. NewLeaf will make money selling its
system. Potentially, the only losers would be Sega and Nintendo, who manufacture car-
36
NewLeaf’s server is designed to support rewritable CDs as well as cartridges. Flexi-
bity will be introduced through offering stores an add-on device that supports the platform's
storage format. Lundeen is also presenting this option to the music industry for adaptation
to the audio CD market. However, an earlier proposal to the music industry by a different
company was turned down, largely because the industry feared loss of sales due to illegal
copying.
its San Francisco market. As part of the trial, Blockbuster plans to stock more than 200
CD-ROM titles from more than 37 software publishers. These include Compton’s NewMe-
dia, Software Toolworks, and the Voyager Company. Fast-action games have proven to be
most popular.
Titles will range from games and adventure to education, entertainment, and refer-
ence. Each of the stores will carry five different hardware platforms: Panasonic's Real 3DO
Multiplayer, Sega’s Genesis CD player, Philips’ CD-I platform, Apple's Macintosh TV and
IBM’s PS/1 computer system. Blockbuster will station trained salespeople at each machine
to answer questions about the hardware and to demonstrate various software titles. Cus-
tomers will be able to try the software in the store or rent the software or equipment to try
at home.
Blockbuster has a range of action and strategy games, educational programs, and
reference works available. For $4, any program can be rented for three evenings. Block-
buster charges $14.95 to rent a SEGA, Magnavox, or Panasonic CD player, and $19.95 to
rent a player and three programs for three evenings. If customers decide that they like the
37
program or equipment after a test drive, Blockbuster has both for sale and will credit $5
toward a purchase of any title. An equipment purchase provides 10 free program rentals.
the Voyager Company—have signed on their titles. Fast-action games have proven to be
most popular.
If the program takes off in the Bay Area, Blockbuster plans to extend it nationwide.
needs. Although sales of CD-ROM players have been growing at a rapid rate, CD-ROM ti-
tles have not been moving as quickly. Nearly 80 percent of the titles shipped are bundled
with equipment when it is purchased, says Bruce Ryon, principal multimedia analyst with
the San Jose market research firm Dataquest. Ryon thinks people hesitate to buy more ti-
Blockbuster's business model for the pilot was based on extensive research in track-
ing consumer profiles and buying habits at its stores. Research indicated that the average
Blockbuster customer profile is one that every multimedia publisher desires. Typical cus-
tomers are in their mid-thirties, are married with children, and have median incomes of
more than $50,000. The percentage of Blockbuster customers with personal computers in
To further its ability to track its customers, Blockbuster tracks every single cus-
tomer’s rental history, every single store’s daily business, and every single store item’s sales
record. More than 40 million customers gives Blockbuster an important source of informa-
Additional data that convinced Blockbuster to pursue new media markets came from
the game industry. Sega concluded that three out of five of its video games are rented be-
38
fore they are purchased. Gaming magazine and Game Pro both found that more than 80
percent of the people they questioned would prefer to rent game cartridges and CD-ROMs
Blockbuster has designed areas for interactive technologies within its stores that it
hopes will appeal to consumers unfamiliar with new media. Each of the five multimedia
machines is set up in its own color-coded kiosk, with promotional material surrounding it.
Similar to Blockbuster's practice with videos, original packaging for the software is promi-
Blockbuster color-codes the kiosks and shelves as well as placing color stickers on
software packages to alleviate consumer confusion about which software will play on which
machine. In addition, Blockbuster promises an employee versed in use of the game players
Through putting different platforms in the store, Blockbuster is making the shift to
interactive media easier on the consumer. By doing so, the company is developing a sce-
nario in which it can generate consumer interest and excitement by lowering the economic
barriers for experimenting with the new technology. In addition, it is providing an opportu-
Competitors Tower Records and Wherehouse indicate that they are conducting re-
search on the marketplace and may come out with similar programs.
Based in Cupertino, California, the new venture’s first two products are a modem for 16-bit
game consoles and an online service to connect them. The modem plugs into a console’s car-
39
tridge port and includes a port for a second cartridge. It will initially be available for Sega
Genesis and Nintendo’s Super NES. Catapult is positioning the system to support existing
multiplayer games without modification. Players insert a game into the modem's own car-
tridge port and then dial into Catapult's network. There, they are paired with a connected
opponent who has the same game cartridge installed, and with whom they can exchange
messages while playing. Catapult's modem will retail for the same price as an average car-
tridge game and is scheduled for release on Sega’s and Nintendo’s cartridge platforms. The
service will be available for a monthly base fee that will allow the player a currently un-
The video game network will enable players to compete with each other over stan-
dard telephone lines. Video game publisher T-HQ is the exclusive distributor of the mo-
dems, which will support all the popular multiplayer games without modification to the
game machine or the software. The modems will serve as add-ons to the Sega Genesis and
Technologically, the modem works in 16-bit game platforms and will also work with
future 32-bit and 64-bit CD-ROM-based platforms. Preprogrammed with Catapult’s toll-free
phone number, the modem can fit into the game cartridge slot of either the Sega Genesis or
the Super Nintendo. The game then plugs into the top of the modem. Consisting of a
printed circuit board, signal processing hardware, and a phone line interface, the modem
draws its power from the game machine and only requires a modular telephone line con-
nection.
Blockbuster’s research indicates that players buy games for their competitive as-
pects; competing via the phone lines is expected to be popular. In the Catapult network,
40
players will have “handles” to protect their privacy and can receive game playing tips,
Catapult is expected to cost $5 to $10 per month to play, which can be paid by check,
credit card, or cash using a rechargeable Smartcard that functions like a debit card. The
card is charged at a retail outlet and then debited when inserted into the Catapult modem.
To play, each player must have the same game cartridge. The modem confirms the
user's telephone number, lets the user enable long-distance or disable the call-waiting fea-
ture (which could interrupt game play and possibly cause disconnection), and asks how long
Once connected, the network finds a match for the user, the players’ telephone num-
bers are exchanged invisibly to the players, the modem hangs up on each end, and one mo-
dem then calls the other user’s modem again. All of this is invisible to the individual users.
Because players’ machines call each other to actually play, the network capacity of 2,000
simultaneous users is enough for millions of games a week. Each system exchanges the in-
formation each player has decided to share with the other, including each player’s “handle.”
The players play in real time. During play they can send prerecorded messages to
each other, such as brags or taunts, by making special moves with the controller. At the end
of the game, players can continue to play with the same player or they can disconnect and
If a competitor cannot be found immediately, say in less than one minute, the mo-
dem sends the particular game and skill level to the network and then disconnects. While
waiting for a match, the player can look at game tips or play in single-player mode. Cata-
pult keeps up-to-date records of the logons concerning rankings. All calls are local calls
41
unless the player specifically indicates otherwise. Parents can control game play by setting
Catapult plans to work in cooperation with game developers to offer extensions that
can be downloaded into the system through the network. This will enable new characters,
Competitors in this area include AT&T, which has developed The Edge, a modem for
the Sega system costing between $100 and $150, and the Time Warner and Sega Enter-
prises, which developed the Sega Channel, an interactive game available over the cable
network.
Introductory Questions
1. What business problems are faced by Blockbuster video?
2. What types of data do they need to collect? How is it collected? What types of reports are
produced?
4. Why did Blockbuster choose to not connect all of the stores online?
5. What problems arise from having different systems in the video stores versus the record
shops? What data issues are it raised?
6. What does Blockbuster gain from the new technologies the chain is installing to handle
CD-ROMs and video games? What potential problems can arise? How is Blockbuster re-
sponding to minimize these problems?
7. Will the Catapult video game system be successful? What challenges does it face?
9. In building the Catapult game system, what data will be needed? Describe the database
features and components that will be needed.
Additional Reading
“The Most Valuable Products of the Year,” PC/Computing, December 1995, pp. 158-182.
42
“Mom and Pop go to War; Small Businesses Use Routers to Configure New Markets,” VAR-
Business, March 15, 1995.
“IBM & Blockbuster Scale Back New Leaf Venture,” Newsbytes, 2/13/95.
“EDI, Premenos and the Internet,” Release 1.0, January 24, 1995.
43
The Air Traffic Control System
(nonmilitary) flight operations in the United States related to safety and access to the air.
The agency establishes safety criteria, issues licenses for pilots, and provides air-worthiness
certificates for planes. The agency also operates the air traffic control system throughout
the United States. Funding for the agency is generated through user fees and taxes on air-
craft fuel, tires, and airline tickets. By 1990, the Aviation Trust Fund held $41 billion, built
up from the prior 20 years. The FAA is an executive agency and theoretically operates un-
der the direct control of the U.S. president. However, tax rates and expenditures are estab-
lished by Congress.
Since 1960, the FAA has exerted control over all commercial airliners from takeoff to
landing. Once they take off, planes are tracked in the following ways:
Controllers in the airport towers, Tracons, and control centers share data from a na-
tionwide network of radar installations. They use a network of radar installations to talk to
the planes.
Air traffic control in the U.S. is an exceedingly complex problem. In 1994, the 300
major airports generated 50,000 flights a day. The air traffic control system is responsible
for scheduling the takeoffs, landings, and flight paths of all these flights. By 1990, 455 mil-
44
Traffic control is organized into three levels: nationwide U.S. airspace, 20 regional
air traffic centers, and individual airports. Air traffic control operators at each airport have
immediate control over takeoffs and landings. Regional operators watch traffic within their
defined air space. Systemwide control is provided by the Central Flow facilities located in
Washington, D.C. The Central Flow managers examine traffic across the entire United
States and resolve conflicts and problems that arise between regions. The 40 traffic man-
agement specialists plan each day in advance, creating alternative routings for problems
Early Systems
The early traffic control system was built with hardware and software from Sperry-
Rand/Univac, a computer company that was purchased in the mid-1980s by Burroughs. The
combined company is now called Unisys. The airport-based traffic control computers were
based on a 256K bytes of main memory and performed 500,000 instructions per second. The
original systems were installed in the early 1960s. The 20 regional centers had their own
computers—IBM 9020 machines that were custom made for the FAA in the 1960s.
Improvements
In 1981, the FAA was given approval for a comprehensive new plan to upgrade the
computer system. New airports, such as Dallas-Fort Worth coupled with deregulation of the
airline industry in 1978 led to huge increases in air traffic. The $12-billion plan called for
By 1990, only 1 of the 12 systems had been replaced and the project was $15 billion
over the original budget and was an average of four years late. The one project that was
45
completed was known as Host, because it called for replacement of the mainframe com-
puters at the 20 regional control centers. IBM installed its 3083 mainframes on schedule
but was $16 million over budget. Even then, the 3083s were technologically obsolete at the
time they were installed, because the newer IBM 3090-class machines had been available
for a year.
In 1982, the White House Science Council examined the problems being encountered
tempt to hire its own staff and build the system in-house. The FAA chose not to accept the
advice, allegedly because the agency found it difficult to separate the new system from the
existing processes. Martin Pozesky, assistant administrator for the upgrade program at the
We would have had to turn over the current air traffic control along with
the modernization plan and then have [the contractor] turn it back to us at
the end.
Instead, the FAA gave a $3.6-billion contract to IBM in 1988 to build the new sys-
tem. Other subcontractors were involved both directly with the FAA and indirectly through
IBM. In terms of managing the process, the FAA subcontracted to Martin Marietta for ad-
vice but did not give the subcontractor control over the contractors, such as IBM, that were
working on the new system. When the six-year contract expired, the FAA issued a new $139
million contract with TRW to provide additional advice and day-to-day management.
46
This lack of oversight and control is somewhat surprising, given the negative
evaluations that were given the FAA for prior contracts. In 1980, the Senate Appropriations
Problems
The computer systems to run the air traffic control system were originally written in
1960. Because the computers and the programs are now 35 years old, serious problems ex-
ist in their continued operation and maintenance. The FAA is still operating equipment
with vacuum tubes, dense webs of wiring, thousands of circuit boards, and other out-of-date
components. This equipment often stumbles or breaks down completely. In 1994, there
were at least 11 times when the systems failed completely. This situation leaves the air
traffic controllers with no means to keep airplanes separated and flying on course.
The influx of young technicians who were hired in 1960 are now facing retirement.
This issue is exacerbated by the firing of those air traffic controllers who struck the gov-
ernment under the auspices of the PATCO Union in 1980. Many of the technicians who
could retire did so in 1995 or 1996 because Congress planned to cut the retirement benefits
Few technicians are in training and there is no one to hire from industry because
some pieces of the equipment are so old that they are used nowhere else. The FAA stopped
training technicians to repair them years ago. Parallel to this, the FAA is cutting back on
47
maintenance and repair. To reduce costs and the need for technicians, equipment is going
Breakdowns occur with increasing frequency. Some are obvious only to pilots be-
cause they are told to wait on the ground or to increase spacing in the sky. This enables
controllers to reduce the traffic to a level the antiquated equipment can handle. Others are
obvious when there is no controller's voice at the other end of the radio. When this happens,
A near collision in 1995 underscores the seriousness of the situation. Faulty equip-
ment in San Juan, Puerto Rico, led a controller to direct to planes toward a head-on colli-
sion. This was only prevented by the plane’s on-board collision-avoidance systems.
The National Transportation Safety Board sent investigators to the Aurora, Illinois,
center as well as others to investigate the safety issue. Aurora is 1 of 20 high altitude and
Even newer equipment has problems. Eleven failures have occurred since a 75 min-
ute power failure September 14 at the Chicago Air Traffic Control Center in Aurora. Power
failures have also occurred at the Ronkonkoma, Long Island, and Oakland, California, Chi-
cago, Washington, and Fort Worth centers. The unions representing the controllers cite fail-
ures at centers in Miami, Los Angeles, and San Juan. Union officials cite their ability to
make-do with equipment so old there are no spare parts commercially available. Neither
the manufacturer nor third-party vendors service it. Jack Johnson, president of the Profes-
sional Airways Systems Specialists, has stated that inadequate maintenance is responsible
for the growing number of failures and long repair times necessary to rectify them.
A study of the New York Center concluded that the IBM 9020e had failures 90 times
between January 1992 and June 1993. This was particularly crucial because this is the sec-
48
tion of the system that takes radar and flight-plan data from the mainframe and delivers it
Since 1993, the FAA has reduced its annual budget by $600 million nationwide and
The FAA continues to defend its cuts in the technician force, even though this re-
sults in cuts in maintenance. Consequently, parts that break tend not to get fixed. Equally
important, careful records are not kept of how often each part needs service. According to
Stanley Rivers, deputy director of the Airways Facilities Service of the FAA, the FAA can-
not afford to have technicians do repairs that are not necessary or are redundant.
At the Air Traffic Control Center in Aurora, of the 55 technicians, 24 are eligible to
retire immediately; 5 more will be eligible within three years. The last time someone was
hired was three years ago; it takes three to five years for a new technician to be qualified.
Because of the critical situation in the Chicago Center, the FAA wants to transfer 50
people from other centers to augment the current 400-controller staff. According to Mark
Scholl, the top union official in the Chicago Center, the learning curve for inexperienced
controllers is so high that even hiring in September 1995 did not cause a benefit for at least
a year.
We have 70 items waiting to be fixed on the bench. We're not covering mid-
shift. I don't know about the control technicians, but the techs’ morale is as
low as I've seen it, and people who've been here 30 years are saying it, too.
We're in a situation where our workload has doubled, we're losing incentive
pay, and there's constant talk we're going to lose benefits—retirement,
health, the whole bit.
According to Jerry Weller, the U.S. House Representative from the area: “Not only is
49
The age of the system is contributing to its lack of integrity. Faulty and unreliable
performance lead to "ghost targets" of planes that are not really there; some planes not
showing up at all, and others that are hard to discern in all the flickers and blinks. A ghost
is an artifact made somewhere in the center's cluster of computers that integrates data
from eight radar stations covering 120,000 square miles. The equipment is increasingly
unreliable; it cannot be trusted to be doing the functions that it reports it is doing. The lim-
ited memory means that information about a plane may not be placed on the screen. Ghosts
complicate the controllers’ job by forcing them to remember which locations are real and
A May 17, 1995, failure at the Aurora site provides an example of the integrity prob-
lem. At 8:30 the screens on the system began to flicker; it then lied to the controllers about
the functions that were still in operation. The green circular screens indicated that the sys-
tem was continuing to work when in fact it was not. For seven minutes the system told the
controllers it was all right to use the mouse when in fact the computer switching was not
working.
Each controller is supposed to be limited to 15 planes at any one time, with no more
Summer is a particularly difficult time because air traffic is heavy, afternoon thunder-
storms force planes to be rerouted, and air traffic controllers schedule vacations.
ter in Aurora went blank, losing vital radio contact with more than 150 planes. The cause
was a power outage at a regional control center near Oakland, California. This problem was
50
the result of computer problems, power outages, telephone line failures, equipment break-
Overall, six major outages impacted air traffic facilities from coast to coast in 1995:
• May 17, 1995, Chicago Center. At 8:30 the screens on the system began to flicker; the
system then lied to the controllers about the functions that were still in operation.
• May 19, 1995, New York Center. A 2½ hour outage in a telecommunications line
delayed 83 flights.
• May 25, 1995, New York Center. A power outage caused by human error resulted in
485 flight delays over six hours.
• June 6, 1995, Washington, DC Center. A computer that processes radar data went
down for two days.
• July 19, 1995, Dallas-Fort Worth Center. Computer problems interrupted work at a
regional control facility.
• August 9, 1995. Chicago Center. Both radar and radio contact with more than 150
planes was lost.
The centers in Chicago, Washington, Cleveland, Dallas, and New York experienced
20 interruptions from June to September 1995. They all depended primarily on an IBM
9020E computer. This computer should have been retired by now. However, the replace-
ment system is not in place to accomplish this goal. David Hinson, FAA administrator, re-
These interruptions and the safety hazards that they have caused got the attention
of the Congress. Hearings were held at the Chicago Center the week of September 26, 1995,
to analyze the enormity of the problem and to “hold the FAA’s feet to the fire.”
Air traffic controllers have been reporting problems with existing systems for years:
• In 1992, West Coast air traffic was delayed for several hours. An IBM 3083 at
the regional station crashed. In the process, it removed the identification labels
from the radar screens of controllers from Oregon to Los Angeles. The controllers
switched to an older backup system but had to increase plane separation from
the typical 3 miles up to 20 miles. Pilots and controllers used radio communica-
tion and manually filed flight plans to compensate. Ron Wilson, a spokesman for
the San Francisco airport, notes that although there are frequent disruptions,
“The FAA computer failures generally don’t last long, just long enough to screw
things up.” At Oakland, California, an average of three times a month the con-
troller screens fail, and controllers have a few seconds to memorize the position,
51
speed, course, altitude and destination of the 12 planes they are typically guid-
ing. Then their screens go blank for at least 10 seconds. Sometimes when the
screens come back, they are missing critical data.
• In 1991, the FAA ordered 44,000 small planes to be equipped with transponders
that transmit flight information to the controller screens. Previously, only com-
mercial planes were required to use the transponders. The additional informa-
tion will increase the load on the FAA computers, pushing the constraints even
harder.
• In 1988, a software upgrade at the regional station in New Hampshire crashed
the computer and resulted in a loss of the data labels that enable controllers to
identify the planes.
• October 14, 1989, was a big day at the Dallas-Fort Worth (DFW) airport. A foot-
ball game between the University of Texas and the University of Oklahoma
brought in hundreds of extra commercial and private planes. The computers
overloaded and some systems were taken offline. Controller screens froze for 19
minutes. More than 100 planes were in the airport’s airspace and several re-
ported “near collisions,” in which they were too close for safety. Controllers at
DFW kept track of computer blackouts, recording 12 computer failures in 1988
and 1989.
• Joel Willemssen, assistant director of the US GAO’s information management
and technology division, reports that 70 percent of the 63 largest airports in the
United States have experienced problems with blank or flickering computer
screens. John Mazor, a spokesman for the Airline Pilots Association, notes the
problems cause
delays, diversions and, in the worst possible cases, accidents. It’s not as
dangerous as you might think, but it’s not something you want to have
happen to you.
• The Los Angeles basin region handles 21 airports with 6.5 million flights a year.
The GAO notes that the FAA computers in the region have repeatedly suffered
from the loss of critical data and slow responses because of the overload.
• The airlines estimate that the problems with the FAA cost travelers $3 billion a
year, not counting the frustration and stress of delays and missed connections.
Advanced Automation System
One of the more visible components of the plan is the Advanced Automation System
(AAS), which is designed to provide updated tracking displays to the controllers. It was
supposed to be completed by 1990, but at that time was delayed until 1993. The system is
designed to utilize IBM RS-6000 computers to display flight information, schedules, and
current location along with weather fronts. The color systems will have higher resolution,
52
In 1994, an internal study of the AAS showed that it was still two years behind
schedule, and probably would fall back another two years before completion. The project at
that time has cost $2.3 billion and is estimated to eventually cost about $7 billion. David
Hinson, FAA administrator, announced that he was replacing top managers on the project,
dropping portions of uncompleted work, and demanding performance guarantees from the
contractors. One system being canceled is the Area Control Computer Complex, which was
designed to interconnect the host computers at the airport and regional levels.
Alternatives
• Private pilots have objected to the FAA plans, led by the Aircraft Owners and Pi-
lots Association (AOPA) of 300,000 noncommercial owners. The AOPA has pro-
posed a satellite-based system that the association estimates would save $6 bil-
lion over the current AAS proposal. The FAA response is that “satellites aren’t a
replacement for the current [system].” The commercial airlines are also resisting
the proposal and suggesting that it should be delayed until 2010.
• In the meantime, because the new AAS is not available, the FAA is trying to
make-do with the existing Univac terminals. For starters, the agency is increas-
ing the internal memory systems with modern technology. The FAA also
awarded a $150-million contract to Unisys to either refurbish older machines or
open up an old production line to produce more of the 15-20 year old terminals.
Much of the equipment, the 30-bit Univac terminals, radar-gathering and data-
filtering units, are still based on vacuum tubes.
• IBM is continuing work on the contract. Noting that it is the largest contract the
company ever received, the workers note that they underestimated the complex-
ity of the problem. They also experienced problems with the Ada compilers and
limited support environment. The project was estimated to require two million
lines of new code. There is some belief by the GAO that even if the project is com-
pleted, it will be obsolete.
• The GAO and FAA have considered additional options, such as entirely new sys-
tems from IBM or from BDM Corp. However, they have been rejected because
they are too risky or would take too long to implement.
• Airlines and governments in other nations are also upset at FAA plans to im-
plement a satellite-based locating and instrument landing system (ILS). Interna-
tional airlines prefer to have a worldwide standard system, but they are con-
cerned about using a satellite system that is controlled by the U.S. Department
of Defense.
53
The National Control Flow
Experts at the national Control Flow center deal with different types of problems.
Although they are not responsible for the immediate location and safety of planes, they
solve problems across the entire United States. For example, in 1994, a traffic management
airports. Although the decision seemed reasonable, it caused some problems. One airline
lost millions of dollars when it found out the next day that its planes were not where they
To assist planners at the national level, the FAA is building an expert system called
the Smartflow Traffic Management System. The system was developed by one senior pro-
grammer from the Computer Sciences Corporation using TAE Plus, a GUI generator from
Century Computing, Inc. Code is generated in C++, with the rules created by a NASA-
developed language called CLIPS. The system was developed with the support of 10 veter-
ans with 10 to 15 years experience. It encompasses 15,000 rules, 30 screens, 100 buttons
and 50,000 lines of C++ code. Yet, the GUI-based system was developed by Kevin Brett in
about two months. It runs on an HP-based midrange computer across a LAN. Users see
color-coded maps at each of the three FAA levels and can click on each object to obtain more
detail. The system replaces a DSS that enabled controllers to perform limited “what-if”
analyses. The new system uses flight-plan data to examine the traffic patterns eight hours
The Future?
Interim computers have been ordered, but will not be delivered until 1997. The prob-
lem is the software, not the hardware. The existing software is written in a very old lan-
guage. The emphasis is being placed on writing an interface between a new language and
54
the old one. In addition to the interface, the technology must be thoroughly tested to ensure
that it will work accurately. The interim equipment has been ordered because of the con-
The original plan was to test only at the FAA's technical control center in Atlantic
City. To reduce the test plan by six months, plans now call for testing at five control facili-
ties. The new computers will run in tandem with the old to check their reliability.
Case Questions
1. What problems arise from the use of out-of-date technology?
3. Why will it take several years to convert to new hardware and software? What prob-
4. What options are available to the FAA? Hint: Do some additional research.
5. As a governmental agency, costs and funding are an important issue. Are there ways to
Additional Reading
“ATC Upgrades: User Fees or Trust Fund,” Federal Computer Week, October 9, 1995.
Brad Bass, “GSA Official Blasts FAA Attempts to Blame Woes on Buying Process,” Federal
Computer Week, September 4, 1995, pp. 3-4.
Dan Carney, “FAA Confirms Wilcox as $475M WAAS winner,” Federal Computer Week,
August 7, 1995, p. 3.
“Clinton’s ‘96 Budget: More IT, Same Money,” Government Computer News, February 20,
1995.
“FAA's $500 Million Navigation Contract takes Flight,” Federal Computer Week, April 10,
1995.
55
Vanecca Jo Grimm, “FAA to Spend $65m on Stopgap Replacements for Old Computers,”
Government Computer News, August 7, 1995, p. 3.
William Jackson, “FAA System Will Improve Flow of Air Traffic Over Oceans,” Government
Computer News, October 2, 1995, p. 70.
William Jackson, “FAA and GSA Renew Their Dogfight Over Air Traffic Control Moderni-
zation,” Government Computer News, September 18, 1995, p.73.
William Jackson, “No Voice Traffic Jams for FAA System,” Government Computer News,
June 19, 1995, p. 14.
William Jackson, “FAA Sticks with Loral on Air Traffic System Contract,” Government
Computer News, May 15, 1995, p. 8.
“Mandate is to Ensure Software will Fly,” Government Computer News, March 20, 1995.
Sam Masnat, “A New Voice for Air Traffic: VSCS is Fault-tolerant,” Government Computer
News, July 31, 1995, pp. 55-56.
John Stein Monroe, “TRW Nabs $231M Support Pact,” Federal Computer Week, June 19,
1995, p. 1.
John Stein Monroe, “FAA Taps Loral to Fly Program Upgrade,” Federal Computer Week,
May 8, 1995, pp. 20-21.
On a Wing and a LAN,” LAN Magazine, December 1994.
Kevin Power, “Given Outsourcing, Privatizing Trend, OMB Plans to Overhaul Circular A-
76,” Government Computer News, July 17, 1995, p. 90.
“Routing Software Uses Compression to Speed Traffic,” Government Computer News, March
20, 1995.
Stephan M. Ryan, “FAA’s Bailout Betrays Citizens, Benefits Lawyers, Government Com-
puter News, September 18, 1995, p. 29.
Charles Walker, Are Aircraft Software Tests up to Scratch?” Computer Weekly, June 22,
1995, p. 16.
56
Comment: Susan Pulliam and Jo-
Reebok International seph Pereira, 1995, Reebok CEO
Fireman faces criticism by institu-
tional holders, WSJ, 9-14-95, p. B1,
Reebok is a youthful, entrepreneurial culture. But it has grown from $50 B2.
million in sales to more than $3 billion in little more than a decade. It isn’t
the same company anymore. My job is to enable the kid in Reebok to stay Ralph T. King Jr., 1995, Nike re-
ports 55% gain in earnings for fiscal
fresh and creative while also allowing the grown-up corporation to compete 1st period, lifting stock, WSJ, 9-19-
in global markets, [Pulliam and Pereira]. 95, p. B2.
This is how Tom Trainer, CIO of Reebok, describes his company and his job. To ac- Joseph Pereira, 1995, In Reebok-
Nike war, big Woolworth chain is a
complish these objectives, Trainer has implemented videoconferencing, computer-aided de- major battlefield, WSJ, 9-22-95, p.
A1, A5.
sign, the Internet, and laptops for the sales force. This has resulted in better communica-
tions among employees, faster development of products, and more effective sales presenta-
tions.
Reebok’s 1993 sales of $2.9 billion placed it second behind $4.4-billion Nike, Inc. The
nearly $1 billion increase in sales from 1989 to 1993 indicates Reebok’s success in gaining
market share.
information systems area was less than up-to-date, with no global information system or
way to look at data. Communications, primarily by telephone and fax, between the manu-
facturing partners and worldwide distribution network were slow. Turnaround on new
products was equally slow. This was a critical problem because Reebok is a fashion-oriented
business with three product cycles a year in footware and five in apparel. While sales rep-
resentatives from Nike were walking in with laptops to display their lines, reps from Ree-
Trainer’s early days were spent accomplishing short-term projects that got him
points with the board of directors. He fired six of eight senior staff. He kept 85 percent of
57
In addition to his IS responsibilities, Trainer drove the re-engineering process in the
company. To do so, he spent a great deal of time on the road, building relationships with
Reebok executives around the world. He also studied Sony Corporation to learn ways that it
lined procedures for production, sales and marketing, research and development, adminis-
information systems plan to Reebok’s executive committee. The board approved it on the
One piece of the new plan was to implement Lotus Notes, particularly in the legal
area. This uses an endorsement database to control the contracts of more than 2000 ath-
letes.
ture for voice, video, and data. Reebok communicates not only with its worldwide distribu-
tion base but also with its ad agency and other suppliers. IS is currently developing an elec-
tronic image library to enable product shots to be distributed to every country where Ree-
bok does business. The system dropped the new product lead time from six months to three,
Before the new ordering system was installed, orders were first printed out locally
and faxed to the international headquarters in London. London would take all of the faxes
and send them to the United States to be entered in the mainframe. Different standards for
shoe sizes from different countries added to the delay. Once the information was entered in
58
To improve this process, Trainer developed a software package called Passport.
Passport rationalizes product codes and shoe sizes. It also gives small distributors and sub-
sidiaries access to the system through personal computers. It can also function as a module
Laptops are also being given to the entire Reebok sales force. When orders were pa-
per based, replacing material in a shoe to change its price from $95 to $65 might take 30
days and mean a lost sale. With the new system, these changes could be made almost auto-
matically. When the rollout is completed 1,500 486-based NEC and Toshiba laptops will be
online. Salespeople will be able to check inventory and look into special orders. They will
also be able to access two years’ catalogs with full motion video and sound clips of Reebok’s
advertisements. Lotus Notes is used to store the catalogs with mail links through cc:Mail.
Another Reebok initiative is to use electronic data interchange with 10-15 percent of
its retailers. This commitment enables goods to be tracked through shipping companies,
Hoover, a data capture system to “suck in” information from databases around the
world, is linked to customer databases that track what customers have ordered and what
they want.
Planet Reebok is an Internet World Wide Web page to which people can sign on and
learn more about products as well as provide marketing information about themselves to
the company.
Touch-screen kiosks are planned to display product information and ask potential
59
Reebok’s new systems have not been implemented completely smoothly, however.
Particularly difficult is effort to integrate the Canadian operations into the U.S. business
operation. Concentrating development and support in the United States did not take into
account the specifics of invoicing under the Canadian law. This mistake added time and re-
10.3 million shares in 1995. From 1986 to 1990, Fireman was one of the ten highest paid
executives in the United States. Under his control, Reebok sales grew from $1.5 million in
In 1988, Fireman relinquished the CEO role to spend time working on other pro-
jects, including developing golf courses in Puerto Rico and Cape Cod. In the late 1980s and
early 1990s, Reebok suffered from two weak marketing campaigns (“Reeboks Let U.B.U.”
and “Physics behind the Physique”). More importantly, the aerobics fitness craze began to
subside. Women aerobics shoes were a major component of Reebok sales, so the sales de-
changed the focus and tried to expand into other areas. In 1993, he estimated that the out-
door-wear division would sell $350 million worth of shoes in 1995. He also tried to increase
sales of basketball shoes to a 25 percent market share. Outdoor sales fell far short of the
goal, reaching about $110 million. The basketball market strategy copied a page from Nike,
and relied on the new “Shaq Attaq” line supported by Shaquille O’Neal from the Orlando
60
Magic. While sales did increase, they did not reach the levels predicted by Mr. Fireman—
1991 to 32.7 percent in June 1995. Experts say shoe company expenses typically average
about 27 percent of sales. Investors blamed most of the increase on the cost of endorse-
ments.
Nike Mid-1995
At the same time that Reebok was suffering, Nike reported a 55 percent jump in
first-quarter 1995 earnings, with revenue increasing by 38 percent. Part of the increase was
from expanded international sales, with a 34 percent increase in orders from France and
Germany. Sales in Japan increased by 65 percent. Nike is also expanding sales of tennis
shoes, partly through endorsements from tennis stars Andre Agassi and Pete Sampras. In
the first quarter of 1995, revenue from tennis shoes increased by 92 percent with a 42 per-
At the same time sales were increasing, Nike managed to decrease its expense ratio.
Selling and administrative costs dropped to 22.3 percent of revenue from 25 percent in the
prior year. Much of the improvement came from an improved distribution system, including
Europe.
Reebok mid-1995
In 1990, Nike surpassed Reebok in footwear sales. In the year ending in August
1995, Nike had $4.7 billion in sales compared to Reebok’s $3.37 billion. One of the largest
battlegrounds is the retail Foot Locker stores owned by Woolworth Corp. The 2800 retail
stores sell 23 percent of U.S. sport shoes, representing $1.5 billion of the $6.5 billion U.S.
61
market for athletic shoes. Sales at Foot Locker stores account for almost 60 percent of the
Insiders note that the problems between Reebok and Foot Locker go back to the days
when Reebok shoes were selling rapidly. Foot Locker wanted concessions on price and
wanted Reebok to make some styles exclusively for them. Reebok was busy selling to other
outlets and was unwilling or unable to alter its production and distribution systems. Nike
was eager to build custom products for Foot Locker and now sells a dozen products exclu-
sively at the chain. Ex-employees at Reebok note that the company had additional problems
Sometimes the samples would come in late and sometimes not at all—
which got Foot Locker mad. . . . Sometimes, fashions last less than six
weeks; if you don’t get it in right then, there goes a major sale.
Mr. Fireman is responding by trying to improve relations with Foot Locker. He has
also offered to begin building exclusive styles for Foot Locker, but the introduction of the
products remains uncertain. He also notes that Reebok is working hard to cut costs and im-
prove its order and information tracking system. One problem that remains is that the
clerks at Foot Locker stores tend to push the Nike brands harder.
By September of 1995, major shareholders were getting upset with Reebok man-
agement. One of the leading outsider shareholders, Glenn Greenberg of Chieftain Capital
62
Reebok and The Internet
Like other shoe manufacturers, Reebok relies heavily on celebrity endorsements.
Signing Alan Iverson (NBA rookie of the year) and Venus Williams (tennis sensation) gave
Reebok greater visibility in 2000. In 2000, Reebok also increased its visibility by sponsoring
the Survivor television show with humorous ads. Their website followed these themes. In
2000, Reebok stopped selling shoes direct from its website. It was concerned about compet-
ing with the traditional retail outlets. So now the site focuses on image, technical informa-
tion about products, and then directs consumers to the retail partners.
sales dropped from $3.6 billion in 1997 to $2.9 billion in 1999 to about $2.8 billion in 2000.
Worse yet, from 1999 to 2000, gross margin declined from 38.5 percent to 37.9 percent. The
company implemented a version of SAP specifically designed for the footwear industry. It
took a year or so to resolve technical issues in configuring and installing the software. Con-
sequently, the software was implemented in phases at the various divisions (e.g., Ralph
Lauren Footwear in 2001, Rockport in early 2002, and Reebok North America in mid 2002).
Some of the anticipated strengths of the software are to integrate financial data across sev-
the United States. Approximately 44 percent of Reebok’s sales are outside the United
States. One concern in Europe is that pricing products in euros may provide price transpar-
ency, so that the company will be forced to charge the same price for an item in every coun-
try—giving up some profits made from charging higher prices in some markets. In 2000,
Paul Fireman was promoted to the position of President and CEO. Much of the top staff
63
Nike
Beginning in the late 1990s, the footwear industry lost its luster. However, Nike
revenue increased from $3.4 billion in 1998 to $9.0 billion in 2000 to $9.5 billion in 2001. In
2001, Nike installed a customized retail supply chain system from i2 Technologies, Inc. The
implementation, including ties to other ERP systems, did not go well, and Nike faced a se-
rious inventory reduction and misplacement. Nike management was disappointed in the
problems, and Nike chairman questioned: “This is what we get for $400 million?”
Introductory Questions
1. Why is business integration important to Reebok?
2. Diagram what information is collected and how it is used in the new system at Ree-
bok. Specify the format of the data collected at each point.
3. Describe the components and links in the global network that Reebok uses. Hint: Do
additional research, or “estimate” what connections are needed.
4. When problems arise with the network, or the software, how can they be identified
and resolved? How do we set up an IS group to solve problems and help users?
6. Design a new information system for Reebok that will help officials make better de-
cisions and regain sales and profitability.
Additional Reading
Five Approaches to Mainframe-alternative Computing,” Enterprise Systems Journal, Feb-
ruary 1995.
Ralph T. King Jr., “Nike Reports 55% Gain in Earnings for Fiscal 1st Period, Lifting Stock,”
The Wall Street Journal, September 19, 1995, p. B2.
Susan Pulliam and Joseph Pereira, “Reebok CEO Fireman Faces Criticism by Institutional
Holders,” The Wall Street Journal, September 14, 1995, pp. B1, B2.
Joseph Pereira, “In Reebok-Nike War, Big Woolworth Chain is a Major Battlefield,” The
Wall Street Journal, September 22, 1995, pp. A1, A5.
“The Trainer Trajectory, Reebok Loses Tech Chief to Drug Giant Eli Lilly,” Information
64
Week, January 9, 1995.
65
Comment: Lots of sources, notably
The Internal Revenue Service (IRS) Computerworld and Government
Computing News, notably:
Between personal and business returns, the IRS processes more than 200 million
Anthes, Gary H., 1993, IRS uncov-
tax returns a year. Some of the returns are simple one-page forms, others run to thousands ers bogus access to tax records,
Computerworld, 08/09/93, p. 15.
of pages of supporting documents. Overall, they handle more than 1 billion information Anthes, Gary H., 1993, Tax man
gets with the program, Computer-
world, 04/12/93, p. 20.
documents a year. The IRS brings in more than $1.25 trillion in tax revenue a year. The
Anthes, Gary H., 1992, IRS seeks to
cash in on third IRS overhaul, Com-
IRS estimates that there is a $150 billion backlog of uncollected taxes. The IRS has 10 re-
puterworld, 04/13/92, p. 1.
gional service centers that are responsible for processing and storing individual forms. In Anthes, Gary H., 1991, Friends in
high places, Computerworld,
11/04/91, p. 69.
1989, it cost the IRS $34 million just to store 1.2 billion tax returns in some 1 million
Anthes, Gary H., 1991, IRS’ systems
overhaul plan under fire, Com-
square feet of storage space. By 2001, the IRS expects to receive 224 million tax returns puterworld, 07/01/91, p. 4.
main computer center is in Martinsburg, West Virginia. Blankenhorn, Dana, IRS taking
returns by phone—without needing
computer, Newsbytes, 1/23/92.
Until 1990, all documents at the IRS were stored as paper records in a central ware-
Cortese, Amy, 1989, System woes
house. Documents were organized according to the year of filing. As a result, if a taxpayer taxing IRS to the limit, Computer-
world, 04/10/89, p. 1.
had a problem or question that covered multiple years, the citizen had to schedule multiple Halper, Mark, 1993, UK tax agency
will outsource to EDS, Computer-
world, 11/29/93, p. 16.
meetings with IRS officials to correct problems for each of the years. In some cases, it could
McCormick, John, IRS tries out
verbal tax filing, Newsbytes, 1/24/92
take weeks or months just to get the files. Occasionally, the IRS found it was faster to ask
Neumann, Peter G., 1992, Aggrava-
the taxpayer for a copy of the return. By the early 1990s, this problem was resolved by hav- tion by computer: life, death, and
taxes, Communications of the ACM,
35(7), p. 122. ... [1]
ing each of the 10 service centers store digital images of the tax returns—making them
66
available to agents on their terminals. Even so, the IRS knows that it needs more automa-
tion, especially the ability to scan the returns directly into a computerized information sys-
tem.
faced by Dickie Ann Conn. The IRS determined that she owed $67,714 in back taxes. As a
result, she was sent a bill for more than $1 billion in interest and penalties. On challenge,
the IRS admitted that there was an error in the interest computation.
faster processing, fewer mistakes, and easier access to data ought to save a considerable
amount of money. The computer’s ability to search the data, automatically match transac-
tions, and to analyze each return presents several additional opportunities that can either
cut costs or raise additional revenue. Managers at the IRS are fully aware of the potential,
and they have proposed several systems over the years. The problem has been in implemen-
In the late 1960s, the IRS knew that it needed to redesign its basic systems and be-
gan planning for a system to be installed in the 1970s. Congress eventually killed the plan
for two main reasons: it was too expensive, and the members of Congress were concerned
about security and taxpayer privacy. The IRS then focused on keeping its existing com-
puters running.
In 1982, the existing system was nearing capacity and the IRS established the Tax
System Redesign program. It was a major redesign and consisted of three major compo-
nents. According to the GAO, changes in management resulted in the system never getting
past the design stage. A new assistant commissioner in 1982 embarked designing a new
67
system that would carry the IRS through the 1990s. Initial costs were estimated at $3 to $5
billion over the entire project. The primary objective was to replace the old central tape-
based system with an online database. Eventually optical technology would be used to scan
the original documents and store the data in the database. A new communication system
would carry the data to any agent’s workstation. By 1989, initial planning had already cost
the IRS more than $70 million, with no concrete proposal or results.
The main computer systems were replaced at the IRS service centers in 1985. The
change in the systems was almost disastrous for the IRS. The change delayed returns proc-
essing, leading to delays in refunds that cost the IRS millions of dollars in interest pay-
ments. IRS employees worked overtime but still could not keep up. Rumors were flying that
some employees were dumping returns to cut down their backlog. Because of the delays and
backlogs, the IRS managed to audit only about half the usual number of returns.
In 1986, the IRS initiated a plan to provide 18,000 laptop computers to make its field
auditors more productive, with its Automated Examination System (AES). Unfortunately,
the service bought the Zenith laptops a full year before the software was ready. The system
was written in Pascal and was delivered to agents in July 1986. The system was designed
to help examine Form 1040 returns. Its biggest drawback was that it used 18 different disk-
ettes, requiring agents to continually swap the disks. From privatization efforts by the
funding was cut, programmers with experience in Pascal were cut. The system had to be
rewritten in C.
A survey in 1988 revealed that 77 percent of the agents were dissatisfied with the
software, and it was used by only one-third of them. By 1989, the IRS revised the software
and managed to reduce it to eight disks. Overall, by 1989, the AES project was more than
68
six years behind schedule and the GAO observed that it would be $800 million over the
original budget. The IRS originally anticipated that the AES would produce $16.2 billion in
additional revenue over nine years by making agents more productive. The GAO disputed
the IRS has been unable to verify that the use of laptops has actually re-
sulted in the examination of additional returns or increased tax revenues.
In 1990, the White House cut funding for the program from $110 million down to
$20 million.
collecting taxes and processing information. In hearings before Congress, Sen. David Pryor
(D-Ark.) noted that the 1960s era IRS computers were headed for a “train wreck” in the
mid-1990s. The GAO estimated the original project would cost between $3 and $4 billion.
The overall design calls for a centralized online database, smaller departmental sys-
tems containing local information, and a nationwide network to tie them together. Tax re-
turn data would be entered with a combination of electronic filing and optical scanners.
By 1991, the estimated cost of the plan had expanded to $8 billion. Although it was
anticipated that the system would cut $6 billion in costs, the plan was rapidly attacked by
members of Congress. Three studies of the plan by the GAO were released in early 1991. (1)
The GAO was concerned that optical technology was not sufficiently advanced to perform
the tasks demanded by the IRS. The GAO urged greater emphasis on electronic filing. (2)
The GAO was concerned about management issues such as transition planning, progress
69
measurement and accountability. (3) The GAO and Sen. John Glenn (D-Ohio) voiced con-
This is a serious omission in view of the fact that the IRS intends to allow
public access . . . to some of its systems and because concerns over the secu-
rity of taxpayer information helped doom the first [IRS] modernization ef-
fort in the late 1970s.
Despite these misgivings, the IRS was committed to the plan. Fred Goldberg, IRS
We have been running our business essentially the same way, using essen-
tially the same computer and telecommunications systems design for 25
years. [Existing systems] will perform well and achieve incremental im-
provements for the next few years. . . Our best judgment is that [OCR] tech-
nology will be there when we need it, by the end of the decade.
By 1992, the situation was worse. Shirley Peterson, the new commissioner of inter-
Our systems are so antiquated that we cannot adequately serve the public.
The potential for breakdown during the filing season greatly exceeds ac-
ceptable business risk . . . Some components of these computers are so old
and brittle that they literally crumble when removed for maintenance.
In December 1991, the IRS awarded a 12-year, $300-million contract to TRW to help
manage the process and provide planning and system integration services.
The new system is ambitious, calling for 60 major projects, two dozen major pur-
chases, 20 million lines of new software, and 308 people just to manage the purchasing. De-
spite their efforts, elements of the IRS modernization plan were stalled because of purchas-
ing difficulties. In July 1991, the IRS awarded a billion-dollar Treasury Multiuser Acquisi-
tion Contract (TMAC) to AT&T. The goal was to standardize purchasing for the IRS and the
Treasury Department by routing all purchases through one vendor. The contract was chal-
lenged by other vendors and overturned. The contract was rebid and AT&T won a second
time. IBM (one of the original protesters) again objected to the process, noting that the IBM
bid of $708 million was less than the $1.4 billion bid by AT&T.
70
In 1993, the IRS acknowledged that the TSM Design Master Plan needed to be re-
coordinate technical planning with IRS needs, the agency established a research and devel-
opment center, funded by $78.5 million of federal money but run by the private sector. The
center is responsible for providing technical assistance and strategic planning for the TSM.
The IRS also established a high-level “architect office” to evaluate technologies and their
likely uses.
Through 1992, the IRS had spent $800 million on TSM. In 1993, new IRS estimates
indicate that TSM will cost $7.8 billion above the $15.5 billion needed to keep existing sys-
tems running. The new system is expected to generate $12.6 billion in total benefits by
2008 through reduced costs, increased collections, and interest savings. Additionally, the
improved processes should save taxpayers $5.4 billion and cut 1 billion hours from their
The IRS asked Congress for a 1996 allocation of $1.03 billion, a substantial increase
from the $622 million it spent on automation in 1995. However, Hazel Edwards from the
after eight years and an investment of almost $2 billion, IRS’ progress to-
ward its vision has been minimal.
IRS commissioner, Margaret Milner Richardson, denies the GAO claims, noting
spending more money, it will be possible to create a system that finally works. The GAO
believes it is impossible to complete the complete project envisioned by the IRS. The GAO
believes the IRS should focus on smaller projects that can be completed in one to two years.
71
Electronic Filing
The IRS introduced electronic filing in 1986, when 25,000 forms were filed electroni-
cally. By 1990, 4.2 million people filed for tax refunds electronically. In 1992, the number
increased to 10 million filers. In 1994, about 16 million tax returns (7.8 percent of the total)
were filed electronically. About half were 1040A forms. In 1995, the IRS expects electronic
The primary target of electronic filing is the millions of individual taxpayers who
will receive refunds. To control the process and ensure that documents are properly filed,
electronic filing is only available through authorized tax preparers. The IRS is deliberately
avoiding providing access to individual taxpayers. As a result, taxpayers who use the sys-
tem pay an additional charge to the preparer. Interestingly, the preparer does not have to
pay a fee to the IRS. However, the electronic system provides for refunds within a couple of
weeks.
Electronically filed returns cost the IRS one-tenth the processing cost of paper forms.
They also eliminate the cost of paper storage. The IRS notes that the service is able to store
For taxpayers with easy returns, the IRS is simplifying the process even further—
providing for filing over the telephone. In a 1992 pilot, 117,000 Ohio taxpayers filed for re-
funds using TouchTone phone calls. The system was expanded nationwide in 1994. It can
only be used by taxpayers who qualify to use the 1040EZ form. A replacement form (1040-
TEL) must still be signed and filed with the IRS, along with the W-2 (withholding) state-
ments.
72
Document Processing System
Despite initial efforts in electronic collection of tax data, the IRS remains committed
to handling paper forms. To make that task more efficient, the service is designing a new
document processing system. Operators at personal computers will scan in paper docu-
ments. They will then correct and key in additional data. The goal is to move 100 percent of
tronic form.
ment methods several times. The GAO issued a comprehensive report in 1995. Despite the
73
• IRS has not assigned responsibility, authority, and accountability for
managing and controlling systems modernization to one individual or
office.
One of the fundamental GAO complaints deals with the overall strategy of the IRS.
IRS's goal is to have electronic filings for 70 million individual returns and
10 million business returns by 2001. This goal of 80 million electronically
filed returns represents 35 percent of all returns. On the basis of the current
rate of electronic filings from individuals, IRS estimates that by 2001, only
about 29 million individuals will file electronically. If 10 million business
returns are filed electronically as projected, a total of about 39 million fil-
ings will be electronic. This is only about 17.4 percent of the 224 million tax
returns anticipated in 2001, less than half of IRS's goal.
The GAO is also extremely concerned about the IRS development methods. The IRS
has been criticized repeatedly for not adopting strong SDLC development controls. Carnegie
Mellon University has developed a system (CMM) for evaluating development teams, which
74
In August 1993, using CMM, IRS rated its software development capability
as immature, the lowest level. This level of maturity—CMM level 1—is de-
scribed as ad hoc and, at times, chaotic, and indicates significant weak-
nesses in software development capability. Since that date, IRS's software
development capability has not improved significantly. IRS's software de-
velopment activities remain inconsistent and poorly controlled, with no de-
tailed procedures for systems engineers to follow in developing software.
Several problems have arisen because of inconsistencies and multiple, scattered de-
velopment teams. The IRS took a step to resolve some of these problems by naming the
operations and the CIO were reassigned to report directly to the associate commissioner.
The fragmented nature of the IRS TSM project has already caused several problems.
These problems are especially acute in handling data. Several data definition problems
the IRS. Each year the IRS returns to Congress and requests more money for its independ-
75
ent projects. The IRS has also been criticized for being sloppy in estimating benefits and
costs of the proposed systems. In one example, the IRS claimed the new system would gen-
erate additional revenue—but the GAO found that the revenue increase really came about
from hiring additional workers for collection. To be fair, the IRS understands and agrees
that it has some serious problems with designing and implementing the new systems. They
have undertaken several steps to help evaluate and control the project development. For
• Business Master Plan: reflects the business priorities set by IRS's top ex-
ecutives and links IRS's strategic objectives and business vision with
the tactical actions needed to implement them.
• IRS Future Concept of Operations: articulates IRS's future business vi-
sion so that the Congress, IRS employees, and the public can see and
better understand IRS's plans for serving the public.
• Integrated Transition Plan and Schedule: provides a top-level view of
the modernization program's tasks, activities, and schedules and is the
primary tool used for accountability for delivering the products and ser-
vices necessary to implement modernization.
Unfortunately, as of May 1995, these plans had not been completed. For example,
the Future Concept of Operations was only 60 percent completed. The plans are also some-
what independent and concepts in one are not necessarily related to the other documents.
In the meantime, ad hoc development continues, along with requests for more development
money. Interestingly, the IRS maintains that all TSM projects have equal priority, and that
they must all be completed together, or the entire project will fail. On the other hand, they
IRS has identified 6 core business areas and defined 11 business processes
that support these areas. Of these 11, 3 were selected to begin re-engineering
efforts. Those selected for initial redesign are (1) processing returns, (2) re-
sponding to taxpayers, and (3) enforcement actions.
76
From past criticisms, the IRS has begun to evaluate its development efforts. These
evaluations are largely keyed toward appeasing Congress and monitoring the time and ex-
penses involved.
IRS currently holds program control meetings to assess and control infor-
mation technology. However, these meetings have generally focused on the
costs and implementation schedules of individual projects, rather than on
comprehensively evaluating and prioritizing risks and returns expected
from these investments. Instead of using explicit criteria to measure risks
and returns, IRS evaluates each project's progress using a time-line.
The IRS has created several teams with specific tasks to help the servie design and
all projects, and they are being held up by lack of a strategic plan, and limited customer in-
Although the teams have made progress, their accomplishments have not
significantly improved IRS's software development capability.
In 1993, the IRS committed to an information engineering systems development
methodology, which is used to create an information strategic plan that will guide future
purchases and development decisions. However, in July 1993, the IRS stated that the “in-
tegrated systems architecture” will be completed as each of the TSM components is built.
Security
The IRS has experienced several problems with security in the past few years. Most
of them have arisen from problems with its own workers. In particular, the IRS’s internal
77
• Accessed taxpayer records to monitor the processing of fraudulent re-
turns.
• Browsed taxpayer accounts that were unrelated to their work, including
those of friends, relatives, and neighbors.
The GAO notes that current IRS controls do not adequately protect taxpayer data.
• Restricted access to taxpayer data to only those employees who need it.
• Monitored the activities of thousands of employees who were authorized
to read and change taxpayer files
• Limited the use of computer programs to only those that have been au-
thorized.
At this point, plans for security in the future systems do not look much better. In its
1995 review, the GAO found several problem areas in which security was lacking:
that IRS employees give wrong answers to taxpayer questions 36 percent of the time. Ad-
mittedly, the problem facing the 5000 telephone “assistors” is challenging. If they do not
know the answer to a question, they need to search 159 IRS publications, or in the worst
case, search through 10 volumes of tax regulations. In 1988, the assistors answered 38.5
To deal with the huge volume of data and improve the answers, in 1990, the IRS Ar-
tificial Intelligence Lab developed the Taxpayer Service Assistant, an expert system that
contains knowledge from the IRS publications. The prototype could handle 50 complete tax
topics and was designed to improve the performance of the novice assistors. It also helped
78
train the novices to ask the appropriate questions and learn the answers to common situa-
tions.
By 1992, the ES was renamed as the Taxpayer Services Integrated System and had
been phased into most of the IRS service centers. Henry Philcox, the IRS chief information
officer, noted that it provided correct information 85 percent of the time. Although this re-
sult represents an improvement, in some cases, the taxpayer had to respond to 43 questions
before getting an answer. The IRS found it could get the same accuracy by providing book-
Another use of expert systems lies in sending IRS letters to taxpayers. The IRS an-
nually sends 15 million letters to taxpayers, answering questions and claims. The IRS ini-
tially built a file of 300 form letters. Agents extract paragraphs and add sections as needed.
In the early 1990s, the GAO estimated that 30 percent of the letters (about 4.5 mil-
lion) contained errors. In response, the IRS AI lab created the Correspondex Expert System
(CES). The system is based on the same file of form letters. However, it contains rules that
check for nonstandard word usage, look for conflicting or redundant paragraphs, check
spelling, and identify the needed enclosures. The CES also insists that each letter begin
The IRS also has an infamous expert system that it uses to evaluate returns and de-
cide which people should be audited. It is known as the Automated Issue Identification Sys-
tem (AIIS). The internal statistical rules are secret—although a group once tried to sue the
IRS to reveal the rules. Ted Rogers, founding chief of the IRS AI lab, noted that in tests, the
AIIS identified 90 percent of the audit issues found by IRS experts. The system can be used
79
to either reduce the amount of preaudit labor by 80 percent or, by keeping the labor the
is a system designed to monitor returns and identify people who are most likely to under-
pay their taxes. The system was first installed in 1992 at the Ogden, Utah regional center.
The system pulls data from the service center’s Unisys 1180 mainframe. It is downloaded
across a local area network to a Sequent Computer System S-81 minicomputer, and from
there it is sent to one of 240 networked Unix workstations on the employees’ desks.
2’s) with the filings of individual taxpayers. Mark Cox, assistant IRS commissioner for in-
formation systems development, notes that in trials with the AUR “We’ve been able to cut
down the rework of cases from 25 percent to less than 5 percent. We see this type of work
The system uses an Oracle Corp database running SQL to compare the data. It also
performs basic tax computation and helps agents send notices to taxpayers. Managers note
that although the new system has not improved the speed of the agents, it has cut down the
error rates. As agents become familiar with the system, they expect productivity to im-
prove.
In 1991, the Ogden center processed 26 million tax returns, collecting $100 billion in
tax payments. It processed $9 billion in refunds. In 1992, it won the Presidential Award for
Quality for improved tax processing, by saving the government $11 million over five years.
80
Currency and Banking Retrieval System
In 1988, Congress passed a new law in an attempt to cut down on crime (notably
drugs) and to provide leads to people who significantly underreport their income. Every
cash transaction of more than $10,000 is required by federal law to be reported to the IRS
on a Form 8300. The IRS created the Currency and Banking Retrieval System to match
these forms against the filer’s tax return. The system automatically identifies people who
had large cash purchases but claimed little income. However, due to a programming error,
the system missed forms covering $15 million in cash transactions between 1989 and 1990.
The problem stemmed from the fact that the IRS used the same code number on the
8300 forms that it had been using on other cash transaction forms. The IRS later assigned
separate codes for each form. But when programmers created the new matching programs,
they did not know that there were now two codes for each transaction.
The system was corrected in 1991, and by 1992 was used to process more than 1 mil-
Jennie Stathis of the GAO notes that there are additional problems with the Form
8300. In particular, the filings are often incomplete or contain incorrect taxpayer identifica-
tion numbers. The IRS is developing software that will allow businesses to automatically
verify the taxpayer ID numbers before the customer completes the purchase.
design a document processing system that by the late 1990s will convert virtually every tax
return to digital form. A day after the contract was awarded, IBM sold the Federal Systems
81
The 15-year systems integration contract called for having the system online in
1996. The plan calls for scanning incoming tax forms. Special software will digitally remove
the form layout and instructions, leaving just the taxpayer data. OCR software will then
The system is scheduled for initial installation at the Austin, Texas regional center
in August 1995. Plans call for installing it at Ogden, Utah, Cincinnati, Ohio, Memphis, Ten-
Despite the popularity of electronic filing, the IRS still sees a need for the OCR sys-
tem. The IRS anticipates receiving 252 million paper filings in the year 2001.
SCRIPS is a less ambitious project ($88 million) that was awarded in 1993 to
Grumman Corp.’s data systems unit. SCRIPS was designed to capture data from four sim-
ple IRS forms that are single-sided. SCRIPS was supposed to be an interim solution that
would support the IRS until DPS could be fully deployed. However, delays have pushed
Interestingly, Grumman Data Systems was the loser in the contest for the DPS con-
tract. The IRS noted that Grumman failed a key technical test.
Security Breaches
In 1983, Sen. John Glenn (D-Ohio) released an IRS report indicating that 386 em-
ployees took advantage of “ineffective security controls” and looked through tax records of
friends, neighbors, relatives, and celebrities at the Atlanta regional IRS office. Additionally,
five employees used the system to create fraudulent returns, triggering more than 200 false
tax refunds. Additional investigations turned up more than 100 other IRS employees na-
tionwide with unauthorized access to records. Glenn observed that the IRS investigation
82
examined only one region, and looked at only 1 of 56 methods that could be use to compro-
mise security. He noted that “I’m concerned this is just the tip of a very large iceberg.”
The IRS itself noted that the Tax Systems Modernization (TSM) program “greatly
increases the risk of employee browsing, disclosure and fraud,” because of the online access
Margaret Richardson, commissioner of internal revenue, notes that the system used
by the perpetrators is 20 years old and is used by 56,000 employees. It meets all federal se-
curity standards, using passwords and limiting access based on job descriptions. The IRS
found the problems in Atlanta by examining records of database access during the last
three years. Because the system generates 100 million transactions a month, the data is
In 1989, the IRS arrested Alan N. Scott, of West Roxbury, Massachusetts, for alleg-
edly submitting 45 fraudulent returns via the new electronic filing system. The IRS claims
The IRS requires tax return preparers to fill out an application before it issues an
access code. Scott apparently used a fake taxpayer ID number and lied on the application
form to gain the access number. The IRS claims he then submitted false returns using bo-
gus names and taxpayer ID numbers to get refund checks ranging from $3000 to $23,000.
IRS officials note that the electronic filings actually made it easier to identify the
problem, because the computer could scan the data earlier than if it had been submitted by
hand. Once the situation was identified, the IRS was able to immediately lock out further
83
IRS Records
In 1993, Congress allowed some high-income taxpayers to spread a portion of their
tax payments over three years. The IRS was responsible for tracking and billing for these
payments. In August 1995, the IRS issued a public notice that many of the thousands of
“delinquent” notices it sent were wrong, but because of weak records, the service did not
know how many might be wrong. In July, the IRS issued more than 43,000 incorrect no-
tices.
The General Accounting Office (GAO) in 1995 cited the IRS with failure to keep
proper internal accounting records. The GAO stated that the records were so bad, they were
unable to express an opinion about the reliability of the IRS financial statements. For ex-
ample, the GAO was unable to verify “a significant portion” of the $2.1 billion the IRS
IRS Budget
Like any Congressional agency, the IRS budget is set by Congress and approved by
the president. In 1995, The Clinton administration asked Congress to increase the IRS
budget by 10 percent—allocating the money to improving the information systems and pro-
cedures at the IRS to make it more effective. Congress responded by cutting the IRS budget
by 2 percent. The Clinton budget called for $8.23 billion, and the Congressional numbers
cut the budget from $7.48 billion in 1995 to $7.35 billion in 1996. Congress did grant a
slight increase in the budget for tax system modernization. Rep. Jim Lightfoot (R-Iowa) ob-
served that
Without modernization, I think you’re throwing good money after bad. The
IRS is still working out of cardboard boxes. It’s basically that bad.
84
Alternatives
Virginia
In 1991, John D. Johnson, the chief financial officer of the IRS was surprised when
he contacted the Virginia state tax office regarding his personal state tax refund. On receipt
of John’s social security number, the Virginia tax commissioner typed it into the terminal
on his desk. Within seconds, the answer was displayed on the terminal.
Mr. Johnson was shocked that the state agency could provide the information so rap-
idly. Attempting to obtain the same information from the U.S. IRS would take at least three
days and probably several phone calls. The IRS promptly sent the chief information officer
UK equivalent of the U.S. IRS. Fueled by the success of privatizing the motor vehicle
registration system, government managers evaluated the benefits of outsourcing the com-
Inland Revenue signed a 10-year contract worth up to $2 billion with EDS subsidi-
ary EDS-Scicon Ltd. to take over the information processing. EDS must still answer ques-
tions about security and labor/hiring practices. The arrangement calls for EDS to purchase
$105 million of equipment from Inland and to hire 2000 of its 2500 workers. Inland would
cision, citing security and privacy concerns as reasons to block the deal. Inland managers
responded by noting that Inland Revenue and the British government “attach the greatest
importance to safeguarding the privacy” of taxpayer information. They also stated that In-
85
Inland would retain responsibility for confidentiality and would punish any breaches
through “legal sanctions.” An EDS spokesperson concurred and noted that EDS has strong
North Carolina, are developing one-half of the federal government’s Electronic Federal Tax
Payment System. In doing so, it has nine months to put together a program that will proc-
ess taxpayer data and provide online querying and batch updates on settlement transac-
tions for customers and the IRS. AT&T is developing the telecom and voice-recognition ser-
vices; ISSC is providing the data-processing services; and Intranet is providing the Auto-
According to Marybeth Anderson, manager of the project for First Chicago, the de-
velopment group wanted to focus on object-oriented technology in the database work be-
To construct their half of the program, NationsBank has subcontracted the project to
First Data Corporation in Hackensack, New Jersey. First Data is building the program on
Once the program is completed, First Chicago and NationsBank will become the fi-
nancial agents for the Treasury Department. They will develop and operate information
systems that will enable the electronic handling of tax payments and taxpayer information.
Treasury projects it will save $433 million through 1999 by eliminating paperwork from the
collection of the corporate and individual tax payments. The two banks will each collect
86
more than $400 million in transaction fees for their half of the total volume of tax pay-
ments.
splitting the systems between the two banks will give taxpayers the best possible service
Case Questions
1. What problems have been experienced by the IRS in developing its information sys-
tems?
2. How are these problems related to the IRS’ systems development methodologies?
4. Is the IRS pushing technology too hard? For example, are the OCR systems techni-
cally reasonable?
5. The GAO thinks the IRS should place more emphasis on electronic filing. Is the ac-
counting office correct, or is the IRS approach better? Write a proposal supporting
one of the two sides, emphasizing costs, benefits, risks, and opportunities.
6. Why was the State of Virginia able to build an integrated system by 1991, but the
IRS still does not have the same capabilities?
7. Are there any ways to speed up the development of systems for the IRS? What would
be the costs and risks?
9. What would be the advantages and drawbacks to outsourcing the IRS information
systems, similar to the UK approach? How does that approach differ from the meth-
ods used by the IRS?
10. Write a 5-year and 10-year management plan for the development and adoption of
technology at the IRS. Be sure to include transition and implementation details.
11. Why did the IRS choose private banks to develop the electronic payment system?
Could this technique be used for other systems?
13. What are the differences between the IRS proposals and the GAO suggestions? What
87
are the advantages of each approach?
14. Is there any hope? Can the IRS improve its development processes? Outline a meth-
odology that the IRS can use to develop its systems.
15. Design a strategic plan for the IRS tax modernization system. Specify the goals and
the re-engineering that will be involved.
Additional Reading
Gary H. Anthes, “IRS Uncovers Bogus Access to Tax Records, Computerworld, August 9,
1993, p. 15.
Gary H. Anthes, “Tax Man Gets with the Program,” Computerworld, April 12, 1993, p. 20.
Gary H. Anthes, “IRS Seeks to Cash in on Third IRS Overhaul,” Computerworld, April 13,
1992, p. 1.
Gary H. Anthes, “IRS’ Systems Overhaul Plan Under Fire,” Computerworld, July 1, 1991, p.
4.
Gary H. Anthes, “IRS Tries Expert System for Fewer Errors,” Computerworld, June 3,
1991, p. 33.
Mitch Betts, “IRS Goes Digital to Speed Returns,”, Computerworld, March 7, 1994, p. 8.
Mitch Betts, “IRS Laptop Gains not Realized,” Computerworld, August 21, 1989, p. 39.
Amy Cortese, “System Woes Taxing IRS to the Limit,” Computerworld, April 10, 1989, p. 1.
Mark Halper, “UK Tax Agency Will Outsource to EDS,” Computerworld, November 29,
1993, p. 16.
88
“IRS Modernization Effort Called Slow, Ineffective,” Saint Paul Pioneer Press (AP), Febru-
ary 17, 1995, p. 12A.
John McCormick, “IRS Tries Out Verbal Tax Filing, “ Newsbytes, January 24, 1992.
R.R. Nelson, E.M. Whitener, H.H. Philcox, “The Assessment of End-user Training Needs,”
Communications of the ACM, July 1995, pp. 27-39.
Florence Olsen, “Downsized Tax System Takes up Auditing Load,” Government Computer
News, April 13, 1992, pp. 1-2.
Richard Pastore, “IRS Arrests Boston Man on Electronic Tax Fraud Charges,” Computer-
world, August 21, 1989, p. 6.
Kevin Power, “IRS Finally Gets TMAC in the Door,” Government Computer News, July 20,
1992, pp. 1-2.
Terrey Hatcher Quindlen, “Recent IRS Award Puts TSM in Motion,” Government Computer
News, December 23, 1991, p. 3-4.
Terrey Hatcher Quindlen, “IRS Official Decries Technology for its Own Sake,” Government
Computer News, December 9, 1991, p. 72.
Terrey Hatcher Quindlen, “CIO Says Despite Rocky Terrain, IRS Tax Modernization Pre-
vails,” Government Computer News, February 17, 1992, p. 70.
Terrey Hatcher Quindlen, “IRS Wins Quality Award for Saving Government $11 Million,”
Government Computer News, May 11, 1992, p. 82.
Terrey Hatcher Quindlen, “IRS Programming Goof Stymies Crime Fighting for 2 Years,”
Government Computer News, July 6, 1992, p. 1-2.
Dave Skidmore, “Cuts Could Keep IRS From Shrinking $150 Billion Backlog,” Louisville
Courier-Journal (AP), October 9, 1995, p. A1.
“Tax Report,”, The Wall Street Journal, August 9, 1995, p. A1. [Mistakes in billing and in-
ternal records.]
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Page 66: [1] Comment COMMENT
Lots of sources, notably Computerworld and Government Computing News, notably:
Anthes, Gary H., 1993, IRS uncovers bogus access to tax records, Computerworld, 08/09/93, p. 15.
Anthes, Gary H., 1993, Tax man gets with the program, Computerworld, 04/12/93, p. 20.
Anthes, Gary H., 1992, IRS seeks to cash in on third IRS overhaul, Computerworld, 04/13/92, p. 1.
Anthes, Gary H., 1991, Friends in high places, Computerworld, 11/04/91, p. 69.
Anthes, Gary H., 1991, IRS’ systems overhaul plan under fire, Computerworld, 07/01/91, p. 4.
Anthes, Gary H., 1991, IRS tries expert system for fewer errors, Computerworld, 06/03/91, p. 33.
Bartolik, Peter, 1990, IRS urges taxpayers to file electronically, Computerworld, 02/05/90, p. 144.
Betts, Mitch, 1994, IRS goes digital to speed returns, Computerworld, 03/07/94, p. 8.
Betts, Mitch, 1989, IRS laptop gains not realized, Computerworld, 08/21/89, p. 39.
Blankenhorn, Dana, IRS taking returns by phone—without needing computer, Newsbytes, 1/23/92.
Cortese, Amy, 1989, System woes taxing IRS to the limit, Computerworld, 04/10/89, p. 1.
Halper, Mark, 1993, UK tax agency will outsource to EDS, Computerworld, 11/29/93, p. 16.
McCormick, John, IRS tries out verbal tax filing, Newsbytes, 1/24/92
Neumann, Peter G., 1992, Aggravation by computer: life, death, and taxes, Communications of the ACM, 35(7), p. 122.
Olsen, Florence, 1992, Downsized tax system takes up auditing load, Government Computer News, 4/13/92, 11(8), p. 1-2.
Pastore, Richard, IRS arrests Boston man on electronic tax fraud charges, Computerworld, 08/21/89, p. 6.
Power, Kevin, 1992, IRS finally gets TMAC in the door, Government Computer News, 7/20/92, 11(15), p. 1-2.
Quindlen, Terrey Hatcher, Recent IRS award puts TSM in motion, Government Computer News, 12/23/91, 10(26), p. 3-4.
Quindlen, Terrey Hatcher, 1991, IRS official decries technology for its own sake, Government Computer News, 12/9/91, 10(25), p. 72.
Quindlen, Terrey Hatcher, 1992, CIO says despite rocky terrain, IRS tax modernization prevails, Government Computer News,
2/17/92, 11(4), p. 70.
Quindlen, Terrey Hatcher, 1992, IRS wins quality award for saving government $11 million, Government Computer News, 5/11/92,
11(10), p. 82.
Quindlen, Terrey Hatcher, 1992, IRS programming goof stymies crime fighting for 2 years, Government Computer News, 7/06/92,
11(14), p. 1-2.
Saint Paul Pioneer Press (AP), IRS modernization effort called slow, ineffective, 2/17/95,
p. 12A.
Dave Skidmore, 1995, AP, Cuts could keep IRS from shrinking $150 billion backlog,
Louisville Courier-Journal, 10-9-95, p. A1.
WSJ, 1995, Tax report, 8-9-95, p. A1. (mistakes in billing and internal records)