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Deloitte Research – Clinical Transformation

A Deloitte Research Health Care Study

CLINICALTRANSFORMATION

Deloitte Research

Cross-Industry Lessons for Health Care

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TABLE OF CONTENTS

Executive Summary ..................................................................... 1

PART ONETHE CROSS-INDUSTRY PERSPECTIVE ............................... 6

The Computer and the Dynamo ............................................. 8IT Adoption and Implementation–A Conceptual Model ............. 9BANKING ................................................................................ 11

The ATM–A Continually Evolving Success Story .................. 13AIRLINES ................................................................................. 15

Paperless Cockpit ................................................................... 17Orbitz–The Risks of External Cooperation ............................ 18

RETAILING ............................................................................. 21Information Technology, Organizational Transformationand Business Performance ...................................................... 23Information Technology’s Contribution to RetailProductivity Growth .............................................................. 24Implementation Failure Prevention at Wal-Mart .................... 25

Implications for Health Care...................................................... 26

PART TWOHEALTH CARE: CLINICAL TRANSFORMATION ............. 28Drivers and Current Industry Responses .................................... 30Implementation Challenges ....................................................... 34

Physicians’ Attitudes Toward CPOE ...................................... 34The Road to Clinical Transformation ......................................... 38

End Notes .................................................................................. 45About Deloitte Research ............................................................ 47

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CLINICAL TRANSFORMATION

EXECUTIVE SUMMARY

Clinical Transformation and theValue of a Cross-Industry PerspectiveIn recent years, a spotlight has shone brightly on the qualityshortcomings of the U.S. health care system; demands forimprovement, especially with respect to patient safety inhospitals, have been growing steadily in intensity. With theirrecent reports, To Err is Human: Building a Safer HealthSystem, and Crossing the Quality Chasm: A New Health Systemfor the 21st Century, the Institute of Medicine (IOM) almostsingle-handedly ignited a national debate on this topic.Members of the IOM and many other experts in the fieldsee few viable alternatives to dealing with this serious andworsening problem short of fundamentally revamping ortransforming our entire health care system.

Unlike other aspects of society, the health care delivery systemhas been relatively unaffected by the recent revolution ininformation technology. But according to the IOM, if weexpect to see substantial improvement in quality over thenear term, information technology (IT) will need to play acentral role in the redesign of the health care system. Indeed,being able to take advantage of advances in informationtechnology is seen as a critical catalyst and enabling factor inthe process of change.

If expected benefits of “clinical transformation” for healthcare organizations and society are so compelling, why hasthere been so little movement in this direction? Financing isalways a concern, but nonfinancial implementation issuespresent even greater challenges. Making this investment payoff ultimately depends on how well IT systems mesh withorganizational, operational, interpersonal, and institutionalprocesses and objectives; monumental obstacles face anyhospital contemplating clinical transformation. Without helpin overcoming them, the true potential of clinical IT in healthcare is unlikely to be realized.

The purpose of this study is to get to the root of this problem.Our approach takes the position that hospital executives,clinicians, and policy-makers have a great deal to learn fromthe experiences of companies in other major serviceindustries, where IT has proved to be a transformative force.Banking, airlines, and retailing are frequently held up assuccess stories in their use of IT advances to increase efficiencyand improve service quality. We examine each of theseindustries in detail, identifying the key forces that contributedto successful “IT transformation,” and providing insights andpractical lessons to all interested in moving the health caresystem toward clinical transformation.

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IT Adoption and Implementation– A Conceptual ModelIn banking, airlines, and retailing, the impact of ITinnovations has been nothing short of transformative—fundamentally altering the nature of business and its valueto consumers. As we examine the experiences of theseindustries, we need to recognize the major common forcesbehind this dramatic change.

DRIVERS. Drivers are the main forces pushing for adoptionof innovative information technologies in an industry. Theyare environmental—related to external market and otherpressures—and technological—stemming from new ITcapabilities that make novel applications possible.Environmental pressures can come from market forces suchas an up-tick in the level of competition that demands aresponse from companies if they want to maintain currentlevels of profitability, or simply remain viable competitors.A more competitive market situation drives the need to cutoperating costs or improve quality or value as perceived bythe customer, areas where IT innovations can make a majorcontribution. No less important than competition for drivingadoption is the availability of IT solutions that are up to thetask of helping companies meet their competitive needs.Requisite hardware, software, and network capabilities areall critical in driving industry adoption.

CHALLENGES. At the same time that drivers pushcompanies toward adoption of novel IT solutions, a numberof important challenges can present hurdles that must beovercome for successful implementation. A major challengeis the need to mesh new systems with what are likely to beincompatible existing legacy systems that cannot simplybe replaced. Another daunting task is introducing ITsystem-related changes into the workplace. Design andimplementation strategies for new information systems must

take into account the likelihood of worker resistance tochange and must therefore include approaches forovercoming it. In addition to dealing with challenges relatedto building internal support for a new IT system, it may benecessary to secure cooperation for IT system design andfunction decisions from external parties—such ascompetitors, suppliers, and major customers—for datastandards and other IT system interoperability requirements.

SUCCESS FACTORS. Regardless of the industry, keysuccess factors include management capabilities, not onlywith IT innovation, design, and implementation, but alsoin regard to business decisions and the overall organizationalstrategic approach—a concept that we refer to as “ITLeadership.” Use of novel IT solutions alone is not enoughto ensure success, but must complement, and be accompaniedby, a solid business strategy that builds off an intense focuson the customer. Management also has a crucial role to playin IT system implementation, especially in overcoming thetwo major challenges of assuring internal and externalcooperation. Successful implementation requires that themost senior levels of management have a solid understandingof the value of IT and have the ability to communicate thesebenefits to all those necessary to implementation and optimalsystem use.

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IT Transformation–Service Industry Comparisons

Banking

Financial services companies rely heavily on gathering,processing, analyzing and providing information to meet theneeds of their customers. Because of the importance ofinformation in banking, it is not surprising that banks wereamong the earliest adopters of automated informationprocessing technology, beginning in the 1950s. As it becameclear that many of the banks’ information-handling processescould be automated, computerization in banking becameincreasingly common, greatly enhancing industryproductivity. The next major wave of computerization beganin the 1970s with the introduction of electronic paymentsand electronic fund transfer. In the current phase of ITevolution, banks continue to upgrade their basic back-officesystems and develop new applications, enabling them tosharpen their customer focus.

Retail banking has made major strides in the use ofinformation technology over the past decades. But as theypush the current limits of IT into new areas, banks now facedifferent and arguably more difficult challenges. Historically,IT in banking enhanced productivity primarily byautomating simple, repetitive functions such as basiccalculations and internally focused back-office supportactivities. But banking also involves higher-level judgments,the decisions that can be informed and improved, but notmade, by computers. The benefits of computerizing thesefunctions are likely to be great, as are the challenges toimplementation.

Airlines

Airlines, like financial services companies, have been earlyadopters of information technology, frequently as theresult of public rather than private sector initiatives. Thegovernment has played a major role in the evolution ofthe U.S. airline industry, which historically relied on thepublic sector to fund essential physical and informationinfrastructure investments. The most significant early ITinnovations involved the creation of the modern air trafficcontrol system in the 1950s and the introduction ofcomputerized reservation systems (CRS) in the mid-1960s.Following industry deregulation in 1978, yield managementand frequent flyer passenger loyalty programs built on existingCRS data systems helped major carriers to compete. Themajor IT development of the 1990s affecting airlines was

clearly the Internet, whose transformative effect, both inlowering costs and driving competition, cannot be overstated.

As in banking, IT Leadership plays a central role in ITadoption and implementation success in the airline industry.IT innovation and general financial success seem to go handin hand. American Airlines was an early leader, not only withrespect to its IT initiatives, but across the board, with itsconsistently superior performance. American’s managementwas instrumental in both creating the first CRS, SABRE, andexploiting this asset, post-deregulation, through invention ofthe frequent flyer program. But past leadership does notguarantee future success. The most serious threats to Americanand other major carriers are low-cost competitors such asJetBlue and Southwest Airlines. Southwest has not been theearliest adopter of IT innovations, but excels at exploiting ITin the context of its business model and corporate culture.

Retailing

IT systems in retail today are generally less pervasive andsophisticated than those used by banks and airlines. Narrowindustry margins have restrained universal adoption; lack ofa viable mass market for retail IT has reduced the availabilityof generally affordable applications and solutions. As a result,the presence of IT in the industry varies greatly by entity sizeand merchandise category. Most obvious to retail consumersare point of sales applications such as bar code reader/scanners,which have been around for decades. More recent innovationsat the consumer interface include onsite self-help kiosks andthe most revolutionary retailing innovation of the last 100years, online shopping. Invisible to the consumer, “behind-the-scenes” IT developments have actually made a greatercontribution to the IT transformation of the retail industry.

To understand adoption and successful implementation ofIT in the retail industry, it is critical to focus on the experienceof a single company: Wal-Mart. Wal-Mart’s ability to integrateIT savvy with solid business strategies led to astonishinggrowth and what many consider an unassailable position ofcompetitive advantage today. Success in implementing andoptimizing the value of its IT initiatives has been attributedlargely to Wal-Mart’s organizational culture. Historically, thecompany has emphasized and explicitly rewardedexperimentation and widespread communication ofinformation throughout all levels and divisions of thecompany. Wal-Mart’s corporate philosophy, initially espousedby founder Sam Walton, stresses the value of information andthe benefits of information sharing for continually improvingorganizational performance.

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Clinical Transformation–Similar Forces and Special ChallengesWhen compared to other industries, health care seems highlyfragmented and inefficient. Major change, however, maybe on the horizon. Two converging forces now seem to befueling related developments: rapidly rising health care costsand a growing concern for the quality of that care. Manyexperts believe current cost and quality concerns can beaddressed through “clinical transformation,” the systematicmodernization of the health care industry on the basis ofnew and evolving clinical information systems. These clinicalsystems will provide targeted and timely information at keydecision points along the path of diagnosis and treatment,allowing clinicians to provide more effective and higherquality care, and managers to assess the processes of care toimprove their cost effectiveness.

Health Care IT Drivers of Adoption

As with banking, airlines, and retailing, market and otherenvironmental forces play a central role in driving adoptionof IT in health care. Health care faces less obvious market-based competition than do other industries. Still, competitiveforces on managed care organizations (MCOs), doctors, andother providers, and, increasingly, on hospitals, are growing.The health care industry has been gradually undergoing itsown form of “deregulation” over the past 20 years, startingwith selective-contracting legislation and the elimination ofcertificate of need (CON) and hospital rate-setting regulationin many states. The growth of managed care in the earlyand mid-1990s exerted additional pressures on providers;new competitive forces include “tiering” and higher levels ofpatient cost-sharing. In addition, public agencies and othernongovernmental regulatory bodies have recently begun todrive adoption of clinical IT either by raising standards forquality reporting or by providing funding to develop andevaluate programs and applications designed to improvepatient safety.

Health Care IT Implementation Challenges

The authors of the IOM’s Crossing the Quality Chasm and ToErr Is Human recognize the difficulties facing the industry.

The challenge of applying information technology to healthcare should not be underestimated. Health care isundoubtedly one of the most, if not the most, complexsectors of the economy. The number of different types oftransactions (i.e., patient needs, interactions, and services)is very large. Sizable capital investments and multi-yearcommitments to building systems will be required.Widespread adoption of many information technologyapplications will require behavioral adaptations on thepart of large numbers of patients, clinicians, andorganizations.

– IOM, Crossing the Quality Chasm, 2001

Adoption of transformative IT in health care presentschallenges similar to those described elsewhere in this report.In health care, however, these challenges are magnified andseem more complex in all possible dimensions. While healthcare faces massive challenges integrating internal and externalIT systems, its most overwhelming problems relate to gainingphysician and hospital staff cooperation for implementation.

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Although a more competitive market creates the settingrequired to drive adoption of clinical IT, this will not besufficient to guarantee the successful implementationnecessary for bringing about clinical transformation. As wesaw in our cross-industry examples, a key factor underlyingcompany success and industry transformation is thecombination of management competencies that we refer toas IT Leadership. As competition becomes a more significantdriver of change in health care, IT Leadership must beincreasingly attuned to the impact of market forces andmaintain an intense focus on the customer. Effective ITLeadership in health care will come to resemble what’s beenbehind IT transformation in other industries. Health careexecutives and clinicians must still be prepared to deal withthe traditional hurdles to IT implementation peculiar to thehealth care setting. However, they also need to understandand respond to the challenges presented by an increasinglycompetitive environment, since competition will influencetheir choice of overall corporate and IT integrated strategies,major IT decisions and investments, and the optimalapproaches for achieving successful implementation.

In Crossing the Quality Chasm, the IOM asserts that efficiencyand quality of care cannot be guaranteed in the future withoutfundamental change to the entire U.S. health care system.Given the magnitude and obvious difficulty of this task, theyalso recognize that the “need for leadership in health carehas never been greater.” A major practical insight from ourcross-industry analysis of IT transformation is a cleardescription of the particular leadership approach needed tobring about these fundamental changes. Health careexecutives and clinicians do face a daunting challenge.They can, however, benefit from the experiences of theircounterparts in other industries, whose IT Leadershipprovides a model for success that can, in large part, begeneralized to the health care setting.

The Road to Clinical Transformation–Cross-Industry LessonsWhere are we on our journey to clinical transformation?What will it take to get there, and when are we likely toarrive? This final section provides a realistic assessment ofthe near-term prospects for clinical transformation as well assome concrete and targeted suggestions for ways to acceleratethe overall process. The experiences of other industries canprovide insights and practical lessons for everyone interestedin achieving this goal.

Our cross-industry analysis suggests two primary conditionsare required for IT (including clinical) transformation:

1) An effective, competitive market environment thatrewards organizations’ investments in technologiesthat raise productivity, either by improving productquality, reducing costs of production, or both; and

2) An intense focus on the customer, combined withIT Leadership, enabling organizations to excel withIT-integrated business strategy and ongoing ITinnovations developed in response to marketopportunities and threats.

A key driving force in the adoption of service quality- andproductivity-enhancing IT systems and applications is thegrowing impact of market competition. In order forcompetition to be a significant force in the adoption ofclinical IT in health care, the market must “reward” quality,allowing health care providers to charge more for a higherquality of care. Establishing such an effective, competitivemarket requires three components: 1) consumer demand;2) provider competition; and 3) IT capabilities at a reasonablecost. Today, consumer demand and provider competitionpresent relatively effective forces driving competition,although both could be spurred on with greater private andpublic sector initiatives. On the other hand, without subsidiesto promote more technological innovation, the limitedavailability of affordable IT solutions may hinderdevelopment of a truly competitive market for the foreseeablefuture.

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PART ONE –THE CROSS-INDUSTRY PERSPECTIVE

The American health care system is in need of fundamentalchange. Many patients, doctors, nurses, and health careleaders are concerned that the care that is delivered is not,essentially, the care that we should receive. The frustrationlevels of both patients and clinicians have probably neverbeen higher. Yet the problems remain. Health care todayharms too frequently and fails to deliver its potentialbenefits.1

In recent years, a spotlight has been directed at the qualityshortcomings of the U.S. health care system. Demands forimprovement, especially with respect to patient safety inhospitals, have been steadily growing in intensity. With its1999 report, To Err is Human: Building a Safer Health System,the Institute of Medicine (IOM) almost single-handedlyignited a national debate on this topic. In its recent report,Crossing the Quality Chasm: A New Health System for the 21st

Century, the IOM not only attacked the current level ofquality but, barring major reforms to the system, predictedan even bleaker prospect for the future. An aging population,with a higher prevalence of frequently overlapping chronicconditions, will present an even more complex diagnosticand treatment challenge, and exert even greater pressure onhealth care organizations and their workforces, aggravatingthe quality problems now inherent in the system.

Members of the IOM and other experts in the field seefew viable alternatives to dealing with this serious andworsening problem short of the radical step of fundamentallyredesigning or transforming our health care system. As theIOM asserts in Crossing the Quality Chasm, “a higher level ofquality cannot be achieved by further stressing currentsystems of care. The current systems cannot do the job.Trying harder will not work. Changing systems of care will.”

The current system has many failings, all of which contributeto poor quality. In general, the IOM lays much of the blameon “outmoded systems of work,” setting up the current healthcare workforce, mainly physicians and nurses, “to fail,regardless of how hard they try.” While the IOM provides acomprehensive series of recommendations and actionsnecessary for industry transformation, the main enginedriving the process will need to be “redesigned systems ofcare, including the use of information technology to supportclinical and administrative processes.”

Unlike other aspects of society, the health care delivery systemhas been relatively unaffected by the recent revolution ininformation technology.2 But if we expect to see substantialimprovement in quality over the near term, informationtechnology will need to play a central role in the redesign ofthe health care system. Indeed, being able to take advantageof advances in information technology is seen as a criticalcatalyst or enabling factor in the process of change. Thedeployment of more sophisticated IT will be essential toenhancing quality and improving efficiency in the future.However, challenges abound, in part because of the limitedcapabilities of currently available clinical IT applications andin part due to lack of public support for an IT-enabled healthcare system. As the IOM warns, “In the absence of a nationalcommitment and financial support to build a national healthinformation infrastructure, the committee believes that theprogress of quality improvement will be painfully slow.”

Despite public and industry recognition of the IOM’sconcerns and goals for improvement, little significant progresshas been made in restructuring the health care system byapplying information technology to improve administrativeand clinical processes. This has been particularly

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disappointing in the hospital sector, a major source of manypatient safety concerns outlined by the IOM in To Err isHuman. The report suggests that medical errors areresponsible for 44,000 to 98,000 deaths annually. Whilenot everyone agrees how many patients are actually harmedevery year by preventable medical errors, most in the industryunderstand that advances in clinical IT have great potentialfor reducing hospital-based medical errors, improving patientsafety and improving health care system quality overall.

If the cost and quality benefits of “clinical transformation”for health care organizations and society are so compelling,why has there been so little movement in this direction? Evenfor motivated hospitals, adoption of clinical IT systems isneither easy nor straightforward. Financing is always aconcern, but, as hospital leaders are consistently finding, non-financial implementation issues probably present the greatestchallenges. Although clinical transformation is based on atechnology solution, it is not strictly a “technological fix” toa problem. Instead, making this investment pay off ultimatelydepends on how well IT systems mesh with organizational,operational, interpersonal, and institutional processes andobjectives—monumental obstacles to any hospitalcontemplating clinical transformation. Without help inovercoming these obstacles, the true potential of clinical ITin health care is unlikely to be realized.

The purpose of this study is to try to get to the root of thisproblem: understanding why clinical transformation hasgenerally been stalled and identifying how best to get theprocess moving. One potential source of guidance that mayhelp speed up clinical transformation involves a focus on theexperiences of industry leaders and pioneers. These are thehandful of early-adopter hospitals and health systems,including Boston’s Brigham and Women’s hospital, Utah’sIntermountain Health Care, and the Veterans HealthAdministration systems, whose institutional successes withclinical IT have been instrumental in demonstrating thedramatic impact these systems can have on cost and qualityof care, and the indisputable value of clinical IT in a hospitalsetting. Unfortunately, because of their unique characteristicsand special attributes, these organizations’ experiences providelimited practical lessons relevant for most hospitals wrestlingwith the major challenges of clinical transformation.

Based on our research, however, we at Deloitte Researchbelieve that hospital executives, clinicians and policy-makershave a great deal to learn from the experiences of companiesin other major service industries, where IT has proven to bea transformative force over the past several decades. Banking,airlines, and retailing are frequently held up as success storiesin their use of IT advances to increase efficiency as well as tochange and improve profoundly the nature of services as theconsumer perceives them. We examine each of theseindustries in detail, identifying the key forces that havecontributed to successful IT transformation, explaining howand why the impact of these forces varied across industries.Finally, we determine how IT use affected organizationalperformance and the competitive advantage of differentcompanies in the same industry. While some of the findingsare specific to these industries alone, most can be readilygeneralized to health care and the hospital setting. Theyprovide insights and practical lessons to all interested inmoving the health care system faster and further along theroad to clinical transformation.

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Those in health care who have become impatient with theslow pace of IT development in transforming clinical caremanagement in the past several years might want to considera parallel from the previous technology revolution. ThomasAlva Edison invented the carbon filament incandescent lampback in 1879. The central generating stations in New Yorkand London were in place in 1891, yet by 1899 only threepercent of U.S. homes were using electric lighting and electricmotors installed in manufacturing plants represented onlyfive percent of factory mechanical drive.

As economist Paul A. David points out in his article, “TheDynamo and the Computer: An Historical Perspective onthe Modern Productivity Paradox,” “It may be remarked that,in 1900, an observer of the progress of the ‘Electrical Age’stood as far distant in time from the introduction of thecarbon filament incandescent lamp…and the Edison centralgeneration station…as today we stand from comparable‘breakthrough’ events in the computer revolution: theintroduction of the 1043 byte memory chip (1969) and thesilicon micro-processor (1970) by Intel.”3 Indeed, David’sresearch implies that, to be fully understood, the uneven,far-from-lightning-speed pace of IT-facilitated change inhealth care and in other industries must be considered in thecontext of the past electrical energy revolution.

David’s essential thesis is this: the simple fact of theintroduction of potentially transformative technology in thelate 19th century was not in itself enough to transformindustrial processes. Why not? Factory electrificationprogressed slowly and unevenly because, at the beginning ofthe process, it was unprofitable, at least in the short term, toreplace still-serviceable manufacturing plants using the old

THE COMPUTER AND THE DYNAMO

mechanical power derived from water and steam. In addition,the manufacturing industry remained largely decentralizedand “extremely unconcentrated, and was characterized by ahigh rate of turnover of firms and skilled personnel at theturn of the last century.” And, equally importantly, thewidespread transformation of industrial processes by electricpower “did not acquire real momentum in the United Statesuntil after 1914-17, when regulated regional utility rates forelectricity were lowered substantially in relationship to thegeneral price level… and central station generation capacitycame to predominate over generating capacity in isolatedindustrial plants.”

In other words, the long-awaited transformation of the“Electrical Age” progressed relatively slowly and unevenlyand ultimately required changes in the policy/regulatoryenvironment, as well as profound changes in operatingmethods in industry. The price of electricity as an industryinput had to come down, and industrial plants had to bereengineered, before the potential inherent in electrificationbecame a “dynamo” that then propelled the manufacturingsector of the economy forward through increased productivityand technological innovation.

The historical lessons? In order for IT to have a meaningfulimpact on an industry, the cost of replacing older technologywith new technology must be affordable; barriers to theimplementation of technology need to be eliminated. It canbe difficult for executives to justify the adoption of newtechnology unless they are able to show a strong short-termreturn on investment (ROI); that difficulty leads to lags intechnology adoption/diffusion.


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IT Adoption and Implementation –A Conceptual ModelIn the past few decades, information technology of all kindshas been widely adopted throughout the economy, leadingto improvements in productivity, service quality, operationalefficiency, and other benefits in a range of situations outsidehealth care. In a number of industries such as financialservices, airlines/transportation, retailing, and others, theimpact of IT innovations has been nothing short oftransformative—fundamentally altering the nature ofbusiness and its value to consumers. What forces underliesuccessful transformation? We present an explanatory modelthat is based on drivers, challenges, and success factors.

Drivers. Drivers are the main forces pushing for adoptionof innovative information technologies in an industry. Theyare environmental—related to external market and otherpressures—as well as technological—stemming from new ITcapabilities that make novel applications possible.Environmental pressures can come from market forces suchas an up-tick in the level of competition which demands aresponse from companies who want to maintain current levelsof profitability, or even remain viable competitors in thebusiness. A more competitive market situation drives the needto lower operating costs or improve value/quality as perceivedby the customer, both areas where IT innovations can makea major contribution. But external competitive pressuresalone are not enough to stimulate adoption. A second keyfactor is the availability of IT solutions that are up to thetask of helping companies meet their competitive needs.Requisite hardware, software, and network capabilities areall critical in driving industry adoption.

Challenges. At the same time that drivers push companiestoward adoption of novel IT solutions, a number ofimportant challenges present hurdles that must be overcomefor successful implementation. A first, basic challenge isrelated to the inherent complexity of the data processing taskat hand. Even with powerful technology (hardware andsoftware innovations), the task of automating new processesfor the first time requires considerable experimentation.There are pitfalls, some related to data issues but manystemming from the need to integrate new informationsystems within an existing organizational structure. Thisrequires meshing new systems with what are likely to beincompatible existing legacy systems that cannot simply bereplaced.

An even more daunting task is introducing IT system-relatedchanges into the workplace. Design and implementationstrategies for new information systems must take into accountthe likelihood of worker resistance to change and musttherefore include approaches for overcoming it. In additionto dealing with challenges related to building internal supportfor a new IT system, it may be necessary to secure cooperationfor IT system design and structure decisions, data standards,and other IT system interoperability requirements fromexternal sources, including competitors, suppliers, majorcustomers, and the government. Need for collaboration bycompetitors and other market players may initially createbarriers to timely development and adoption of systems, butwhen technical standards are in place, industry-wide adoptionof the system usually takes place much more rapidly thanwith industries where the need for standardization is lessimportant.

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SOURCE: DELOITTE RESEARCH

FIGURE 1. CONCEPTUAL MODEL FORIT-ENABLED INDUSTRY TRANSFORMATION

CHALLENGES

• Inherent complexity• Need for internal and

external cooperation

SUCCESS FACTORS

IT leadership

SUCCESS FACTORS

Intensecustomer

focus

DRIVERS

• Environmental and competitivemarket pressures

• Information technologycapabilities

IT-ENABLED INDUSTRY TRANSFORMATION

Success Factors. Since companies in a given industry feelthe impact of the same drivers and face many of the samechallenges, what explains the variations in successfuladoption and the degree of IT transformation that we see?By looking at company-specific examples across and withinour comparative industries—banking, airlines, and retail—we can identify the most significant factors underlyingsuccessful implementation and transformation. Regardlessof industry, key success factors are management capabilities,not only with IT innovation, design, and implementationbut also in regard to business decisions and overall organiza-tional strategic approach, a concept that we refer to as ITLeadership. Use of novel IT solutions alone is not enough toensure success but must complement, and be accompaniedby, a solid corporate strategy, focused intently on customerneeds and expectations.

Moreover, management has a crucial role to play in IT systemimplementation, especially in overcoming the two majorchallenges of ensuring internal and external cooperation.Successful implementation requires that management havea thorough understanding of the value of IT and be able tocommunicate these benefits to all those necessary forimplementation and system use. Without exception, seniorexecutives (in many cases, CEOs) of successful organizationswere well-versed in the technical and strategic features of ITsystem innovations proposed and adopted, and provided theleadership needed to keep these projects on track and bringthem to fruition, even in the face of initial resistance.

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Legislative changes with the greatest impact on thebanking industry were:

1. The Depository Institutions Deregulation andMonetary Control Act (1980), which phased outinterest rate ceilings on deposits;

2. The Garn-St. Germain Act (1982), which furtherderegulated Thrifts and allowed for the creation ofMoney Market Deposit Accounts;

3. The Riegle-Neal Interstate Banking and BranchingEfficiency Act (1994), which permitted interstateexpansion and mergers;

4. The Gramm-Leach-Bliley Financial ServicesModernization Act (1999), which allowed financialholding companies to offer banking, securities, andinsurance products under one roof.

BankingBanks and other financial services companies rely heavilyon gathering, processing, analyzing, and providinginformation to meet the needs of customers. Because of theimportance of information in banking, it is not surprisingthat banks were among the earliest adopters of automatedinformation processing technology, beginning in the 1950s.Computerization in banking became increasingly commonover the following decade as it became clear that many ofthe banks’ most error-prone and labor-intensive information-handling processes could be computerized, greatly enhancingproductivity.

A second major wave of computerization occurred in the1970s and 1980s, with the introduction and expansion ofelectronic payments, including credit cards and electronicfund transfer (EFT). In the current phase of IT evolution,banks continue to upgrade their basic back-office systemsand to develop applications that allow them to sharpen theircustomer focus. Growing competition for customers frombrokerages and insurance companies, as well as traditionalbanking rivals, has underscored the value of IT advances inproviding convenient access to services (by ATMs, online, atkiosks, via call centers), enabling “mining” and analysis ofcustomer data to personalize services more effectively, developnew products and identify the best opportunities for efficientcross-marketing.

Drivers

Why are banks investing in IT today? Heightenedcompetition is the major driving force. With deregulationof the industry over the past couple of decades, competitivepressure has been growing steadily. Following the Depression,when many banks failed, the industry was highly regulated,and generally protected from market forces. The federalgovernment had determined that the best way to protectbanking customers, investors, and the public as a whole wasthrough the Glass-Steagall Act, which tightly controlled manyof the banks’ business activities. By the mid-1970s, however,public policy support for economic regulation across many

industries (including financial services, trucking, and airlines)was beginning to evaporate. Starting in 1980, a series offederal laws began to lift many of the market restrictions onbanking and other segments of the financial services industry,raising the level of competition banks now face.

By expanding the scope of activities in which banks canparticipate and the financial products they can offer,deregulation has spurred competition and increased thefinancial risk that banks must now accept. IT systeminvestments are expected to assist in both respects. In orderto compete successfully, banks need to reduce costs, increaselevels of customer loyalty, and price their products for thegreatest profitability. While these tasks have always beenimportant to organizational performance, recent deregulationtrends have made them even more pressing. For example, byallowing brokerages and insurance companies to provide theircurrent customers with banking services, the Gramm-Leach-Bliley Act of 1999 has effectively increased the number ofcompetitors that banks now face. Charles Schwab and otherbrokerages have applied for banking licenses in order to beable to provide one-stop financial shopping for theirbrokerage customers, whose loyalty to their banks is nowthreatened.4

BANKING DEREGULATION ANDGROWTH OF COMPETITIVE PRESSURES

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Challenges

While the retail banking industry as a whole has beensubstantially transformed by IT over the past few decades,this is not to say that banks and other financial servicescompanies do not and will not continue to face seriousimplementation challenges.

Need for Internal Cooperation

Successful adoption and implementation of IT innovationsrequires overcoming major technical and organizationalchallenges. Although financial data has been standardizedfor a long time, system diversity and complexity creates majorproblems for successful IT implementation in banking.Currently, data sources in banks are fragmented, flowingthrough largely isolated systems. Information on customerscomes from many different sources and channels and is rarelyintegrated to provide a holistic view of the various customersegments. A primary challenge is simply getting existinglegacy systems to function together optimally, whether theybe historically siloed operations in a single organization, orIT systems that must now link merging entities. While theproblems related to systems integration are huge, so are theanticipated benefits. Banks hold a wealth of detailed customerinformation that makes them the envy of companies in otherindustries. If banks can overcome the related IT hurdles, thepotential value of these data is substantial.

The systems integration problems banks face have actuallybeen aggravated by the result of a wave of mergers that hitthe industry during the late 1990s. In 1996, the Riegle-Neal Interstate Banking and Branching Efficiency Act (passedin 1994), allowed bank holding companies to acquire banksin any state. At that time, many banks had inefficient siloedlegacy core banking functions. Bank mergers, combined withother organizational problems and leadership shortcomings,made this problem worse. Rather than increasing overallefficiency, costs frequently went up following a merger.

In addition to the IT challenges stemming from the wave ofpure banking mergers, the Gramm-Leach-Bliley Act of 1999is driving industry consolidation of another variety. Byallowing cross-industry mergers, banks now find themselvescompeting directly with many more competitors—insurancecompanies and brokerages. Banks have been encouraged to

SOURCE: FDIC

FIGURE 2. NUMBER OF INTERSTATE BANK MERGERS1994–2002

250

200

150

100

50

01994 1995 1996 1997 1998 1999 2000 2001 2002

acquire brokerage and insurance companies and now offerthese services themselves, to protect their traditional customerbase. Systems integration in cross-industry mergers will likelybecome even more complex in the future. Banks will facenot only the widely anticipated problems of attempting tocombine legacy systems, but they must simultaneously copewith clashes in organizational cultures, making post-mergerintegration a special challenge.

Need for External Cooperation

Many banking services rely heavily on actions of othersoutside the bank, or even outside the financial servicesindustry. The check-clearing process, for example, hashistorically depended on the existence of an establishedcommunication infrastructure among banks, as well as onother participants, including customers and merchants whowrite and accept checks. Because this communication is coreto the basic banking business model, external cooperationaround IT systems and standards has not presented a majorchallenge for the banking industry. Banks are used to workingtogether; since federal and state regulators mandated commonreporting and compliance guidelines, they were pushed todata system standardization early on. As a result, banks havealways shown a high level of collaboration, both in their lesscompetitive core functions and in IT innovations, such asthe development of the ATM machine.

13


A common regulatory framework, reporting requirements,and the need for banks to communicate quickly andefficiently just to carry out their normal business has providedan infrastructure on which to layer/build IT enhancements.As a result, most innovations (including back-office as wellas customer-facing applications services such as ATMs, onlinebanking and computer-managed call centers), have diffusedeasily throughout the industry. Many of these IT innovationsspread so quickly they were simply considered part of the“cost of doing business” even before their true ROI had beendetermined. Because of their rapid adoption, bankingtechnologies are typically quite immature when firstimplemented. It takes time, experimentation, and, in somecases, ultimately more external cooperation, before they reachtheir optimal form, both with respect to organizationalperformance (impact on productivity) and customeracceptance.

A prime example of gradual technology evolution is theautomated teller machine (ATM). The ATM is nowubiquitous; most people cannot imagine banking withoutit. Yet, for years following its introduction, its use was limited.It was only after continual evolution in the nature of theservices, advances in the underlying technology, and strategiesfor marketing to and segmenting customers, did we see massuse of ATMs on a scale that could begin to drive the branchoperational efficiency benefits that banks had hoped for whenthey first introduced ATMs in the late 1960s and early 1970s.

The slow take-off of ATMs was related to both technologicallimitations and consumer reactions. Initially, access to ATMswas quite restricted. The first ATMs were stand-alonemachines, not connected to bank accounts by a computernetwork. Thus banks had to be very careful in allowing

THE ATM – A CONTINUALLY EVOLVING SUCCESS STORY

access to them; typically ATM privileges were provided onlyto their credit card holders with good records. Given theserestrictions and customers’ security concerns about computerbanking, mass consumer enthusiasm for the concept was slowto develop.

But banks adapted and ATMs evolved. By the mid-1970sthey had begun to refine their ATM strategy, increasingcustomer access, providing greater benefits, and drivingexpanded use. Banks began offering “on-line” ATM services;ATMs were now linked directly with the bank’s mainframecomputer through the phone system. This offered a muchlarger share of bank depositors ATM access. Geographicaccess also improved in this period. The earliest ATMs werelocated only in bank vestibules and drive-through lanes. Butlater ATMs started appearing at remote locations, increasingtheir value for a greater number of potential users. With thecreation of worldwide ATM networks, consumer acceptanceand use of ATMs continued to grow.

In 1978, there were only 9,750 ATMs in the U.S. In 1980there were 18,500, and ATM availability and use increaseddramatically in the 1980s. By 1990, the number had risento 80,156, and to 324,000 by 2001. ATMs are frequentlypresented as a major and transformative IT innovation infinancial services, but it is important to realize why they werenot an overnight success. The evolution and growth of ATMsfollowed an iterative process. Initially introduced to helpbanks reduce the cost of branch operations, consumeracceptance and use of ATMs reached a critical mass onlyafter their functionality had improved dramatically, and theirvalue with regard to security and convenience had beendemonstrated.5

13


SOURCE: CARD INDUSTRY DIRECTORY, 2003 EDITION

FIGURE 3. NUMBER OF ATMs IN OPERATION1973 – 2002

01973 ‘74 ‘75 ‘76 ‘77 ‘78 ‘79 ‘80 ‘81 ‘82 ‘83 ‘84 ‘85 ‘86 ‘87 ‘88 ‘89 ‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 2002

50,000

100,000

150,000

200,000

250,000

300,000

350,000

14


In the case of external cooperation, the main challengefacing banks is not what one might expect—difficulty ingetting suspicious rivals, suppliers, and customers in the sameroom to share sensitive competitive information—butrather a serious side effect of the industry-wide networkedinformation infrastructure. Because of the common standardsand systems used in banking, an IT innovation invented anddeveloped by one bank can quickly diffuse throughout theindustry. As a result, in the past it has been difficult for banksto differentiate themselves and achieve a sustainablecompetitive advantage on the basis of their IT investments.

Today, for fear of losing customers to competitors who adoptthese innovations, banks have all rushed to implement onlinebanking and call centers. These IT innovations improveorganizational productivity and convenience for consumersand drive overall transformation in the industry. But becauseinnovations are quickly adopted throughout the industry, itis nearly impossible for banks to derive higher profits fromtheir IT investments. Most IT innovations in banking are inthe long run simply part of the “cost of doing business.”They are necessary for survival in a competitive market butnot sufficient for long-term success in the industry or in aspecific company.

Success Factors

Over the past few decades, retail banking has made majoradvances in the use of information technology. But as theypush the current limits of IT, banks now face new andarguably more difficult challenges. Consider, for example,one of their greatest but until now seriously under-exploitedresources: their richly detailed customer databases. Newways of utilizing existing customer information should notonly revolutionize retail banking but also help banks forestallincursions from insurance companies and brokerages thathave recently begun to target banking’s traditional customers.While these present a great opportunity for value creation,this will be missed unless banks can mesh their complex,and currently siloed, legacy data systems to make themoperate effectively and efficiently.

Competitive pressures fueled by deregulation will requiremassive process-redesign and integration projects, not onlywithin individual institutions, but across merging entities,including nonbank financial institutions. The compellingbenefits of IT investment do not make the related costs anyless daunting. What will banks need to succeed in this regard?The answer seems to be IT Leadership, which requires seniormanagement to operate at a very high level of technical,organizational, and general strategic competence. It is notessential for banking CEOs to have the highest level of ITexpertise. However, as IT plays a more fundamental role inensuring business success, and perhaps even survival, CEOsthroughout the financial services industry must become moreIT-savvy. CEOs in particular need to understand the keyissues and to supervise implementation, holding vendors,contractors, and internal staff accountable for responsibilitiesand commitments.6

More broadly, CEOs need a clear vision of the value of majorIT investments, as well as effective approaches to dealingwith the organizational hurdles that must be overcome toachieve that vision. Historically, IT in banking has greatlyenhanced productivity by automating simple, repetitivefunctions such as basic calculations and internally focusedback-office support activities. But banking also involveshigher-level judgments, decisions that can be informed andimproved but not made by computers. Further, given theindustry’s networked information structure, many of theessential IT investments required of banks and financialservices companies risk becoming simply part of the “cost ofdoing business.” For this reason, CEOs must become well-versed and engaged in the strategic and technical benefits ofIT innovations under consideration and provide leadershipneeded for successful implementation.

15


AirlinesHistorically, airlines, like financial services companies, havebeen early adopters of information technology, frequently asthe result of public rather than private sector initiatives. Thegovernment has played a major role in the evolution of theU.S. airline industry. In the 1920s, air mail delivery for theU.S. Post Office represented the lion’s share of business for avariety of regional, fledging airlines. Even after commercialpassenger traffic exceeded government business, airlines reliedon the public sector for the physical and informationinfrastructures essential to the industry. These includedbeacons and systems for navigation and airports.7 A majoradvance came for airlines in the 1950s, with additional publicsector programs and initiatives, in particular the creation ofthe modern air traffic control (ATC) system. Ultimately, itis in the realm of safety that government has played thegreatest role—both in regard to aircraft safety standards andin creating and managing the ATC system, which overseesthe entire air transportation system.

Later airline industry IT innovations represent privateinvestments. The most important was the mid-1960sintroduction of SABRE by American Airlines. SABRE wasthe first computerized reservation system (CRS), and thefoundation for many other key IT innovations that wouldtransform the industry in the years to come. Following airlineindustry deregulation in 1978, it became clear that CRS-generated data made possible operational and informationalinitiatives to help airlines cope in a more intensely competitiveenvironment. The most important of these are yieldmanagement and frequent flyer passenger loyalty programs,both still central to industry functioning today. The majorIT development of the 1990s was the Internet. While itsimpact on other industries may have been overstated, thetransformative effect of the Internet on the travel industrycannot be disputed. Online booking in particular hasrevolutionized ticket distribution, dramatically reducingairlines’ administrative costs while at the same timesignificantly ratcheting up price competition throughout theair travel market.

19500

200,000

2001

400,000

600,000

19500

10.00

2001

40.00

50.00

30.00

20.00

FIGURE 4b. U.S. DOMESTIC AIR TRAVELPRICE IN CENTS PER MILE

(Inflation Adjusted 2001 Dollars)

SOURCE: AIR TRANSPORT ASSOCIATION

1950-10,000,000

-5,000,000

2001

10,000,000

FIGURE 4c. AIRLINE INDUSTRY ANNUAL PROFIT/LOSSIN THOUSANDS OF DOLLARS(Inflation Adjusted 2001 Dollars)

5,000,000

0

FIGURE 4a. U.S. DOMESTIC AIRLINE INDUSTRYPASSENGER MILES

16


Drivers

Forces driving the airline industry’s adoption of moresophisticated information technology were not only greaterprivate market competition but also growing public andpolitical pressure to ensure both the safety of airline passengersand the financial future of a growing industry. In 1956, twoairliners collided over the Grand Canyon, triggering demandsfor major changes in the nature of technology systemsrequired for air traffic safety oversight in the United States.The Federal Aviation Act of 1958 created the Federal AviationAgency (later the Federal Aviation Administration under theDepartment of Transportation in 1967), and established thefirst integrated U.S. air traffic control system with a strongeremphasis on safety.

While the accident highlighted a crisis situation and the needfor an immediate response, it was the availability of advancedcomputer and other technologies that made development ofa modern ATC system possible. In addition to organizationaland operational reforms, a number of technologies couldalso be readily applied to enhance air travel safety. Radarcould be used for positive control of airspace, replacing voiceposition reports and enabling automatic independentposition verification. By the mid-1970s, the U.S. had a semi-automated ATC system based on a marriage of radar andcomputer technology. Further technological enhancementshave been added over the years, in part to keep pace with theincreased level of air traffic following deregulation in the late1970s. Advances have included higher levels of automationas well as new radar, communication, and weather warningand forecasting systems.

The other major driver of IT adoption and exploitation wasan unprecedented upsurge in competition, set in motion bythe Airline Deregulation Act of 1978.8 Prior to 1978, theairline industry had been subject to public utility rate-of-return regulation by the Civil Aeronautics Board (CAB) andthus significantly sheltered from most competitive forces.Fares were based on industry-wide costs and airlines werenot allowed to compete on price. In addition, entry of newfirms was very limited. The CAB did not allow new entrantson routes that already had two competitors, effectively stiflingmuch competition. This all changed in 1978 withderegulation, thrusting the industry into a new era that was,as Robert Crandall of American Airlines told a Senate hearing,“intensely, vigorously, bitterly and savagely competitive.”9

Having to operate in a new, fiercely competitive environmentpresented both challenges and opportunities. While pricecompetition was a threat to stable profits, airlines soonrealized that there were IT and other operational innovationsto help them succeed under this new market regime. Themajor innovations were those developed and adopted by themain carriers to maintain their competitive edge not onlyagainst each other but also against new, small upstart rivalsflooding the market in the wake of deregulation. Databasecapabilities of the CRS, especially SABRE, enabled existingcarriers to respond assertively to the new competitive threat.Two of the more important applications relying on CRS dataemerged as effective counter-competitive responses toderegulation: yield management and frequent flyer programs.Sophisticated variable pricing (yield management) programsallowed airlines to price tickets to meet actual passengerdemand, ensuring the highest level of profitability. Frequentflyer programs rewarded the most “loyal” passengers,preventing their defection to new, lower cost carriers.

Today’s competitive pressures continue to drive adoption ofnew information technologies and innovative uses of existingIT. The airline industry is now even more brutally competitivethan in the past; in an attempt to maintain their dominantpositions and past levels of profitability, major airlines areresorting to defensive actions such as consolidation. Todaymuch pressure comes from smaller rivals whose point-to-point route structures, superior operational efficiency, lowerlabor costs, and efficiency enhancing IT investments havemounted a serious assault on profits of the major carriers. Ifthis were not bad enough, as a result of the current economicmalaise and continuing post-9/11 passenger anxieties aboutair travel, all airlines face an unprecedented drop in demandand massive revenue shortfall, affecting both business andleisure travel markets. Profit margins are squeezed furtherby operational and infrastructure expenses required, in part,to fund the new airport security measures, only some of whichcan be passed on to passengers in the form of higher ticketprices.

17


Challenges

To a great extent, the challenges facing airlines with ITimplementation mirror those seen in the banking industry—the overwhelming need to guarantee internal and externalcooperation.

Need for Internal Cooperation—Systems

As the major carriers deal with the practical aftermath of arecent wave of mergers, a high priority challenge is theintegration of complex and frequently incompatible legacyIT systems. Seriously affected by consolidation is AmericanAirlines, which has pursued probably the most aggressivemerger strategy in the industry, including its 2001 acquisitionof TWA for $742 million. Having taken over many of itsfailing competitors for their international routes and landingrights, American must now integrate their operations andsystems with its own to ensure a timely return on thisinvestment strategy.

Need for Internal Cooperation—Staffing

Internal cooperation is also required to ensure worker buy-in and guarantee optimal utilization of systems as designed.While typically not a great concern for banks or retailers, apotential challenge for major airlines is their heavily unionizedworkforce, from pilots to fight attendants to mechanics andbaggage handlers. Strong unions make implementation ofany system perceived to be a threat to workers’ pay and jobsecurity especially difficult. The introduction of productivity-enhancing IT can result in major labor disruptions, such asthe recent West Coast port shutdown, where the portoperators’ plans to automate the clerical work involved inprocessing cargo were expected to result in the loss of manyunion jobs. Fortunately, while they are a factor in airlineworker resistance to some IT innovations, most changescurrently proposed for the airline industry are unlikely tohave this impact. Rather than simply automating workersout of their current positions, they are expected to improvethe workers’ job experience while driving efficiency, as the“paperless cockpit” explains.

PAPERLESS COCKPIT

To cut costs, improve safety, and decrease airport delays,a number of airlines have been switching to use of laptopsfor preflight calculations, which can be error-prone whennot automated. This approach offers significant savings,since honing take-off calculations can slash as much asfive percent from maintenance and operating cost for ajetliner. Conventional paper manuals in use in the pastoffered only generalized rules-of-thumb for calculations,causing pilots to add thrust on take-off to ensure a widesafety margin. Computerizing calculations, however,informs pilots exactly what their thrust settings and take-off speed should be. Southwest Airlines has reported thatswitching to computerized flight calculations three yearsago paid for itself in nine months by eliminating theadministrative costs of updating pilots’ reference bookswith the latest runway and other necessary airportinformation. Since use of these systems can reduce flightdelays, there are advantages for passengers as well. Animportant factor in overcoming any possible resistanceto implementation was the opportunity to enhance theemployee’s work experience. As Capt. Peter Schmideitnersaid of the “paperless cockpit” project he led at AustrianAirlines, “Pilots really recognized that [computerization]adds to the quality of their professional life.”10

18


ORBITZ— THE RISKS OFEXTERNAL COOPERATION

Airlines are pushing for more passengers to purchase ticketselectronically, whether on their own company Websites oronline travel sites. Orbitz, an online travel Website ownedby five major carriers (American, Delta, Northwestern,United and Continental) was created with the intent ofmaximizing online ticket sales but reducing fees paid toother sites, such as Travelocity. Travel agents, consumergroups, and smaller airlines, such as Southwest, have allchallenged Orbitz, which they fear will come to dominateticket distribution. Recent investigations by the U.S.Department of Transportation have cleared Orbitz of thesecharges, but a DOJ antitrust investigation was still ongoingas of May 2003.

Orbitz presents other more serious problems for its airlineowners, despite its unequivocal success in reducing airlinemembers’ distribution costs (agent commissions,reservation systems, and telephone agents), and fees paidto other online sites. Even as it cuts their administrativecosts, Orbitz undercuts its members’ efforts to maintainreasonable profit levels. In the past, control over saleschannels enabled airlines to exploit variable pricing(yield management) to maximize revenue. However, bypublicizing their lowest (Web) fares widely on Orbitz, theairlines themselves are actively pushing down their ownticket prices. Industry experts say total online sales(including Orbitz) have saved the airlines close to $3 billiona year in administrative costs and fees, but the cost ofparticipating in Orbitz has outstripped the benefits forparticipating airlines, since reduced fares have also loweredtheir total revenues.

While the industry seems to recognize its “no-win” position,the major carriers find themselves with little choice but toadopt this technology. As Gregory T. Taylor, a senior vice-president of United Airlines, puts it:

Orbitz has been very successful from our point of view.Has it made it more difficult to have a fare that is slightlyhigher than the marketplace? The answer to that is yes...But I’m not sure the airlines had any choice in participatingin the Internet.11

Orbitz seems to be a “cost of doing business” technologywith an even more negative twist; the Internet’s much-vaunted pricing transparency shifts the benefits of Orbitz’stechnological advances directly and completely to theconsumers.


As with banking, the networked nature of the airlineindustry means that the common systems developed bythe industry tend to improve productivity for all playersin the market. The joint benefits of interoperabilitystrongly encourage industry cooperation and collaborationon data standards and protocols. In addition to generalcoordination around safety systems regulated andfacilitated by the FAA, airlines have collaboratedextensively on certain critical business functions, mostnotably computerized reservation systems (CRS), linkingairlines directly with travel agencies. The first system wasSABRE. SABRE initially served American Airlinesexclusively but soon began to provide reservation servicesfor most major carrier competitors. As noted previously,use of CRS passenger detail and pricing data enabledairlines to respond more effectively to the growingcompetitive pressures brought about by deregulation. Asin the case of EFT and other common systems in banking,access to CRS soon became part of the “cost of doingbusiness” for the airline industry.

While the airline industry, like banking, scores high onexternal cooperation, this does not imply the total absenceof problems. Due to the very concentrated nature of theindustry, collaboration among large airline companiesfrequently draws criticism because of the potential foranticompetitive consequences. Airline activities onSABRE have attracted antitrust scrutiny several times overthe past two decades. In the early 1990s, the U.S.Department of Justice (DOJ) required that SABREeliminate system features that allowed airline participantsto anticompetitively “signal” pricing changes. Currentcollaborative information-sharing efforts among airlinerivals, ranging from online ticket sale ventures to globalcode-sharing and marketing alliances, gave rise to similarsuspicions and have created more regulatory andcompetitive challenges for the industry, as our discussionof Orbitz shows.

19


American’s past IT-related successes stemmed in large partfrom the efforts of CEOs who understood the value of IT inthe context of a broader corporate strategy. Like other majorcarriers, American Airlines now finds itself in one of the mostdifficult competitive environments that it has everexperienced. How well American does in the future willdepend in no small part on the capabilities of its currentCEO, who will likely preside over an era of market turmoiland corresponding needs for IT Leadership equal to thatfaced by his predecessors following deregulation.14 Two ofthe most serious competitive threats to American and therest of the major airlines are Southwest and JetBlue Airlines.Even in the current market, characterized by rising cost andfalling demand, both airlines remain profitable. What is thebasis of their success and staying power in an industry where100 start-up airlines have failed since 1978? How has theiruse of IT innovations in particular contributed to theircurrent performance, and what can we expect in the future?

Since its founding in 1971, Southwest’s success has been dueprimarily to its innovative business model. Southwest fliesonly 737s on mostly short-haul flights to nonmajor airports,has a low cost structure, and an extremely motivatedworkforce. It has not always been the earliest adopter of ITinnovations but seems to excel at exploiting IT in the contextof its business model and corporate culture. Historically anindustry exception, Southwest avoided using CRS for travelagent sales. However, it immediately saw the advantage ofadopting electronic ticketing after its 1994 purchase of MorrisAir, which had pioneered the concept. Although Americanwas the first airline to have a company Website, Southwestwas the first to sell tickets online in 1996, dramaticallyreducing administrative expenses. Southwest’s simple butwell-designed Website is easy to use; the percentage ofpassenger revenues generated on the site has rapidly grownfrom eight percent in 1998 to 31 percent in 2000, 40 percentin 2001 and 49 percent in 2002.15 Because of Southwest’spowerful reputation as the low-cost carrier, it feels no needto participate in competitive travel sites such as Orbitz,Expedia, or Travelocity to guarantee a high and risingproportion of online sales.

Success Factors

Information technology advances—from the federal ATCsystem to CRS to the Internet today—have played a majorrole in transforming the airline industry, increasingproductivity and safety, generally improving the travelexperience and dramatically lowering prices for passengers.However, the use and financial impact of IT innovations hasnot been uniform across the industry. What explains thebroad range of IT experiences among competing airlines,and what factors determine who the winners and losers willbe? As with banking, IT Leadership plays a major role. CEOsmust recognize and be able to communicate the value of ITfor their industry and their specific companies. Their ITvision must be consistent with an appropriate businessstrategy and they must be able to identify and, ideally, foreseeupcoming opportunities and threats that innovative ITsolutions can address.

IT innovation and financial success seem to go hand in hand.American Airlines was an early leader, not only in IT, butacross the board, with a long-standing reputation forconsistently superior performance. From its earliest days,American has been well known for its attention to customers.In the 1930s, at a time when its rivals still depended on federalair mail business subsidies, American was the first airline tomake money on commercial passenger services. EvenAmerican’s most important early IT innovation, a telephone-based reservation system, dating back to 1930 and evolvingsteadily over the next few decades, was directly customer-focused. American managed to maintain its lead role throughthe 1950s and 1960s, with the chance meeting of AmericanAirlines and IBM CEOs on a cross-country flight whichpaved the way for the creation of SABRE, the first CRS.12

While transformative, even in its early years, SABRE becameeven more important following deregulation of the industryin 1978. In 1981, Robert Crandall, then American Airlinespresident and COO, a former computer systems manager,recognized the potential of CRS data-processing capabilitiesfor devising strategies to survive and even thrive in the fiercelycompetitive post-deregulation era.13 He is widely creditedwith inventing the frequent flyer program and developingand promoting the use of yield management pricingstrategies.

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JetBlue, with a business model very similar to that ofSouthwest, is the latest start-up to present a competitive threatto the major carriers. As with Southwest, JetBlue posted aprofit in 2002, a year when all other carriers collectively lost$10 billion. How much do IT innovations and seniormanagement’s IT Leadership contribute to this success? CEODavid Neeleman feels they are critical. He wants JetBlue tobe the prime example of a high-tech/high-touch airline, andinvestment in innovative IT is central to bringing this about.In the wake of 9/11, most other carriers cut or flat-fundedIT budgets, but JetBlue nearly doubled its IT capital budget,from $5.6 million in 2001 to $10 million in 2002. Besidesbeing the most IT-advanced airline (e.g., 100 percentelectronic ticketing and “paperless cockpits” used by all 289pilots), JetBlue’s wide variety of projected IT initiatives seemsto guarantee that it will stay in the lead.

While IT Leadership and personal attention from JetBlue’sCEO are critical success factors, the young airline has alsobenefited from its ability to start operations with a “cleanslate.” One major advantage of being a new company is thelack of legacy systems to be coordinated and integrated withnew applications as they are developed. Instead, managementfeels that it has been provided with a “fresh canvas” on whichto create IT systems optimally suited to technical and businessneeds. In addition, much of JetBlue’s cost advantage(reported to be 30 percent lower than the major carriers)comes from avoiding inheriting a high-cost, unionizedworkforce. According to JetBlue’s CIO, Jeff Cohen, ongoingIT innovation is expected to help sustain this advantage, inpart serving as a tool for keeping both labor productivityand workforce job satisfaction high. As Cohen explains, “IThas made a huge impact on our number one cost, which islabor. It allows us to do more with fewer people and it alsoallows us to take better care of the people we have.”16

The strength of IT Leadership plays a central role incompany-specific success, but the effect of public sectorinitiatives should not be forgotten. Without a doubt, thefoundation for transformation of the airline industry andongoing performance has been public sector investment inboth facility and IT infrastructure. While a variety ofgovernment interventions shapes the nature of the bankingsystem, the government plays an even greater role in theairline industry. Beyond simply providing regulatoryoversight, it serves as the main source of financial support.In a recent speech, Delta Airlines CEO Leo Mullin drewattention to the government’s ongoing responsibility forupgrading the air transportation infrastructure: “We mustprovide ATC and airport infrastructure that not onlyaccommodates future customers but also welcomes themaboard with the level of service they deserve.”17 The airlinesrecognize that a large share of the IT investment budget mustbe borne by the public sector; the industry simply could notfunction without it.

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RetailingCompared to banking and airlines, the retail industry’sadoption of IT came later. IT investments can add value inretail, but their absolute necessity is not as obvious as inindustries such as banking and airlines, whose basicoperations rely on information networking. Traditionally,retail has operated relatively effectively—though not withoptimal efficiency—in a much more fragmented fashion.Unlike airlines and banks, there was little or no reason forrival retailers to communicate with each other as any part ofthe business process. Moreover, even when IT-basedimprovements are possible, retail companies, because of theirperennially narrow margins, have been slow to adopt newtechnologies. And in reaction, IT vendors have been hesitantto develop solutions lacking broad market demand. Butthe environment finally seems to be changing. With theexpansion of major national retailing chains, competitivepressures have been building steadily, forcing adoption ofIT systems expected to reduce operating costs and promotecustomer loyalty.

At present, however, retail IT systems are relatively lesspervasive than those used by banks and airlines. The presenceand prevalence of IT applications throughout the industryvary by entity size and merchandise category. Most apparentto retail consumers are point-of-sales applications such asbar code readers/scanners, which have been around fordecades. More recent and future innovations at the consumerinterface include on-site self-help kiosks, automated check-out stations and the most revolutionary aspect of retailing inthe last 100 years, online shopping.18 Retailers are also tryingto assess the value of such market-facing IT initiatives suchas loyalty programs (e.g., smart cards) and analysis of datacollected to better understand and respond to customerneeds.

Invisible to the consumer, behind-the-scenes IT develop-ments have actually made a greater contribution to the ITtransformation of the retail industry than those out front.These applications have been key in driving down operatingcosts—making possible the low prices consumers have come

to expect. Major advances in the past ten years have involvedsupply chain and inventory control systems. Most importantare vendor coordination systems/vendor managementsystems (VCS/VMS) that link retailers to their suppliers’systems, allowing for better supply and demand visibility,enhanced coordination between retailer and supplier, andmuch lower transaction costs. Applications whose use isexpected to grow in the future are merchandise planningand management systems to support more detailed analysisand strategic use of sales and customer data. Retailers hopethat these innovations—demand forecasting tools, revenuemanagement applications, data warehouses, and databasemining tools—will, among other things, enable them toexploit variable pricing to maximize revenue, much as airlineshave done historically through yield management.

Drivers

With global revenues of nearly $218 billion in 2002,Wal-Mart is the world’s largest company. Behind Wal-Mart’ssuccess has been CEO Sam Walton’s single-minded goal ofbuilding the best-run retail operation possible. In his view,this meant responding to customers’ demands for competitiveprices which, by necessity, required an intense focus oncontrolling costs by any and all means possible. Wal-Martprovides a preeminent example of how one company’scompetitive strategy, aided by IT innovation and investments,has resulted in astonishing growth and what may ultimatelyprove to be an unassailable market position.

Since going public in 1972, Wal-Mart has been growingsteadily. By the 1980s, expansion of its retail empire wasbeing aided by integrating solid business strategy withtechnological savvy. In 1987, Wal-Mart saw an opportunity

1972$0

$50,000

2002

$200,000

$250,000

SOURCE: WAL-MART ANNUAL REPORTS

FIGURE 5. WAL-MART NET SALES(Millions of Dollars)

$100,000

$150,000

22


in IT and began developing and investing in innovativecomputerized supply chain technology. By collecting andanalyzing sales data daily from its stores around the nation,the company was able to determine which merchandise wasmoving slowly, and so was able to avoid overstocking anddeep discounting. This led to the pursuit of a low-inventory,fast-turnaround stocking/merchandising strategy, using itspoint-of-sales system that identifies each item sold, finds itsprice in a computerized database, creates an accurate salesreceipt for the customer, and stores this item-by-item salesinformation for use in analyzing sales and reorderinginventory. This ultimately evolved into Wal-Mart’s powerfulprivate exchange, RetailLink, which provides its supplierswith sales and inventory data to help them manage theirown operations better and reduce costs on both sides of atransaction, to mutual benefit.

As a result of the adoption, successful implementation, andcontinuous improvement of its IT innovations over the years,Wal-Mart has become the single most feared competitoracross a wide and growing swath of the retail industry.Indeed, it is not an exaggeration to say that the Wal-Martmodel itself is the major source of competitive pressure inretail today. In past years, large discount department storesfelt the fallout of Wal-Mart’s hypercompetitive prices; inrecent years, specialty retailers in the consumer electronicsand entertainment, toy, retail pharmacy, and grocery storesectors are finding themselves threatened by Wal-Mart, withits wide variety of products, low-cost structure, “everydaylow-price” strategy, and sustained growth.

Wal-Mart’s recent role as a driver of grocery industry ITadoption is particularly striking.19 Steady expansion in thisline of business has made it the nation’s largest retail grocer.Based on 2002 sales of $65.3 billion, the company nowaccounts for 9.6 percent of the total U.S. grocery market.Wal-Mart’s entry into the grocery business poses a seriousthreat to many traditional grocery store chains that still lackthe IT infrastructure and sophisticated supply chain systemsneeded to be cost competitive. As a result, few grocery chainsare currently able to meet Wal-Mart’s pricing challenge. Forexample, midwest-based Kroger has competed directly withWal-Mart since 1992 but now faces competition on 55percent of its turf, a very worrisome development sincesurveys show Wal-Mart’s food prices running 20 percentbelow Kroger’s. Other chains, such as California-basedSafeway, have thus far been able to avoid head-to-headcompetition by virtue of location but may become just as

vulnerable as Wal-Mart expands its west coast operations andenters more of Safeway’s local markets.

The continued expansion of Wal-Mart is probably the mainforce driving adoption and implementation of transformativeIT throughout the grocery retail sector. Grocers began torecognize the wisdom of modernizing business processes andsystems a decade ago, when the time came to upgrade anearlier generation of point-of-sales and in-store systems.Having Wal-Mart invade their turf made the need fordecisions on IT investments all the more relevant andimmediate. Grocery chains have responded by attemptingto copy Wal-Mart’s supply chain and inventory controlsystems. They need to implement systems to prevent“stock-out” (where the advertised item is not in stock whencustomers come in) to compete with RetailLink, which hasvirtually eliminated this problem for Wal-Mart, by providingdaily scanner data to its suppliers. Yet, even as grocery retailerstry such approaches to reduce expenses, they will struggle tofully match Wal-Mart’s low costs.20

Challenges

Need for Internal Cooperation

As with banking and airlines, the lack of internal systemcoordination creates implementation problems for retail. Formany retail companies, and grocery stores in particular,distribution and other legacy IT systems are disjointed andsiloed, preventing effective communication. In the currentcompetitive environment, however, performance isincreasingly dependent on tight system integration to ensurethat back-office operations can understand and respondimmediately to information on merchandise sales activity.Increased competition has also led to a wave of industryconsolidation, providing further IT system complexities forthese retailers. As they have merged, grocery chains haveinherited multiple, incompatible IT systems, creating evengreater challenges for system implementation and applicationupgrades. Finally, a major hurdle to IT implementation inall service industries is motivating employees to adapt to bothnew business processes and new technology. Without staffacceptance, achieving the level of performance needed tocompete effectively is nearly impossible in the current retailsetting.

23



The major external challenge retailers face in surviving intoday’s market is collaborating with their suppliers to createand operate IT systems that allow enhanced inventoryvisibility and greater coordination and efficiency in thedistribution process. To compete effectively, they mustreplicate RetailLink, which has given Wal-Mart thecompetitive edge in supply costs. Although this is just oneof a number of IT strategies that Wal-Mart’s rivals aredeveloping, it is probably the most crucial to improving theircompetitive performance.

Replicating the Wal-Mart RetailLink model is not a simpletask. Among the many barriers to the development andadoption of inter-firm data networks is the basic lack of trustthat has historically colored retailer/supplier relationships.By tradition, suppliers and retailers are not used to sharingsupply chain information with each other; there has alwaysbeen concern that releasing valuable proprietary informationcould result in competitive vulnerability. In addition to thelack of general system capabilities, ingrained attitudes, aculture of secrecy, and a powerful bias against informationsharing create a huge challenge for retailers trying to developand (eventually) operate such systems.

Wal-Mart’s success with RetailLink attracted much attentionand contributed to the rise of industry electronic exchangessuch as WorldWide Retail Exchange (WWRE) and GlobalNetXchange (GNX). Each of these exchanges includes dozensof grocery retailers as members. So far, their primary functionhas been to host auctions and reverse auctions, exerting somedownward pressure on transaction costs. But the fullpotential of these exchanges has not yet been felt. At aminimum, these exchanges must reach a “critical mass” oftrade volume. This will require a higher level of industrycooperation—both greater collaboration in developingindustry standards and greater participation by all players.However, until the hurdles to trust and open communicationare overcome, success of the exchanges on a Wal-Mart scalewill continue to be elusive.

Success Factors

Which factors are most responsible for Wal-Mart’sphenomenal success? Clearly, the company can lay claim toretail’s most important IT innovation, RetailLink. Thoughthey are essential for their past and current success, specifictechnological advances are only part of the story. ITLeadership, as described previously, again provides the truefoundation for success in this industry. Wal-Mart’s capabilitiesin leveraging IT innovations in support of its powerfulbusiness model are widely acknowledged. More thantechnical savvy and skill in exploiting IT within a greatcorporate strategy, true IT Leadership also requires the abilityto manage relationships—externally as well as internally—to overcome the high hurdles to implementation and optimalperformance.

INFORMATION TECHNOLOGY,ORGANIZATIONAL TRANSFORMATION,

AND BUSINESS PERFORMANCE

MIT’s Erik Brynjolfsson and Wharton’s Lorin Hitthave conducted extensive research on how investmentsin IT are linked to higher productivity andorganizational transformation across a wide range ofindustries. Based on their findings, they believethat a significant component of IT’s value is its abilityto complement other organizational investments,improving overall business effectiveness. ITinvestments are expected to enhance productivity bothby reducing costs and generally improving companyoutputs through the development of new products orimprovements in intangible aspects of existingproducts like “convenience, timeliness, quality andvariety.” In a recent study of more than 1,000 largeU.S. companies, Brynjolfsson and Hitt identifiedfactors predictive of company success in this regard.They discovered that companies making heavy use ofIT are likely to be more productive than their lesstech-oriented competitors but only when theycommunicate and share information openly, dispersedecision-making authority, and provide extensivetraining. The authors also cite “active investment” incultural processes and values as a key companydifferentiator.21

24


Wal-Mart’s success in implementing and optimizing the valueof its IT initiatives has been attributed largely to itsorganizational culture. Since its earliest days, the companyhas emphasized, and explicitly rewarded, experimentationand widespread communication of results throughout alllevels and divisions of the organization. Wal-Mart’s corporatephilosophy, initially espoused by founder Sam Walton,stresses the value of information and the benefits ofinformation sharing for continually improving organizationalperformance. Though he did not have a technical ITbackground, as a former military intelligence officer Waltonlearned to place a high value not only on all possible sourcesof information but on the development of innovative usesof information and new ways of transmitting it. Notsurprisingly, he provided the leadership vision behind theinvention of RetailLink, as well as the influential leadershipto guarantee its initial implementation and ongoingevolution.

A number of specific explanations apart from the favorablecultural environment have been suggested for Wal-Mart’ssuccess with IT implementation. The first stems from thenature of Wal-Mart’s recent growth, which has been almostexclusively internal and “organic” rather than throughmergers and acquisitions. Since organic expansion involvesbuilding new stores rather than acquiring existing operations,Wal-Mart avoids many related IT integration headaches. LikeJetBlue, which also exemplifies the advantages of organicgrowth, Wal-Mart’s IT initiatives and developments are notconstrained or complicated by existing legacy systems ofacquisition targets. Moreover, because new store openings(referred to as “greenfielding”) involve a major and immediatestaffing effort, IT training needs are greatly simplified, andcosts and staff resistance are reduced.

The ability to “greenfield” new operations cannot be the solesource of Wal-Mart’s success; system improvements andupgrades in existing stores continue to be necessary onan ongoing basis. Consistent with Wal-Mart’s corporatephilosophy of promoting participation, experimentation, andinformation sharing is the expectation that all IT professionalsdeveloping and implementing applications and systems trulyunderstand the business, particularly the special nature ofthe retail industry. In fact, according to past and currentCIOs, a cardinal rule of the IT division is that even IT staff“are merchants first and technologists second.”23 To drivehome the importance of that belief, Bob Martin, Wal-MartCIO between 1984 and 1993, required that his people spendat least one busy holiday weekend working in a Wal-Martstore, in order to fully appreciate the IT and other challengesfaced by Wal-Mart sales employees.

INFORMATION TECHNOLOGY’SCONTRIBUTION TO RETAILPRODUCTIVITY GROWTH

Organic growth in retail, which took off in the late1990s, has been shown to contribute substantially toproductivity not only at Wal-Mart but throughout theindustry. According to research by economists LuciaFoster, John Haltiwanger, and C.J. Krizan, replacingold stores with new, more IT-supported operationswas responsible for nearly 100 percent of theproductivity gains seen in retail during this period.Large retail chains, like Wal-Mart, that could buildfrom scratch had an overwhelming cost advantage.In today’s intensely competitive environment, they areable to drive many of their smaller scale, lowerproductivity/higher cost competitors, who could notfollow this strategy, out of business.22

25


While internal cooperation is essential for ITimplementation, external cooperation for the developmentof new IT applications and systems has been critical to Wal-Mart’s overall success. In fact, one of Wal-Mart’s greatestcompetitive advantages stems from its close externalrelationships with the very best suppliers. The developmentof supporting systems, culminating in RetailLink, has enabledWal-Mart and its suppliers jointly to reduce transaction anddistribution costs, to great mutual benefit.

Despite recognition of the magnitude of this achievementtoday, in 1987 Wal-Mart’s initial collaborative efforts withits largest supplier, Procter & Gamble (P&G), were fairlypragmatic. They addressed a basic need identified by SamWalton: how to come up with a better way of keeping Wal-Mart stocked with P&G products, disposable diapers inparticular. At that time, Wal-Mart and P&G were each other’sbiggest trading partners. Both believed that collaborationmight allow them to improve on their current method fordoing business, which they felt was more expensive, time-consuming, and frustrating than it needed to be. Startingwith a basic logistics project that P&G had originally createdfor Kmart, the project team expanded functionality over time,allowing for better service and reduced inventory, with majorcost implications.

Ralph Drayer, who represented P&G in 1987, considers thisone of the most important events in the “history ofcollaborative business processes,” in large part because theP&G and Wal-Mart project team members realized that“replenishment is more than computing... but requiresrelationships and vision.” While the technologicalaccomplishments were impressive, according to Drayer, themost significant benefits for both companies stemmed fromthe “soft” process that evolved from the project, which hedescribes as “the foundation for a collaborative tradingrelationship.”25 Among these, he cites establishing a trustingbusiness relationship in order to achieve extensive externaland internal cooperation, and expression of support forexternal cooperation coming all the way from the top of theorganization This was clearly the case at Wal-Mart, whereSam Walton was both committed to change and deeplyinvolved in the process needed to bring it about.

IMPLEMENTATION FAILUREPREVENTION AT WAL-MART

According to current Wal-Mart CIO Kevin Turner, theultimate key to success in his job is to truly understandthe business and process you are trying to automate;the clearest indicator of implementation failure is thatnobody is using the application. He requires all ITprojects to follow these steps, which he considersessential to prevent failure:

1. Define success with customers (employees who willbe impacted and who are asking for it), so that youknow what you are aiming for;

2. Eliminate redundancy to improve ease of use;

3. Do a business process overview—lay out the projectfrom a process standpoint—and walk through theproject step by step before diving into development;

4. Pilot the project with your toughest users so you catchmistakes early.24

26


Implications for Health CareNo one can ignore the major differences between healthcare and the industries just described. But by focusingon the primary forces affecting successful IT adoptionand implementation cross-industry, important commonexplanatory themes begin to emerge.

Drivers for Adoption

The most important driver for adoption of new or morecreative applications of existing IT has been the rise ofcompetitive pressures. Although some core IT innovations,especially the ATM and CRS, were introduced in earlier,relatively less competitive eras, the most creative use oftechnology in all three industries has been in direct responseto a dramatic upsurge in competition. For banking andairlines, this followed industry deregulation; for retail,competition intensified tremendously with the expansion ofWal-Mart. But competitive pressures were not the sole forcedriving IT adoption. In the airline industry, the adoption ofsafety systems, both organized and, to a large extent, financedby the federal government, represented a “crisis” response toa single event revealing serious deficiencies with the existingsafety oversight system that promised to worsen as air trafficincreased in later years.

Both of these drivers are at work in health care today. Thoughnot engendering the same sense of crisis, nor providing theoverwhelming impetus for public investment that spurredthe creation of the modern ATC, the response to the IOMreports indicates that patient safety concerns have greaterurgency than ever before. Probably as great a driver as anyfor the adoption of clinical IT is the increasingly competitivehealth care market. Managed care organizations (MCOs),doctors, and hospitals are now subject to greater competitivepressures, both with respect to price and quality. Not entirelyunlike banking and airlines, the health care industry has beengradually undergoing its own form of “deregulation” overthe past 20 years, beginning with selective-contractinglegislation, and, in many states, the elimination of certificate-of-need requirements and hospital rate-setting regulation.The growth of managed care in the early 1990s exertedadditional pressures on providers. MCOs are responding tothe current wave of provider-driven cost inflation withmarket-based strategies: demanding that hospitalsdemonstrate higher quality to justify higher charges, andpassing any excessive costs on to the direct consumer ofservices, thus shifting the competitive locus to a differentbut no less important level.

FIGURE 6. IT-TRANSFORMATION: CROSS-INDUSTRY COMPARISON

Drivers Challenges Success Factors

Banking

Airlines

Retailing


Customer Focusand IT Leadership

Competition (especially Wal-Mart)and technological advances(mainframes and the Internet)

Competition and technologicaladvances (mainframes, ATMsand telecom, and the Internet)

Not much of a challenge in obtaining internalcooperation if companies are expanding and can“greenfield.” More internal challenges relatedto system integration of merging companies andthe greatest challenges are related to gainingexternal cooperation from suppliers in order todevelop and run supply chain and inventorymanagement systems

Primarily the need to gain internal cooperationfor IT system integration, implementation, andutilization

Industry crisis regarding passengersafety, competition, technologicaladvances (mainframes, radar, andthe Internet)

Primarily the need to gain internal cooperationfor IT system integration, implementation, andutilization, with some challenges related tomanaging external relationships (code-sharingalliance and online ticket distribution)

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Challenges to Implementation

All service industries face substantial challenges related tothe need for internal cooperation, both in regard tointegration with incompatible legacy systems and ensuringworkforce support to get full value of IT investments. Healthcare is no exception. As with the other industries, siloedhospital IT systems need to be integrated with each otherand new applications to yield maximum benefits. Healthcare probably faces even greater challenges in persuading thehospital workforce (both employed nurses and affiliatedphysicians) to embrace these new technologies. Unlikeexpanding retail chains (Wal-Mart) and upstart airlines(JetBlue) that are growing organically, hospitals typicallycannot deal with this problem by “greenfielding,” setting upnew IT enabled facilities from scratch and then hiring andtraining new staff to operate them. In addition to internalcooperation, ongoing cooperation among all industrysegments and the public sector will be essential for ITimplementation success. Historically, a lack of common ITstandards has reduced the value and affordability of clinicalIT systems. Since health care lags far behind other industriesin this area, extensive external collaboration will be requiredto achieve the true interoperability necessary to achieveclinical transformation.

Success Factors

Our brief cross-industry tour clearly shows that a high degreeof involvement by senior management in IT adoptiondecisions and the implementation process has been a keyfactor for successful industry transformation. In fact, ITLeadership may be the ultimate success factor in drivingtransformative change, regardless of industry. To derive themaximum company-specific benefits from IT, the CEO mustbe able to formulate, communicate, and execute an innovativevision of IT within the context of an overall, cutting-edgecorporate strategy. We would expect IT Leadership to be asimportant in health care, and perhaps, given the magnitudeof the task at hand and challenges to be overcome, to play aneven more significant role in bringing about clinicaltransformation. The IOM recognizes this:

The need for leadership in health care has never beengreater. Transforming the health care system will not bean easy process. But the potential benefits are large as well.Narrowing the quality chasm will make it possible to bringthe benefits of medical science and technology to allAmericans in every community, and this in turn will meanless pain and suffering, less disability, greater longevity,and a more productive workforce.26

The second half of this report turns to health care, firstanalyzing the same forces influencing and bringing aboutIT transformation in other industries: drivers for adoptionand challenges and success factors in implementation. Howdoes health care stack up? Based on an assessment of thecurrent situation, we evaluate the prospects for clinicaltransformation. By focusing on the conditions critical tobringing it about, we can pinpoint those currently lackingand suggest how these deficiencies can be remedied.

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PART TWO—HEALTH CARE:CLINICAL TRANSFORMATION

Despite its ranking as the largest U.S. industrial sector (14.1percent of the GDP in 2001, projected to reach 17.7 percentby 2012), health care remains highly fragmented andinefficient in comparison to the other industries we haveexplored.27 But major change may be on the horizon. Thoughhealth care has long operated outside the purely competitivemarket that promoted adoption of innovative IT solutionsin other industries, this period of relative isolation may soonbe coming to an end. Two converging forces are now fuelingthis trend: rapidly rising health care costs and an increasingconcern for the quality of that care.

How can advances in information technology help addressthese problems and societal demands? IT advances inbanking, airlines, and retail have transformed the consumerexperience dramatically and vastly improved industryproductivity. How probable is such a transformative changein health care, and how soon might we expect it to occur?First, we need to understand the level of system andinstitutional reform experts feel is necessary to bring thisabout. In addition, as with the comparison industries, weneed to recognize the impact of the health care-specific forcesinvolved. What are the drivers for adoption, the challengesto implementation? What are the success factors? They willdetermine the prospects for transformation and provideinsight into how this process might be accelerated—to thegreat benefit of the industry and society as a whole.

Many experts agree that current cost and quality concernscan be addressed at least in part through clinicaltransformation, the systematic modernization of the healthcare industry on the basis of new and evolving clinicalsystems. The Institute of Medicine’s 1999 report, To Err IsHuman: Building a Safer Health System, brought this idea tothe forefront of public and industry attention. That report,with its estimate of between 44,000 and 98,000 deaths dueto preventable medical error, startled the nation and focuseda media spotlight on medical errors. In its executive summary,the authors point out that, “Health care delivery has beenrelatively untouched by the revolution in informationtechnology that has been transforming nearly every otheraspect of society.” The authors note that only a small fractionof patient care organizations have the necessary informationsystems “to provide clinical information or support clinicaldecision-making. The development and application of moresophisticated information systems is essential to enhancequality and improve efficiency.”28

29


What sort of IT advances does the IOM have in mind? It ispromoting the use of better systems for collecting, analyzing,and, where appropriate, distributing patient-level clinicalinformation to systematize and therefore improve the processof health care delivery. Lately, most attention has focusedon the value of hospital-based computerized physician orderentry (CPOE), but this is only one component of atransformed clinical system that will act as a major line ofattack on the problem of medical errors. The foundation ofthe system would be the individual electronic medical record(EMR) or computerized data repository (CDR). Specificapplications, such as CPOE, clinical decision support services(CDSS), and others, would link together to enhancecoordination of care—driving improvements in both qualityand efficiency. Specific related technologies include patientidentification systems, computerized physician order entry,pharmacy information systems, robotic filling devices,automated medication carts, and bar coding administrationdevices. The main purpose of these clinical systems is toprovide targeted and timely information at key decision-points along the path of diagnosis and treatment, allowingclinicians to provide more effective care and permittingmanagers to assess care processes to improve their cost-effectiveness.

30


Drivers and Current Industry ResponsesAs with the other industries, market and other environmentalforces are expected to play a central role in driving adoptionof clinical IT in health care. The most important of theseforces involve direct consumers of health care services, privateand public sector purchasers of health care benefits, andgovernment and other regulatory bodies responsible forquality of care oversight.

Consumers

Direct consumers of health care services have an importantstake in the current and future struggle to control costs whilemaintaining an acceptable level of quality. As a result,consumers are potentially a powerful force for system-widechange, functioning as a driver for the widespread adoptionof clinical IT in hospitals. Despite extensive public attentionover the past few years, the general public apparently doesnot consider medical errors and hospital quality its highestpriority health care issue at present. A recent opinion surveyby the Kaiser Family Foundation and the Harvard School ofPublic Health indicated that the general public did not believethat medical errors were one of the nation’s most pressinghealth care challenges. Consumers surveyed had heard aboutthe problems of medical errors and recognized the importanceof improving patient safety. Not surprisingly, however, theyfelt that other problems, including the rising costs of healthcare, were more immediately important. Yet clearly, despitetheir relatively lower priority, given other health careconcerns, issues of patient safety have captured the public’sattention. When asked about the likely causes of medicalerrors, the public in fact suggested problems that could besuccessfully addressed by innovative IT solutions: MDs nothaving enough time with patients (72 percent); overwork,stress, and fatigue of health professionals (70 percent); healthprofessionals not working or communicating as a team (67percent) and shortage of nurses (65 percent).29

In spite of the IOM’s reports and related media coverage,consumers today seem less concerned about quality of carerelated to medical errors than might be expected. Oneexplanation might be the current lack of a cohesive consumerlobby centered on the issue of patient safety, such as pastmovements formed around environmental concerns or, morerecently, in response to perceived abuses of managed care.But this may begin to change soon for a variety of reasons.Demographic trends suggest that consumer interest inquality-of-care issues will intensify in the future. Older peopleare more than twice as likely to be hospitalized as the under65 population, with four times the annual number of daysof hospitalization. In 2000, people 65 years and olderrepresented 12.4 percent of the population. That age groupis expected to grow to 20 percent by 2030.30 Since a growingaging population will rely more heavily on hospital servicesin the years to come, concerns about adequacy of hospitalquality standards will get more attention. Baby boomers,now caring for elderly parents, have been exposed andsensitized to many of the safety issues publicized in the IOMreport, raising concerns and interest in solutions.

In addition, as heath care costs continue to rise, consumerswill see an increasing share of their income go to cover theseexpenses, possibly prompting them to be much moreaggressive about demanding greater value (higher quality)for their heath care dollars. Spending on health care jumped8.7 percent in 2001 and is projected to grow at an annualrate of 7.7 percent through 2012, outpacing overall economicgrowth.31 As a result, health care cost inflation is translatingdirectly into higher premiums for purchasers of health carebenefits and their beneficiaries, the direct consumers. TheKaiser Family Foundation & Hospital Research andEducation Trust 2002 Employer Health Benefits Survey foundthe 2001 to 2002 rise in monthly premiums for employer-sponsored health insurance to be 12.7 percent, the secondyear of double-digit growth. Cost-sharing with employeeswas pervasive and increasing. Workers are now paying a largerpercentage of the premiums, higher deductibles, and co-payments, while coverage and benefit levels are declining.This trend is likely to continue; 56 percent of large firmsincreased their employees’ share of health insurance costsand 78 percent said a further increase is likely next year.32

31


A final force driving change is the increasing ease of consumeraccess to information on a wide variety of health care issues.This includes comparative institutional data that can enableconsumers to apply competitive pressures by rewardinginstitutions with high demonstrated quality standards.Unlike most other industries, reliable information aboutproduct and service quality has been extremely limited forhealth care and, in most cases, simply nonexistent.Comparative health care quality reporting is still in its infancybut is expected to make major strides as consumer interestand demand intensifies. While the Internet is not the onlycontributing factor, it obviously plays an important role inexpanding ready access to health care information for an ever-increasing share of the population. The Internet has thepotential to demystify this information for the masses,allowing them to be more active participants in demandingthe highest quality of care possible. The Internet’s uniqueability to disseminate quality information broadly and

3,500

SOURCE: CENTERS FOR MEDICARE AND MEDICAID SERVICES

FIGURE 7a. NATIONAL HEALTH EXPENDITURES(Billions of Dollars)

1988

2,500

1,500

500

0

3,000

2,000

1,000

1993 2000 2001 2002* 2003* 2008* 2012*

FIGURE 7b. REAL NATIONAL HEALTH EXPENDITURES(Dollars per Capita)

8,000

1988

6,000

4,000

2,000

01993 2000 2001 2002* 2003* 2008* 2012*

FIGURE 7c. NATIONAL HEALTH EXPENDITURES AS PERCENT OF GDP

20%

1988

15%

10%

5%

0%1993 2000 2001 2002* 2003* 2008* 2012*

Total national healthexpenditures (NHE)

Real NHE (inflationadjusted in 1996 dollars)

*Forecast

efficiently may enable the health care industry to move to acompetitive, performance-based system, driven by “valuepurchasing,” where consumers and purchasers are finally ableto determine what they are really getting for their money,and pay a premium price only for higher quality.

Purchasers

Although we might expect direct consumers of health careservices to be most concerned about widely publicizedproblems of hospital safety and medical errors, it is thepurchasers of health care services, both employers andHMOs, who now represent the primary force driving hospitaladoption of clinical IT systems.

Galvanized by the positive reception of the first IOM report,in late 2001 the Business Roundtable founded the LeapfrogGroup, a consortium of large public and private companiesthat purchase health care benefits for more than 20 millionAmericans. The new group’s major objective has been toconvince hospitals to implement three scientifically supportedinitiatives for improving quality of care, including theimplementation of CPOE to reduce medical errors. Leapfrogestimates that by installing a CPOE system, a hospital couldcut prescribing errors by at least one-half. Leapfrog employermembers plan to recognize and reward hospitals adoptingthese measures through what they refer to as “preferentialuse and market reinforcement.” They call their plan a“market-based solution” to the problem of medical errors—holding hospitals to a higher standard by providing economicincentives for demonstrating higher quality of care.

As an employer coalition, Leapfrog can only go so far inpromoting the technology adoption and other organizationalchanges shown to have an impact on cost and quality. It isthe HMOs, with the most direct financial and bargainingrelationships with hospitals, that are likely to have the greatestimpact; they are using a number of tactics to drive adoptionof hospital quality initiatives. Development of incentivesystems by HMOs is still in its infancy but could eventuallygrow into a substantial force driving adoption of clinical IT.In July of 2002, Washington-based Regence BlueCrossannounced that it was the first health plan in the state toprovide online patient safety information, including in-depthhospital safety data based on Leapfrog ratings. RegenceBlueCross has also begun to add patient safety standardrequirements to its contracts with hospitals. In the fall of2001, Empire Blue Cross and Blue Shield of New York saidthat it would pay hospitals a four percent bonus for meeting

32


two of Leapfrog’s patient safety standards, including havinga CPOE system.

The HMO industry’s latest approach to dealing with risinghospital costs is “tiering” or classifying contracting hospitalsbased on their relative charges and requiring higher cost-sharing from HMO members who wish to use the moreexpensive facilities. For Blue Shield of California members,hospital patients will have to pay $200 more, or 10 percentof the fee, for going to a nonpreferred (high-cost tier) facility.Criticized by some hospitals as a system where health plansseemed to favor hospitals solely on the basis of lower costs,Blue Shield recently announced an incentive program thatwill reward hospitals on both cost and quality, in part asdefined by meeting Leapfrog standards. In support of BlueShield, Peter Lee, CEO of West Coast-based health carepurchasing coalition, Pacific Business Group on Health(PBGH), explained, “We are changing the way we pay forhealth care—to include not just the financial bottom line,but the ‘quality’ bottom line.”33 Other purchasers and plansare monitoring these developments closely and are likely tomove in this direction as well if the results appear promising.34

Regulatory Quality Initiatives

The public sector and other private oversight bodies play amajor role in ensuring that quality criteria and standards aremet, especially in industries such as health care, where thelack of good information makes it difficult, if not impossible,for consumers or purchasers to assess quality. The JointCommission on Accreditation of Healthcare Organizations(JCAHO), which accredits nearly 19,000 health careorganizations annually, recently introduced 11 revisedstandards in support of patient safety and medical errorreduction. Dennis O’Leary, president of JCAHO, inannouncing a national campaign to encourage patients tobe more active in identifying medical errors, called medicalerrors “the single most pressing health care issue of ourtime.”35 While the JCAHO’s recent campaign to improvepatient safety does not explicitly mandate or even endorseCPOE and other clinical IT systems, it is a major step inthat direction.

In addition, state and federal legislation have been introducedand passed to deal with various aspects of the medical errorproblems since the release of the first IOM report in 1999.There are currently a number of related bills in Congress

with objectives that range from promoting federal medicalerror reporting requirements to providing seed money tohospitals and other health care facilities for adoption andimplementation of CPOE and other clinical informationsystems. Financial support has been allocated to assist inresearching the best approaches to improving patient safety.In 2001, the Agency for Healthcare Research and Quality(AHRQ), a division of the U.S. Department of Health andHuman Services, provided $50 million in grants for 94patient safety programs. This is the single largest investmentin patient-safety research. AHRQ will distribute $55 millionin 2002 and $60 million in 2003. Other federal actionincludes the recent FDA proposal for all medicationsdispensed in the inpatient setting to be bar coded and for allhospitals, pharmacies and blood banks to report medicationerrors and blood product problems to the government morepromptly.36

Although not its original objective, the Health InsurancePortability and Accountability Act of 1996 (HIPAA) willalso have an impact, since it requires uniform standards forthe safekeeping and electronic transmission of patient records.Although many experts believe that HIPAA’s data standardsrequirements will provide a boost to digitizing hospitals,the industry itself is raising concerns about related coststhat could squeeze out other, more direct quality relatedinvestments.

State legislatures have also been active in the area of patientsafety. California and Massachusetts have been the mostaggressive in legislating mandatory reporting of medical errorsand requiring hospital investments in IT to support thereduction of medical errors. Passed in 2000, California SenateBill 1875 requires every general acute hospital, specialhospital, and surgical clinic in California (with the exceptionof some small and rural hospitals) to adopt a formal plan forminimizing medication-related errors as a condition oflicensure. Plans must be implemented before January 1, 2005and include “technology implementation, such as, but notlimited to, CPOE or other technology” to eliminate orsubstantially reduce medication-related errors. Interest inthis area has continued to grow as shown by the number ofstates introducing legislation and the number of billsintroduced and enacted since the release of the IOM reportin 1999.37

33


Current Industry Responses

What have the primary industry responses to these driversbeen? Hospitals and other providers do express concern aboutquality issues, reacting to the growing trend of reimburse-ment in part on safety and/or quality. Unfortunately, due toinsufficient funding or lack of basic infrastructure, concernand interest do not seem to translate into much action interms of implementing clinical systems. With a few excep-tions, there is little evidence that hospitals are spending moreon their information systems, despite the current environ-mental and regulatory pressures.

In the 2003 Modern Healthcare survey of hospital executives(CEO, CFO, and CIO, and others) asking about IT systemplans and current capabilities, feedback clearly reflected theinfluence of the drivers described above.38 External pressuresobviously continue to contribute to the perceived need fornew systems. The highest priorities have focused on clinicalinformation systems that are designed to improve patientcare capabilities, with interest rising over time. In the 2002survey, 53 percent of respondents said that improving patientcare capabilities was an information system priority over thenext 24 months; by 2003 this had increased to 63 percent.39

70

SOURCE: NATIONAL ACADEMY FOR STATE HEALTH POLICY

FIGURE 8. STATE LEGISLATIVE ACTIVITY REGARDINGPATIENT SAFETY, 1999–2001

1999

50

30

10

0

60

40

20

2000 2001

Bills introduced

Laws enacted

States introducinglegislation

Although an increasing number of health care executivesindicate future plans to invest in technology and informationsystems designed to reduce errors, actual adoption of newtechnology has been exceedingly slow to date. Hospitalmanagement expresses strong preferences for clinicallyoriented IT enhancements, but limited resources and otherequally important implementation challenges stand in theway of realizing related objectives. Cost implications of amajor IT overhaul are a legitimate source of concern. Thereare many stories of high expectations that translated intomajor disappointments, failed implementations, andsignificant cost overruns. Hospitals recognize the importanceof improving and demonstrating quality but some feel thatthe bar is currently set too high for most of the industry.According to Richard Wade, Senior Vice-President of theAmerican Hospital Association, “I think it’s safe to say thatthe majority of our constituency is uncomfortable withLeapfrog. They are holding out a set of standards that it wouldbe impossible for all but the most sophisticated hospitalsto meet.”40

34


Implementation ChallengesWhile promoting clinical transformation, the authors ofthe IOM’s Crossing the Quality Chasm and To Err Is Humanrecognize the attendant difficulties facing the industry.“The challenge of applying information technology tohealth care should not be underestimated,” they warn andexplain further: “Health care is undoubtedly one of themost, if not the most, complex sectors of the economy.The number of different types of transactions (i.e., patientneeds, interactions, and services) is very large. Sizablecapital investments and multi-year commitments tobuilding systems will be needed. Widespread adoption ofmany information technology applications will requirebehavioral adaptations on the part of large numbersof patients, clinicians, and organizations.” Significantly,they predict that “in the absence of a national commitmentand financial support to build a national healthinformation infrastructure, the committee believes thatprogress on quality improvement will be painfully slow.”

Adoption of transformative IT in health care presentssimilar challenges to those seen with other service industriesprofiled previously in this report. In health care, however,these challenges seem magnified in all regards—butparticularly in the need for internal cooperation forimplementation.

Need for Internal Cooperation:Physicians and Nurses

Gaining acceptance from physicians is clearly thesingle largest hurdle to IT adoption and successfulimplementation. Hospitals need systems that are easy tolearn, that mesh well with the physician’s natural workflow,that allow timely access to the exact information he or shewants, and that show benefits in terms of real time savings,providing more time to see patients. This puts tremendousdemands on a CPOE system. Increasingly, hospitalsrecognize the seriousness of this problem. The 2003Modern Healthcare IT System Survey discovered that themain reason deterring hospitals from planning to acquireCPOE over the next year was not anticipated expense, asmight be expected, but was that “physicians and cliniciansare resistant to using it in their work.”41

At the heart of IT implementation with physicians is theproblem of misaligned financial incentives. Because they areindependent operators not employees, most doctors don’t havea vested interest in directly improving hospital efficiency.Physicians, however, will buy into the use of new IT applicationsshown to save them time or provide clear-cut improvements inquality of care. Doctors clearly have reason to be concernedabout the time costs associated with CPOE systems, as theyare likely to be more time-consuming to use than writingconventional orders. Research, in fact, has shown that CPOEmay add one to two minutes to each patient interaction.42

PHYSICIANS’ ATTITUDES TOWARD CPOE

The Deloitte Research report, Taking the Pulse: Physiciansand Emerging Information Technology, presents findings onphysicians’ attitudes toward CPOE.43 When asked whatfactors would affect their use of CPOE, doctors consistentlyindicated that their greatest concern was with the extratime required. Lack of convenient access to computerterminals was the next most important factor deterring use,with lack of familiarity with systems a close third.Physicians clearly value and guard their time. They are likelyto be wary of any computer applications that require moreof their time without a clear (direct and immediate) benefit.

60%


FIGURE 9. CURRENT PHYSICIAN ATTITUDES ABOUT CPOE:KEY FACTORS DETERRING USAGE – 2001

Extra time required

40%

20%

0%

50%

30%

10%

Lack ofconvenient access

Not familiarwith systems

All physiciansPrimary careSpecialistSolo practiceGroup practice

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In addition to concern about time cost, many physicians areconcerned about the impact of CPOE on quality of care. Theymay simply not feel comfortable with the clinical standardsand clinical decision rules upon which these systems are based,especially if they have not been professionally involved in theirdevelopment. Health care professionals who use CPOE systemsreport varying degrees of satisfaction, with some reporting anincrease in errors, at least in the early phases of implementation.This may occur for several reasons, including poorly designedsystems—cumbersome and awkward to use—that are forcedon practitioners.44 Poor products combined with poorimplementation only elicit greater physician dissatisfaction andresistance to system change.45

Aside from these direct implementation challenges, it may bemore difficult to convince physicians of the value of clinicalsystems because many simply don’t believe that medical errorspresent nearly the threat to patient safety as argued in the IOMreports. In “Patient Safety: Views of Practicing Physicians andthe Public on Medical Errors,” published in the New EnglandJournal of Medicine and based on the findings of the recentKaiser Family Foundation/Harvard School of Public Healthopinion survey, most doctors considered the cost of malpracticeinsurance and lawsuits more important problems than medicalerrors, and disagreed with national experts on the effectivenessof many of the proposed solutions to the problem of medicalerrors.46 This attitude on the part of physicians may change inthe future, however, given the greater attention given to anumber of recent high-profile cases.47

The need to focus on the physician-related challenges to ITimplementation is obvious, but it is also important to recognizethat future advances in clinical IT are likely to have the greatestimpact on hospital nursing staff. Fortunately, nurses, unlikephysicians, generally understand the potential benefits of newtechnology immediately and, with proper support, are muchmore likely to promote, rather than resist, adoption. One recentstudy found that nurses generally see CPOE in a more favorablelight than physicians. The majority of nurses and doctorssurveyed agreed that orders were executed faster, but only 30percent of physicians thought the system improved quality ofcare, compared to 56 percent of RNs.48

Despite nurses’ relatively favorable take on IT, a well-orchestrated implementation is still essential to obtainmaximum buy-in from the nursing staff. An emphasis onnursing involvement in IT is key and can be carried outby organizing nursing leaders and staff into core teams toprovide input on applications that will be used, to buildeffective partnerships between IT staff and clinical andmanager users, and to ensure that the end result meetseverybody’s needs. In some instances, it may make senseto charge a senior level nursing executive with the job ofspecializing in IT (a Chief Nursing Information Officer).Finally, once systems are operational, highly reliable systemsupport and maintenance is essential, especially in areaslike critical care, where patient survival may be at stake.

SOURCE: KAISER FAMILY FOUNDATION/HARVARD SCHOOL OF PUBLIC HEALTH

FIGURE 10. KAISER FAMILY FOUNDATION/HARVARD SCHOOL OF PUBLIC HEALTH

PHYSICIAN SURVEY RESPONSES ON MEDICAL ERRORS

Very often

40%

20%

0%

60%

Somewhatoften

Not veryoften

Not oftenat all

92% Not enough nurses in hospitals91% Overwork, stress, and fatigue of health professionals88% Health professionals not working together or

communicating as a team83% Doctors not having enough time with patients81% Medical care being very complicated78% The influence of HMOs and other managed care plans

on treatment decisions66% Poor training of health professionals66% Poor handwriting by health professionals58% Poor supervision of health professionals45% Lack of computerized medical records37% Uncaring health professionals

When people seek help from a health professional, how oftendo you think preventable errors are made in their care?

IDENTIFICATION OF POSSIBLE CAUSES:Physicians responding that these were

“very important” or “somewhat important”

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The Chicago-based Advocate Healthcare system is investing$45 million to $60 million to install a new clinicalinformation system for all of its eight hospitals over the nextthree to five years.52 According to one Advocate facility,Lutheran General, an important additional benefit of beingtechnologically aggressive has been a reduction in its rate ofnursing turnover. The nursing shortage makes adoption andimplementation of clinical IT systems that can leveragenurses’ skills all the more compelling. New clinical tools freenurses to focus on the patient care they prefer, rather thanbeing burdened with clerical tasks that now occupy much oftheir time. Advocate has found that once nurses are familiarwith the hospital’s clinical information systems they are muchless likely to move to a competitor hospital without similarcapabilities. Management believes that, as a result of itsclinical IT investments, Advocate Healthcare has acompetitive edge in RN recruitment, retention, and overalljob satisfaction.

Need for Internal Cooperation: Systems Integration

With respect to the need to integrate new and existing internalIT systems, hospitals and other health care providers findthemselves very much in the same boat as banks, airlines,and retail companies. Reconciling legacy systems is atremendous challenge for hospitals. Typically, past ITinvestments were made on a department-specific basis, withlittle thought to the future need for these systems tocommunicate with each other in a real-time environment.Yet this is precisely what is required to derive the maximumbenefit from existing as well as new systems. Beyond linkinglegacy systems, a great challenge is to enable existing systemsto communicate with new applications, such as CPOE. Thisfrequently requires costly customization, because CPOEneeds to be linked with medical records that may have beendigitized previously with another product, possibly from acompeting vendor.

Hospitals face a dilemma in deciding how to upgrade theirIT systems to provide the greater clinical functionality nowbeing demanded. On the one hand, they are loath to abandontheir major IT investments of the past. The general feeling isthat legacy systems should be leveraged, partly because theyrepresent too big an investment to simply toss out, but alsobecause of the perceived difficulty of scrapping everythingand moving to an entirely new—and untested—system. Forthis reason, many hospital IT executives believe they shouldmove forward with their investments to enable and automate

Adoption of advanced clinical IT systems may even providea positive side effect for both nurses and the hospitalsemploying them. Currently, nurses are overburdened, whichhas a negative effect on their work experience, depresses theirmorale, and encourages them to leave the profession in evergreater numbers. As workforce shortages worsen, theremaining nurses will be overworked and operating underan increasing level of stress—raising risks of medical errorseven further. Proposed technology changes, however, holdthe promise of alleviating some of the problems nurses nowface, helping to stem the outflow, and attracting more nursesinto the hospital setting. Clearly nursing as a profession couldbenefit from a well-planned “digital hospital” environment.

According to the most recent forecast from the U.S.Department of Health and Human Services (DHHS), thecurrent nursing shortage is critical; without remedy, it willonly get worse in the years to come. In the year 2000, therewere only 1.89 million nurses, to meet the demand for 2million, resulting in a nursing shortage of 110,000,approximately six percent. The nursing shortage is expectedto grow relatively slowly until 2010, at which time it willhave reached 12 percent. Then demand will begin to exceedsupply at an accelerated rate and by the year 2015, the nursingshortage will have reached 20 percent. If this problem is notaddressed and if current trends continue, it will reach 29percent by 2020.49 An economic solution to dealing withthis imbalance is to raise RN wages to attract more nursesinto the labor force. A forthcoming Deloitte Research studyindicates that eliminating the shortage predicted for 2016would require wages to increase by 66 percent, with totalRN expenditures doubling by that year.50

While the future looks bleak, the current shortage is alreadycreating problems for hospitals. A 2002 VHA study, TheBusiness Case for Work Force Stability, reported on the seriouscost consequences of high vacancy rates and continuousturnover of staff.51 The report indicated that high turnoverrates can result in higher than average cost per discharge, alower return on assets, increased risk-adjusted mortalityscores, and increased severity-adjusted length-of-stay. Thereport concluded that hospitals successfully tackling thisproblem stand to gain a competitive advantage in their marketbecause of lower costs and access to a superior workforce.

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processes instead of having to completely replace entiresystems. On the other hand, they recognize that building onlegacy systems and transitioning to a new system is not acheap or easy undertaking. A new system that could beimplemented with the minimum integration headaches iscertainly an ideal. Referring to CPOE, Dr. Peter Dysert,chief of pathology and chief medical information officer ofBaylor Medical Center, expressed this best: “I want [theentry system] out of the box as much as possible.”53

Implementation complexity is now of central concern sincethe hardware, software, training, and implementation coststhat accompany customization can be unacceptably high.Until more “off-the-shelf ” products are available,implementation complexity translates into a cost packagethat, for a large segment of the industry, is simplyunaffordable.

Need for External Cooperation: Industry Standards

Many believe the lack of formally agreed-upon external datastandards is principally responsible for holding up ITadvances, and, ultimately, the prospects for clinicaltransformation of health care. Certainly the relatively earlyagreements on data standards in banking and airlinesrespectively, with regard to EFT and CRS, fueled the rapidand widespread adoption of IT innovations, drivingconsumer and productivity benefits for both industries.Hospital IT executives fully recognize the fundamental natureof the problem. As Kevin Fickensher, M.D., of the Institutefor the Future affiliated Health Technology Center complains:“We develop all of these IT systems that don’t communicatewell internally, let alone between organizations. When ishealth care going to develop some standards?”54 The absenceof IT standards has major negative consequences for overallindustry productivity. As a result, the majority of acute carehospitals must develop and implement customized products,at great cost, at the same time, severely limiting futureprospects for a market for much more affordable “off-the-shelf ” products.

How can this problem best be addressed? Externalcooperation and collaboration can be encouraged andfacilitated through public sector involvement, just as thefinancial regulatory infrastructure helped the bankingindustry coordinate financial data standards. To a limitedextent, the federal government has stepped in with HIPAA,which is perceived as providing a major push forward. But itis only the beginning of what needs to be done. HIPAA has

focused primarily on the standardization of codes alreadyused for billing but has not pursued other important dataareas such as drug codes and clinical terminology. To have amajor impact on health care costs and quality, it will beessential to create clinical standards so data can besystematically coded and analyzed, both internally and acrossinstitutional settings. However, because of the challengesinherent in codifying and automating information aboutmedical conditions and treatments, development of clinicalstandards will not be easy. Despite its limited ambitions andscope, there is hope that HIPAA will at least set an exampleof what can be done, spurring further cooperation in thefuture, and collaborative public/private sector efforts to solvethis problem.

Beyond HIPAA, other initiatives for government-influencedor imposed standards loom, possibly driven by the need tocontrol costs for public sector programs such as Medicare,which are expected to explode in the future. In the area ofstandards development, Nancy Johnson (R-Conn) haswarned the private health care sector, “If you don’t, we will…The future of health care quality right now depends as muchas anything else on our ability to mobilize technology,”stressing the central role that clinical IT is expected to play.55

The private sector has become more active as well, mostrecently through the Alliance for Health InformationTechnology, which plans to develop voluntary IT standards.Initially convened by the American Hospital Association, its35 founding members want to build on the efforts of otherindustry groups (HL7 and SNOMED CT) currentlyinvolved in health data standard setting. The first initiativeof the alliance will be to develop uniform bar code standardsfor medical and biological products, down to the unit-doselevel. Bar codes were adopted decades ago in other industriessuch as retailing but are still considered experimental in healthcare. Despite the undisputed role of bar codes in improvingpatient safety in the hospital setting, only 11 percent of the800 hospitals in the latest annual Hospitals and HeathNetwork’s “Most-Wired” survey had implemented bar codesystems.

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The Road to Clinical Transformation[According to] Lucien Leape, former pediatric surgeon andthe author of several earlier groundbreaking studies ofmedical errors, “Before the IOM report, nobody was doingdiddlysquat. Now there are a lot of good people involvedand a tremendous amount of activity. Of course, activityis not the same as progress.” The distinction made by Leapeunderscores the reality of the nascent movement to reducemedical mistakes: There’s a lot of talk, but no significantprogress. The reasons, observers say, include the fierceresistance of doctors and hospitals to mandatory reportingand other IOM recommendations, a lack of oversight bythe federal government, and absence of an effectiveconsumer lobby.56

The Washington Post recently presented this pessimisticprognosis regarding prospects for clinical transformation. Buthow accurate is it? Is the road nearly as rocky as long-timeexpert observers such as Lucien Leape believe? Where arewe in our journey to clinical transformation, and what willit be like when we arrive? Health care faces numerous andserious challenges along this journey. Considering insightsgained about the forces instrumental in bringing about ITtransformation in the banking, airline, and retail industries,what special initiatives might speed up the process in healthcare? This final section tries to answer these questions byproviding a realistic assessment of the near-term prospectsfor clinical transformation, as well as some concrete andtargeted suggestions for ways to accelerate the overall process.

Drivers Challenges Success Factors

Banking

Airlines

HealthCare

Retailing

FIGURE 11. IT TRANSFORMATION: CROSS-INDUSTRY COMPARISONS INCLUDING HEALTH CARE


Customer Focusand IT Leadership

Industry crisis regarding patientsafety concerns, technologicaladvances, and competition

Competition (especially Wal-Mart)and technological advances(mainframes and the Internet)

Competition and technologicaladvances (mainframes, ATMsand telecom, and the Internet)

Major challenges to obtaining both internalcooperation – especially with regard to gettingphysician buy-in, as well as even establishing anexternal framework for IT system data sharing,development of industry standards, systemsintegration

Not much of a challenge in obtaining internalcooperation if companies are expanding and can“greenfield.” More internal challenges relatedto system integration of merging companies andthe greatest challenges are related to gainingexternal cooperation from suppliers in order todevelop and run supply chain and inventorymanagement systems

Primarily the need to gain internal cooperationfor IT system integration, implementation, andutilization

Industry crisis regarding passengersafety, competition, technologicaladvances (mainframes, radar, andthe Internet)

Primarily the need to gain internal cooperationfor IT system integration, implementation, andutilization, with some challenges related tomanaging external relationships (code-sharingalliance and online ticket distribution)

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Cross-Industry Lessons

Understanding the drivers, challenges, and success factorsrelevant to other service industries’ experiences with IT canprovide insights and practical lessons for hospitals as theystrive for clinical transformation. Based on our cross-industryanalysis, there appear to be two major common conditionsrequired for IT transformation, including clinicaltransformation. These are:

Favorable External Environment. An effective, competitivemarket environment that rewards organizations’ investmentsin technologies that raise productivity, either by improvingproduct quality, reducing costs of production, or both;

Critical Industry Capabilities. An intense focus on thecustomer combined with IT Leadership, enablingorganizations to excel with IT-integrated business strategyand ongoing IT innovations developed in response to marketopportunities and threats. SOURCE: DELOITTE RESEARCH

FIGURE 12. CROSS-INDUSTRY LESSONS ANDCONDITIONS REQUIRED FOR CLINICAL

TRANSFORMATION

Consumerdemand for

quality

FAVORABLE EXTERNAL ENVIRONMENT:


Providercompetition

IT capabilitiesat a

reasonable cost

Intense focus onthe customer

CRITICAL INDUSTRY CAPABILITIES:

IT leadership

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Favorable External Environment

As in other industries, a key driver of the adoption of ITsystems and applications is the growing impact of marketcompetition, whether as the result of deregulation (in bankingand airlines) or the emergence of a super-competitor such asWal-Mart in retail. Competitive forces are indeed growingin health care markets today, encouraging all health careorganizations to scrutinize their operations to reduce costs.This explains the current intense focus on evaluating ITsystem investments based on their short term ROI. However,it is important to realize that competition-driven ITinnovations are not restricted to cost-cutting efforts. Inaddition to allowing for greater “price competition,” ITinnovations can provide an opportunity for “qualitycompetition” that may ultimately pay longer-term dividendsto their earliest adopters.

The first generation of IT innovations implemented inbanking, airlines, and retail vastly improved efficiency overthen-standard manual data processing operations. Lowercosts translated into lower prices and played a major role inearly stages of industry transformation. But other ITinnovations also contributed, not by lowering cost, but byactually changing the nature and improving the quality ofthe services bought and sold. While occurring to a greater orlesser degree in all of these industries, the role of this sort ofinnovation was most apparent for airlines. The ATC systemrepresented a major public sector IT investment that vastlyimproved air travel safety (quality), at the same time ensuringthe future financial stability of a critical national economicresource. The creation of frequent flyer programs is anexample of a private sector IT innovation and investmentwhose purpose was to improve quality of service and thuspassenger loyalty, allowing these airlines to command apremium price based on demonstrated customer value.

Although it seems extreme to claim that past hospital ITinvestments in administrative and financial systems have beentruly transformative, they seem analogous to the basic, cost-cutting IT applications in these other industries. In otherwords, many health care organizations have done a reasonablygood job at “picking the low-hanging fruit” with respect toIT-based cost savings. Ever increasing competitive pressures,however, will force health care organizations to move beyond

basic “price competition” to “quality competition” in orderto maintain a competitive edge. For competition to be asignificant force driving the adoption of clinical IT, themarket for health care services must “reward” quality. Healthcare providers must be able to charge more for higher qualitycare, enabling them to actually compete on the basis of qualityrather than just on price. This is typically the case in mostother industries, where product-quality information is readilyobservable or easily obtainable; products and services morehighly valued by consumers command higher prices. Asidefrom superficial amenities, objective measures of health carequality are rare today, so true quality competition is currentlyextremely limited.

In health care, three components are requisite to establishingan effective market that will drive clinical transformation:

1. Consumer demand for quality;

2. Provider competition; and

3. IT capabilities at reasonable cost.

Consumer Demand for Quality

Description and Rationale: To generate demand for quality,consumers need to be able both to measure quality and todiscern variations in quality across providers. As has beendiscussed, consumers are concerned about quality, but, atpresent, have very little information that allows them todifferentiate health care providers on the basis of quality.Purchasers, especially HMOs, have been much moreaggressive in this regard, not only in providing directconsumers, their enrollees, with better information to helpthem make quality-based decisions, but also in taking thefirst tentative steps toward actually linking price with qualityin some appropriate settings.

Prospects & Proposals: Effective consumer demand for qualitywill depend in part on consumers’ perceptions of theimmediate threat of poor quality and in part on theavailability of data to measure and compare quality reasonablyacross facilities. While an awareness of the problems seemsto be growing, albeit slowly, there continues to be a majorlack of information on which to judge quality. Purchasersand the public sector are pushing for greater release ofinformation on patient safety standards and medical errors.

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However, past research indicates that consumers have neitherpaid much attention to, nor based provider choices on, eventhe most informative quality statistics, such as New YorkState’s annual reports on hospital-specific mortality rates forCABG.57 Unfortunately, the most accurate information onhospital quality may become available only in the post-clinicaltransformation era. Perhaps the best way to motivateconsumers to be more concerned about quality for cost orvalue is through the power of the market: make more of thecost burden obvious to them, especially when selecting aprovider. If HMOs move in this direction, consumerdemands for better hospital-specific informationdocumenting quality may drive hospitals to adopt clinicalsystems necessary for its collection.

Provider Competition

Description and Rationale: Local hospital provider marketsmust present an array of competitive choices. Purchaser andconsumer price and quality demands will have little impactif there is no competition among providers. Some purchasershave pointed to hospital consolidation and increased marketconcentration as contributing to recent health care costinflation, since reduced local competition gives hospitals lessreason to compromise on price. With fewer competitors,hospitals are also less likely to compete on quality in thefuture, even when valid and reliable indicators of qualitybecome available. Of course industry consolidation shouldnot imply unequivocally negative prospects for clinicaltransformation. If clinical IT systems entail high fixed costs,mergers may be necessary in some cases to achieve the scaleneeded to make adoption and implementation affordable.Moreover, hospital quality may benefit from consolidationif improved hospital bargaining leverage can be used toencourage local physicians to accept new inpatient-basedclinical IT systems.

Prospects & Proposals: Though it is not widespread, we mayalready be seeing the impact of consolidation and a relatedexercise of market power on quality competition in a limitednumber of markets. In St. Louis, only one of the area’s 23hospitals completed the survey to assess compliance with itsthree quality standards, administered last year by the LeapfrogGroup. Leapfrog’s executive director, Suzanne Delbancoattributes this lack of responsiveness to the highlyconcentrated local market conditions, “What’s unique aboutthe St. Louis market is that there’s not a lot of competition—so I think there’s less of a feeling of urgency to differentiatethemselves.”58 With health care costs rising in double-digitsover the past two years, private purchasers and public sectorregulators want to ensure adequate competition in localmarkets for hospital services. The Federal Trade Commissionis investigating price inflation following hospital mergersdeemed to be anticompetitive but unsuccessfully challengedin court. Hospital consolidation may continue, but as mergerscome under intensified scrutiny, the competitive risks maybe reduced. Moreover, a number of markets are now facingcompetition from niche or boutique hospitals. These facilitiesmay be able to implement “state-of-the-art” clinical ITsystems, attract many local physicians and their mostprofitable patients, and thus pose a new competitive threatto incumbent local hospitals, in terms of both cost andquality.

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IT Capabilities at Reasonable Cost

Description and Rationale: Finally, there will be a need for aclinical IT solution that is affordable, relativelystraightforward to implement, and, most of all, reliable.Moreover, it must meet the operational requirements of allessential participants, most significantly physicians, who nowpresent the most daunting challenge to successfulimplementation. Beyond the pioneering institutions with theintellectual and financial wherewithal to continue to nurturetheir “homegrown” solutions, and a minority (about one-third) of other hospital organizations that can afford to buildsystems customized to their legacy IT capabilities andreasonable costs will be critical in driving adoption for thevast majority of hospitals in the industry. While affordableIT is the most serious challenge to creating a competitivemarket, it is essential for making progress toward achievingclinical transformation.

Prospects & Proposals: The need for an effective and affordableclinical IT solution probably presents the biggest challengeto establishing effective competition and it certainlyrepresents a major uncertainty in the present environment.What is needed is nothing less than a technologicalbreakthrough making possible “state-of-the-art” IT solutionsthat are both affordable and doctor-friendly to jump startadoption and implementation throughout the industry.

Just as the government plays important roles in stimulatingcost-conscious consumer demand and ensuring providercompetition, it can also help improve IT capabilities. First,early-stage public sector IT systems could serve as thefoundation for further developments supporting clinicaltransformation. One example is the Center for DiseaseControl and Prevention’s National Electronic DiseaseSurveillance System (NEDSS), being developed and rolledout to ensure prompt reporting of epidemic outbreaks,possibly due to bioterror attacks. In addition, NEDSS couldfurther address public health and safety needs by providingthe nationalized IT infrastructure for the standardization andtransmission of all clinical information. Second, governmentmandates and/or funding for hospitals to implement error-reduction systems and regular reporting on patient safetycan drive healthy provider industry demand for such clinicalIT applications and systems. This encourages developmentby vendors because it is more likely that there will be a viablemarket for their products. Finally, the government couldstimulate development of more appropriate clinical ITproducts directly, by allocating public sector funds, throughdirect grants to companies or funding of basic or academicresearch through an NIH-like process, or as an extension toits current AHRQ funding initiatives. Another possibleavenue for financing might be a “Health Care QualityInnovation Fund.” Drawing a parallel to the Human GenomeProject, the IOM recently recommended that Congressestablish such a federal entity, its resources of $1 billion overthree to five years to be invested in projects to produce a“public domain portfolio of programs, tools and technologiesof widespread applicability” for improving quality in thenation’s health care system.

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Critical Industry Capabilities

Although a more competitive market creates the settingnecessary for driving adoption of clinical IT, it is not sufficientto guarantee IT transformation. As was evident in our cross-industry examples, one key factor underlying companysuccess and, ultimately, transformation was a keen attentionto customers. IT initiatives that did not recognize customersneeds and desires were doomed to flounder. ATMs wereinitially introduced in banking not to respond to customers’demands but as an effort to drive down operating costs. Lackof customer-friendly features stifled use of ATMs in the earlyyears; it was only after customer needs were explicitlyconsidered that the ATM took off, finally makingproductivity achievements possible. Wal-Mart’s attention tothe customer is famous. RetailLink has enabled the companyto make good on its promise to deliver “the lowest prices,always.” But customer focus is not solely about offering thelowest prices. American Airlines’ greatest customer-focusedIT innovation was the frequent flyer program, which allowedthe airline to compete on services, amenities, and mileage,rather than on price. Identifying and rewarding the mostfrequent flyers and other preferred customers have in recentyears expanded beyond the airline industry as banks andretailers attempt to make use of their data resources and ITsystems to develop their own customer loyalty programs.59

Another critical factor contributing to success is thecombination of management competencies that we refer toas IT Leadership. As competition becomes a more significantdriver of change, IT Leadership in health care must beincreasingly attuned to the impact of market forces. EffectiveIT Leadership in health care will come to resemble what’sbeen behind IT transformation in other industries. Healthcare executives and clinicians must still be prepared to dealwith the traditional hurdles to IT implementation peculiarto the health care setting, such as ensuring physician andother clinician buy-in. However, they also need to understandand respond to the challenges presented by an increasinglycompetitive environment, since competition will influencetheir choice of overall corporate and IT integrated strategies,major IT decisions and investments, as well as the optimalapproaches for achieving successful implementation. Oneimportant test for health care will be the ability to maximizethe return on clinical IT investments. In general, this willbe a function of developing and implementing optimally

integrated business/IT strategies. More specifically, it willinvolve identifying and effectively deploying ITapplications—those required simply as the “cost of doingbusiness,” as well as those that can provide a source of“differentiation” by which a health care organization can gainand sustain a long-run competitive advantage.

“Cost of doing business” technologies are absolutely essentialfor survival in a competitive market but will not, inthemselves, guarantee true success relative to the competition.In banking and airlines, electronic fund transfer (EFT) andcomputerized reservation systems (CRS) were majortransformative IT innovations. As they diffused rapidlythroughout each industry, their use quickly became part ofthe “cost of doing business,” or simply the price of admissionfor all participants wanting to play in each market. As a result,despite the obvious overall productivity benefits to societyand consumers, in most cases EFT and CRS have done littleto improve the profitability of specific companies, or theindustry as a whole. Long-run profitability generally requiresgaining and maintaining a competitive advantage. In orderto do this, a company must have, and control access to, keyassets (including technologies) that allow it to differentiateitself from its rivals. The most obvious example of a powerfuldifferentiating technology is Wal-Mart’s cost-slashing supplychain management and inventory control system, RetailLink.Because other retail chains have found it nearly impossibleto replicate, over time this technology has endowed Wal-Mart with an almost unassailable competitive position.

The degree of competitive advantage that companies inbanking, airlines, and retail derive from their IT innovationsis largely determined by the likelihood of technologydiffusion, but it can also be influenced by the strength of ITLeadership. Access to CRS is considered a “cost of doingbusiness” technology for the airline industry. As a result, itwas more difficult, but not impossible, for one company tomaintain a competitive advantage. Due to the strength of itsIT Leadership, American Airlines proved better than its aircarrier rivals at exploiting the IT potential of CRS. The restof the industry was eventually able to “catch up,” in part bycopying American’s most innovative IT initiative, the frequentflier program. Yet American maintained a degree ofcompetitive advantage. Its relative success depended not onlyon access to basic CRS technology and creation of frequentflyer programs, which diffused throughout the industry, but

44


also on the management expertise needed to structure andoperate these programs for optimal returns and value to thecompany, an area where American has typically excelled.

What is the situation in health care? The first obviousquestion should be: Is clinical IT simply part of the “cost ofdoing business,” or could it be “differentiating” and providea sustainable competitive advantage for some investinginstitutions? At the present immature stage of clinical ITevolution, having such systems might be considered a“differentiator.” Clinical IT systems are now in operationonly at pioneering institutions where they have beeninternally developed or “home-grown.” As a result, thesesystems are quite customized, reducing both interoperabilityand the current likelihood/risk of widespread diffusionthroughout the industry. The cost and quality benefits ofthese systems are widely acknowledged. Despite thisevidence, due to a combination of low margins, prohibitivelyhigh costs, and uncertainty about institution-specific ROI,many other health care organizations have hesitated to makesimilar investments.

Even if the timing is not certain, this situation is expected tochange in the future. As the hurdles to implementation areovercome and the drivers for adoption intensify, the industryshould eventually experience a dramatic shift from a“differentiator” to a “cost of doing business” model.Particularly with the development of IT standards and theavailability of more affordable “off the shelf ” products,economic forces will stimulate rapid diffusion of systems andapplications throughout the industry, just as in banking andairlines. As clinical IT becomes pervasive, its adoption willbe a basic requirement for industry participation, a “cost ofdoing business” technology, such as computerized hospitalbilling systems are today.

As presented throughout this study, competitive advantagein the future will stem not simply from access to a particulartechnology but from the strength of IT Leadership. Thus,even with widespread technology diffusion in the future, therewill still be opportunities for health care organizations tobenefit directly from their own clinical IT investments. Sinceultimately the technology itself will be pervasive, success willdepend primarily on how management applies clinical IT tosupport its overall strategy. IT Leadership, in particular, willbe central in determining how best to leverage clinical IT in

ways that may be difficult for competitors to copy, includingreducing the costs, enhancing and maximizing revenue, andeven competing on quality of care.

While improved quality is not the only operationalimprovement possible following clinical transformation, itis one of the central goals espoused by the IOM. At thepresent time, because we lack reliable quality information orreporting systems, true quality competition is difficult.However, the advent of clinical IT is expected to remedythis situation. The existence of system compatibility andquality measurement standards will ensure comparableresults; hospitals with superior quality ratings will finally beable to benefit financially from their quality improvementefforts. Paradoxically, it is only the advent of widespread “costof doing business” clinical IT systems that will enable thesehigh-performing institutions to demonstrate and differentiatethemselves on quality and gain a powerful competitiveadvantage.60

In Crossing the Quality Chasm, the IOM asserts thatwithout fundamental change to the entire U.S. healthcare system, efficiency and quality of care cannot beguaranteed in the future. Given the magnitude andobvious difficulty of this task, they also recognize thatthe “need for leadership in health care has never beengreater.” A major practical insight to come out of ouranalysis of cross-industry IT transformation is a cleardescription of the particular leadership approach thatwill be needed to bring about these fundamental changes,especially with regard to clinical IT implementation.Health care executives and clinicians face a dauntingchallenge, but they can benefit from understanding theexperiences of their counterparts in other industrieswhose IT Leadership provides a model for success thatcan in large part be generalized to the health care setting.

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End Notes1 Institute of Medicine, Crossing the Quality Chasm: A New Health

System for the 21st Century (Washington, D.C.: NationalAcademy Press, 2001).

2 While we claim that health care has not benefited as much as itcould from the current revolution in information technology, itis hard to claim that health care as an industry has escaped theimpact of automation. Hospital administrative and financialsystems have been around for decades. There are importantexamples in the clinical area (especially lab), which have theiroperations completely computerized. In addition, there is a hugeamount of clinical and computer technology embedded in majordiagnostic (e.g., CT, MRI, ultrasound, cath lab), therapeutic(e.g., cath lab, perfusion equipment, IV infusion pumps), andmonitoring (e.g., cardiac monitors) devices. Where there arenumerous repetitive or standardized clinical processes, healthcare has computerized them. Where there isn’t computerizationis in the nonstandardized clinical processes and the record-keeping around them. It is this last frontier that we consider tobe the true realm of clinical transformation.

3 P. David, “The dynamo and the computer: An historicalperspective on the modern productivity paradox,” AmericanEconomic Review 80, no. 2 (1990): pp. 355-361.

4 P. McGeehan, “New Wall Street pitch: Buy low, sell high andpay bills, too,” New York Times, December 14, 2002.

5 T. Koenke, “Moving money: A history of EFT,” Hoosier Banker,October 11, 1997; Congressional Budget Office, Competitionin ATM Markets: Are ATMs Money Machines? July 1998.

6 According to Edwin Rosane, CEO of USAA Life Insurancecompany: “Senior executives need to be up to their eyeballs intechnology. They need to make sure that IS is doing what thebusiness needs it to do. Before you spend money it’s importantto know what technology can and cannot do so that you’re notwasting a lot of money and time sending people out to do theimpossible.” C. Hildebrand, “USAA’s Edwin Rosane,” CIOEnterprise, July 15, 1999, www.cio.com/archive/enterprise/071599_new.html

7 S. Morrison, “Airline services: the evolution of competition sincederegulation,” in L. Duetsch, ed., Industry Studies (EnglewoodCliffs, NJ: Prentice-Hall, 1993), pp. 225-249.

8 Morrison.

9 A. Taylor, III, “Hard landing: The epic contest for power andprofits that plunged airlines into chaos,” Fortune, November 27,1995.

10 S. Carey and D. Michaels, “At some airlines, laptops replacepilots’ ‘brain bags’ – software figures speed, thrust to save onfuel, cut noise and reduce paper load,” Wall Street Journal, March26, 2002.

11 S. Hansell, “Fare idea returns to haunt airlines,” New York Times,October 27, 2002.

12 “At the end of 1959 and into the early 1960s, American, teamingup with IBM, introduced and implemented SABRE (Semi-Automated Business Research Environment), the largestelectronic data processing system for business use. By 1964, theSABRE network extended from coast to coast and from Canadato Mexico. It became the largest real-time data processing system,second only to the U.S. government’s SAGE [national air defense]system… By 1985, more than 10,000 travel agency offices wereusing SABRE for travel reservations.” From the official historyof American Airlines, www.amrcorp.com.

13 K. Labich, “American takes on the world,” Fortune, September24, 1990.

14 T. Datz, “Can American keep flying?” CIO Magazine, November1, 2002.

15 Personal communication with Investor Relations staff, SouthwestAirlines, February 28, 2003.

16 S. Overby, “JetBlue skies ahead,” CIO Magazine, July 1, 2002.

17 “Mullin calls on government to tackle host of problems,” AirlineFinancial News, March 25, 2002.

18 E. Schatz, “Scan-it-yourself checkout lines,” Wall Street Journal,March 4, 2003.

19 A. Tsao, “Will Wal-Mart take over the world?” Business Week,November 27, 2002; C. Hays, “Discounters stalking high-techterritory,” New York Times, December 14, 2002.

20 Since direct price competition seems so grim, grocery retailersare also experimenting with IT applications designed todifferentiate themselves from Wal-Mart, especially through theuse of loyalty card and pricing optimization programs – customeroriented approaches that proved successful in the airline industry,but that are as yet untested in retailing.

21 E. Brynjolfsson and L. Hitt, “Beyond computation: Informationtechnology, organizational transformation and businessperformance,” Journal of Economic Perspectives 14, no. 4 (2000):pp. 23-48.

22 L. Foster, J. Haltiwanger and C. Krizan, “The link betweenaggregate and micro productivity growth: Evidence from retailtrade,” National Bureau of Economic Research Working PaperNo. 9120, August 2002.

23 J. Bresnahan, “Bob L. Martin, master merchant,” CIO Magazine,September 15, 1997.

24 A. Lundberg, “The I.T. inside the world’s biggest company,”CIO Magazine, July 1, 2002; S. Kaplan, “Elusive Wal-Mart CIOspeaks,” http://www2.cio.com/conferences/april2002/coverage57_content.html

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25 C. Koch, “It all began with Drayer,” CIO Magazine, August 1,2002.

26 Institute of Medicine, Crossing the Quality Chasm: A New HealthSystem for the 21st Century.

27 S. Heffler et al., “Health care spending projections for 2002-2012,” Health Affairs, Feb, 7, 2003, Web Exclusive, http://www.healthaffairs.org/WebExclusives/2202Heffler.pdf

28 Institute of Medicine, To Err is Human: Building a Safer HealthSystem, ed. L. Kohn, J. Corrigan, and M. Donaldson,(Washington, D.C.: National Academy Press, 2000).

29 R. Blendon et al., “Views of practicing physicians and the publicon medical errors,” New England Journal of Medicine 347, no. 4(2002): pp. 1933-1940.

30 www.agingstats.gov

31 Heffler et al.

32 Kaiser Family Foundation and Health Research and EducationalTrust, Employer Health Benefits 2002 Annual Survey, 2002.

33 M. Freudenheim, “Quality goals in incentives for hospitals,”New York Times, June 26, 2002.

34 J. Robinson, J. Yegian, M. Ginsberg and T. Priselac, “Tieredhospital networks in health insurance: Experiments in healthcare cost control,” Health Affairs, Web-exclusive, March 19,2003, www.healthaffairs.org/WebExclusive CHCF WebExcl_031903.htm

35 M. Romano, “And the winner is: Patient safety awards abound,but do they represent real progress in the fight against medicalerrors or are they just for show?” Modern Healthcare, April 22,2002.

36 C. Connolly, “Bar codes on drugs proposed; Errors could becut matching hospital patient, prescription,” Washington Post,March 8, 2003.

37 L. Flowers, State responses to the problem of medical errors: Ananalysis of recent state legislative proposals (Portland, ME: NationalAcademy of State Health Policy, 2002).

38 J. Morrissey, “An info-tech disconnect,” Modern Healthcare,February 10, 2003.

39 J. Morrissey, “High on tech, low on budget,” Modern Healthcare,January 28, 2002.

40 D. Brown, “The end of an error? Big business, launching a newera of reform, is pressuring hospitals to cut mistakes – and costs,”Washington Post, April 26, 2002.

41 J. Morrissey, “An info-tech disconnect.”

42 M. Weiner et al., “Contrasting views of physicians and nursesabout an inpatient computer-based provider order entry system,”Journal of the American Medical Informatics Association 6 (1999):pp. 234-244.

43 Deloitte Research, Taking the Pulse: Physicians and EmergingInformation Technology (2002).

44 Weiner et al.

45 C. Ornstein, “California hospital heeds doctors, suspends useof software: Cedars-Sinai physicians entered prescriptions andother orders in it, but called it unsafe,” Los Angeles Times, January22, 2003.

46 Blendon at al.

47 E. Campion, “A death at Duke,” New England Journal ofMedicine 348, no. 12 (2003): pp. 1083-1084.

48 Weiner et al.

49 U.S. DHHS, Projected Supply, Demand and Shortages of RegisteredNurses: 2000-2020, July 2002.

50 Nursing wage growth projections are currently presented in theworking paper by J. Spetz and R. Given, “The Future of thenursing shortage: Will wage increases close the gap?” (May 2003)but will soon appear in a Deloitte Research report on theeconomic, IT, and organizational implications of the growingnursing shortage.

51 VHA, The Business Case for Workforce Stability, November, 2002.

52 Scottsdale Institute, “The information-savvy nurse executive,”Information Edge.

53 R. Yu, “Texas hospitals target computer system,” Dallas MorningNews, November 26, 2002.

54 “The CIO roundtable: Implementing business and clinicalsystems,” HealthLeaders, January 2002.

55 G. Rollins, “Calming the IT seas: New alliance to guide healthcare toward technology standards,” Hospitals and HealthNetworks, August 2002, pp. 36-40.

56 S. Boodman, “Medical mistakes still pervasive,” Washington Post,December 10, 2002.

57 E. Becher and M. Chassin, “Improving quality, minimizing error:Making it happen,” Health Affairs 20, no. 3 (2001): pp. 68-81.E. Becher and M. Chassin, “Improving the quality of healthcare: Who will lead,” Health Affairs 20, no. 5 (2001): pp. 164-179.

58 B. Darves, “Turning patient safety on its ear,” HealthLeaders,June 2002.

59 L. Selden and G. Colvin, “Will this customer sink your stock?Here’s the newest way to grab competitive advantage: Figureout how profitable your customers really are,” Fortune, September30, 2002.

60 Deloitte Research, Strategy and e-Health: How to harness thepower of the Internet for competitive advantage in health care(2001).

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About the AuthorRUTH GIVENTel: +1 213 443 2028e-mail: [email protected]

Ruth Given is a Director in Deloitte Research, focusing onHealth Care and Life Sciences. She has a Ph.D. in Economicsfrom the University of California–Berkeley, an MS in HealthPolicy and Management from the Harvard School of PublicHealth, and a BA in Medieval Studies from StanfordUniversity. She is based in Los Angeles.

About Deloitte ResearchDeloitte Research identifies, analyzes, and explains the majorissues driving today’s business dynamics and shapingtomorrow’s global marketplace. From provocative points ofview about strategy and organizational change to straighttalk about economics, regulation, and technology, DeloitteResearch delivers innovative, practical insights companiescan use to improve their bottom line performance. Operatingthrough a network of dedicated research professionals,senior consulting practitioners, and academic and technologypartners, Deloitte Research exhibits deep industryknowledge, functional expertise, and a commitment tothought leadership. In boardrooms and business journals,Deloitte Research is known for bringing new perspective toreal-world concerns.

For more information about Deloitte Research, pleasecontact the Global Director, Ann Baxter, at +1 415 268 1026or via e-mail: [email protected].

©2003 Deloitte Consulting. All rights reserved.ISBN 1-892384-52-7

Health Care Thought Leadership• Forecast: What Every Business Needs to Know About

the Current Health Care Crisis

• Strategic Flexibility in Life Sciences: From Discoveringthe Unknown to Exploiting the Uncertain

• Collaborative Knowledge Networks: AcceleratingPharmaceutical R&D in the New Millennium

• Taking the Pulse: Physicians and Emerging InformationTechnology

• The Strategic Impact of Enterprise Resource Planning(ERP) in the Pharmaceuticals Industry

• Strategy and eHealth: How to Harness the Power ofthe Internet for Competitive Advantage in Health Care

• Taking the Pulse: Physicians and the Internet

• Winning the Loyalty of the eHealth Consumer:Building an eBusiness Roadmap

• The Emergence of the eHealth Consumer

Please visit www.dc.com/research for our latest thoughtleadership or contact us at: [email protected].

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For Further Information, Please ContactJOHN BIGALKETel: +1 407 246 8235e-mail: [email protected]

BETTY ANN BIRDTel: +1 713 982 4382e-mail: [email protected]

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BOB KOUDELKATel: +1 469 417 3245e-mail: [email protected]

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