CIO Perspective – Strategy Gone Wrong

Sometimes it’s the little things that trip up a new business strategy and we all know the devil is always in the details. I experienced this on a personal level just this week. Some background:

When we moved to our new condo it was wired for Verizon’s FIOS service and we signed up. The phone, TV and Internet services are terrific, although it turns out that up load speeds on the Internet are far slower than downloads. Since I mainly download information, this was no big deal.

A few weeks later we switched our wireless services to Verizon. Better coverage and having a single supplier made good sense, although I’m sure there will be minor cost savings. Maybe a few dollars. I also decided to receive electronic monthly bills for both services and to pay for the services through an electronic debit option that Verizon offered. I noted at the time that the FIOS services and the wireless services had independent web sites that were only loosely coupled. This was a premiere of things to come.

Every thing was going well and I received a promotion from Verizon to receive one integrated bill for both my FIOS and wireless services. Great, I signed up and then the problems emerged. I received my first integrated bill and the combined costs exceeded $300 for one month. I had already paid separate bills from FIOS and wireless, so I was shocked at the bill. I called Verizon to figure out what had happened.

The FIOS customer service representative was terrific and went to work trying to get things straighten out. Here is what we discovered. The way the consolidated bill works is that the wireless company bills the FIOS company for their services and a consolidated bill is then generated by FIOS. As an aside, the combined bill was 15 pages long and quite confusing. Sounds OK so far.

Using round numbers, the wireless company sent FIOS their first bill for around $300. After doing so the wireless company received my first payment for $300. So their systems, which are not integrated, showed that I owed FIOS $300 and had a credit of $300 with the wireless company. The simple solution seemed to be for the wireless company to send the credit to FIOS.

No way! In turned out there wasn’t a “Verizon” company but in fact FIOS and wireless operate as completely separate companies. With both parties now on the phone call, wireless said there was nothing they could do because I still had an active wireless account. They couldn’t and wouldn’t transfer my credit balance with them to FIOS. I was told the next billing cycle would reflect the credit but it was unclear that it wouldn’t take several months to work off the credit with the wireless company. In the mean time my only option was to pay in full the FIOS bill (i.e., overpay my FIOS bill by $300).

We explored many options to correct the problem. FIOS was willing to acknowledge the dispute in their system but their system would still show the $300 as past due. This created another wrinkle. FIOS had a promotion for a free computer if your account was current for two months. So this strategy, while saving me the overpayment, would cause me to forfeit my free computer. The wireless company offered that I could cancel my service and get my credit refunded immediately. Not a great option and an incredible suggest from the customer’s perspective.

In the end the only solution that worked was to pay my FIOS bill and hope that my credit would appear in the next month’s bill???

What this story surfaces are clear disconnects within Verizon. They want to present themselves to their customers as an integrated company but in fact they are not. The friction between FIOS and the wireless company was obvious during the call and the simple solution of immediately transferring my credit balance with wireless to FIOS was not a possibility. The business rule that wireless can’t issue a credit as long as you have active cell phone services is ridiculous. Most discouraging to me was that my interests as a customer were not important.

In my humble opinion, Verizon should pull back from presenting their FIOS and wireless services as an integrated (voice, TV, Internet and wireless) set until they can support it through a single web site, common business rules that are customer focused, and properly integrated or better still common billing and accounting systems. Their loosely coupled approach is not working.

CIO Perspective – Managing Complex Projects – Defining the Problem

Probably the most important lesson I learned early in my career concerning the management of complex projects was the need to have a clear understanding of the core problem that was to be addressed. It’s amazing to me how many IT projects fail because management lacks an understanding the problem to be solved or the opportunity to be exploited.

Back in early 1974 the Penn Central Transportation Company which was formed by the merger of the New York Central and Pennsylvania Railroads went bankrupt. The trustees who had been appointed by the bankruptcy court were approach by Victor Palmieri, who was then CEO of the railroad’s non-rail subsidiaries including Arvida Corporation, Buckeye Pipeline and Six Flags Corporation. Victor pointed out that within the railroad there were a large number of real estate parcels that could be carved out and sold. The estimate was approximately 10,000 separate parcels worth an estimated $1.3 billion, no small sum. There were also many properties being leased by the railroad generating millions in annual revenues.

The trustees agreed with Palmieri that these properties could be better managed for the benefit of the estate and entered into an agreement with him to build an organization that would take on this challenge. Victor Palmieri and Company was formed and would receive 2% of the gross proceed generated from the sale of these so called “non-operating” properties. Palmieri began building a team of real estate professionals and he also recognized he would need to create from scratch an information system to better manage and market these properties.

In order to explore what would be required to build these system, Palmieri invited several of the major consulting firms and largest accounting firms to a series of meetings to discuss requirements and approaches to this challenge. Among the invitees was a small operation research consulting firm located in Denville New Jersey. Russ White was the President of this small firm and one of the brightest people I’ve ever known. He attended all of these briefings.

Russ had an innate ability to understand and articulate the core problem that needed to be addressed. After this series of briefing Palmieri asked all the participants to submit proposal on their approach to the problem of creating the information systems that would be required by his new company. The larger firms put teams together to prepare detailed proposals that ran hundreds of pages and covered many extraneous topics.

Russ wrote a proposal that was one page and one paragraph in length. He simply stated the obvious problem that no information system or systems could be built until an inventory of the railroad was conducted to actually identify these 10,000 parcels and collect relevant information about them. The information Palmieri needed to manage and market these properties was co-mingled with the railroads records and information systems.

Bingo he had hit the problem that Palmieri faced squarely on the head. If you don’t know where these 10,000 parcels are and you can’t carve out critical information about them such as rent billing contracts, property taxes, book value and estimated market value, how were you going to manage or market them any better than the railroad’s own real estate department was attempting to do.

Our small firm won the contract and built this inventory data base, mapped the properties on railroad maps and generated a locater atlas using USGA maps to pro-actively market the properties. It took approximately a year to complete this inventory and build what became Palmieri’s property information system. Palmieri went on to sell all of these properties and this same system played a key role in breaking these properties out of the railroad when Penn Central’s rail properties were transferred to Conrail.

The lesson I learned from this experience was clear. Understand the problem your looking to solve and express it in simple and straight forward language that everyone can understand. I’ll be cover other topics in this series in the weeks to come.

William A. Crowell

Principal

Magellan Associates, LLC

　

Disaster, Are You Ready? Probably Not!

This past summer has again reminded us that we are constantly facing man made and natural disasters and that organization’s Information Technology (IT) function and therefore their CIO play a critical role when disasters occur. So are you ready for a disaster, to which I posture the answer, probably not.

Why not? Because most of us have not actually experienced a disaster and therefore we don’t know exactly what to expect. This was certainly my experience when I first smelled smoke on Sunday morning while visiting Torre Pines Beach in Del Mar, CA last fall. I had never experienced out of control wild fires fueled by dry tinder box conditions and constant Santa Anna winds over 50 miles per hour.

I had been in Southern California for only 10 weeks and discovered quite quickly how totally unprepared IT was to deal with the wild fires. What was 100 times worse was the ignorance of senior government officials concerning just how unprepared IT was. Great efforts had been made to establish an emergency response center (EMC); to prepare plans for police, fire fighters and other first responders; but IT was completely ignored. So much so that there was no place for the CIO at the EMC and the CIO was not on the telephone call list to notify key employees that an emergency had been declared.

So this was all new to me. New job, new location and new situation with multiple wild fires in the process of burning a significant percentage of the County. When I arrived at the EMC I was met by absolutely livid executives because our emergency web site was down and local officials had been instructing citizens to go to the web site for information, especially concerning evacuations which were a matter of life and death. Moreover, as the impact of the fires became a national and even international story, the web address was being given out and linked to by 1,000′s of news organizations.

As we investigated the “down web site”, we began to see just how unprepared IT was. The number of hits to the web site had increased dramatically for an average of 300,000 per day to around 10 million, well over a 30 fold increase. The web site was not actually down but was experiencing essentially a denial of service attack. Our server, a small Sun server, was overwhelmed. We discovered that the web service software we were using was an older version and single treaded. We also discovered that the software had a setting for the maximum number of concurrent session and that this setting was set at 12.

On the positive side our outsourcing agreements allowed us to quickly address these problems. We installed a humongous Sun server and moved our emergency web site to it. We upgraded our web server software to a current, multi-treaded version and began opening up the throttle on the number of concurrent users. At the peak of the disaster we had open this throttle to well over 30,000 concurrent users.

However, what amazed me was the continued ignorance and distrust that existed over the need to invest in our IT infrastructure, to better prepare for the next wild fires that were certain to happen in the future. The IT staff that predated my arrival continued to cling to the flawed belief that investing in a more robust web architecture was a waste of money and our IT governance body of senior management was struggling to understand the problem and commit to investing in a more scalable architecture.

I think one of the ways to address this lack of understanding is to reposition the discussion around a concept that is more familiar to senior executives, namely, risk management. In this context, running IT as a business and as an integral part of the business, we can better frame the issues and costs around preparing IT for potential disasters. I’ll discuss this risk management perspective in future postings. As we reflect on the recent hurricanes, Ike and Gustav, we would like your thoughts on how best to communicate the need to invest in our IT infrastructures to make them more robust when disasters occur.

William A. Crowell, Principal

Magellan Associates, LLC

http://www.magellan-associates.com/

Disaster, Getting Ready!

This posting is a follow on to the one I recently submitted entitled “Disaster, Are Your Ready? Probably Not!”. In that article, I postulate that executive leadership doesn’t appreciate the key role that IT plays in a disaster and therefore in many cases significantly under invests in its IT infrastructure. This view is based upon my experience in the wild fires of Southern California in 2007.

In evaluating this issue, we must also acknowledge that IT and especially the CIO in his/her leadership role has not necessarily done a very good job in communicating the problem or the solutions in a vocabulary that non-technical executives understand. My suggestion is that rather than frame the issue in technical terms such as disaster recovery or business continuity planning, we should simply frame the issue as “risk management”. Why risk management? Because it’s a concept that most executives can get their heads around.

Risk management is a strategic concept that includes understanding and defining the risks that an organization faces (public or private) and developing an appropriate response to address these risks. Appropriate response implies a level of investment that balances risk abatement and costs. Senior executives play a key role in each of these steps.

In most instances, the operational risks of a man made or natural disaster are easy to understand and define. However, the biggest risk, which will be impacted on how effectively the organization handles the operational risks, are to the reputation of the organization. In a study conducted by Rory F. Knight and Deborah J. Pretly at Templeton College, University of Oxford, they found that companies that were seen as effectively handling a crisis eventually had a 7% increase in shareholder value after an initial decline of 5%, while companies that were seen as ineffective had a 15% decline in shareholder value. Recent events on Wall Street would argue that shareholder value can be essentially obliterated by failure to effectively handle a crisis.

In the public sector there is also clear evidence of the impact of failing to effectively deal with a crisis. Katrina comes to mind. Need we say more?

In my next posting on this topic I will be discussing a 5 step life cycle that we help organizations implement to prepare for and deal with disasters from a risk management perspective.

William A. Crowell, Principal

Magellan Associates, LLC

http://www.magellan-associates.com/

Disaster, Five Steps to Manage the Risks!

Hurricane Ike cripples Texas and leaves more than 2 million citizens without power. The government steps in to rescue Fannie Mae and Freddie Mac. Lehman Brothers announces suddenly that is filing for bankruptcy. Wild fires sweep through Southern California. The Feds announce the bailout of AIG.

Whether natural or man made, sudden and unplanned for disasters can spell major risk for shareholders, employee livelihood, and even human life. If disaster suddenly struck your organization, whether private or public, large or small, would your organization be prepared?

Was Lehman Brothers? Was the State of Texas? Were the companies doing significant business in Texas? Were the companies doing business with the companies doing business in Texas? These disasters serve once again to raise the question, are business and IT aligned and prepared to quickly mitigate the risk of a disaster?

When preparing for a potential disaster from a risk management perspective, 5 clear action steps are critical. 1) Assess the risk, 2) Determine the potential business impacts of the risks, 3) Evaluate and develop recovery strategies, 4) Test, test and test, and 5) Enhance the plan based upon lessons learned.

As a CIO in Southern California, I had the opportunity to live through a disaster presented by the lengthy, and far reaching effects of wild fires. Were we fully prepared? No. Did we learn from the disaster? Yes. Will services and ultimately the residents of Southern California be in a better position if and when other unwanted disasters hit. Absolutely.

So what did I learn?

Assessment of the risks from a disaster is the crucial first step. What we learned from the wild fires was that a principle function of IT during a disaster is to maintain communications when traffic volumes are growing exponentially and capacity is negatively impacted by the fires. Because we did not prepare for this, we were unprepared when traffic volumes to our emergency web site increased by over 30 times and calls to our 211 service increased over 100 times. Could we have designed an architecture that would have easily expanded the capacity of our systems to meet the increased demands? The answer is unmistakably yes, if we had properly understood, assessed and communicated the risks of failure to meet the dramatically increased demands on our services. This last item, communicating the risks, is a key outcome of an optimal disaster recover plan.

Determining business impact is step two and we need to keep in mind here that the potential impact on the organizations reputation and how it handles the crisis can be an overriding factor. This was certainly the case in the wild fire experience. The fact that citizens could not get to our emergency web site for information, even though the local officials were referring everyone to this site, and that our 211 services was experiencing unacceptable wait times sent the public a message of incompetence. The business impact of not being able to dynamically increase capacity for these key services to meet demand in an emergency situation had not been properly analyzed.

The third step, evaluating and developing recovery strategies is an important technical activity for IT as there may be more than one way to skin the cat. While it was certainly possible and arguably best to build a web environment that would meet maximum expected demands during a crisis, this would have been cost prohibitive. Alternatively, we could have outsourced our web operations to a company that would be willing to dial up capacity in a crisis and then dial it down when the emergency had passed. Given that we had already outsourced our computer operations, it turned out that our best strategy from a capability and cost perspective was to re-architect our internal web environment in such a way that inexpensive web servers could be plugged in to handle peek volumes and then redeployed when the crisis had passed.

The fourth step is test, test, and test. A plan is only as good as its test. Yet knowing this why do so many organization scrimp on testing? If you aren’t going to test the plan you developed and spent so much time building, then why build it. To be able to check if off the list as d-o-n-e? This phase also includes documentation, communication and training materials. The time to make sure that everyone “gets it” is never when the disaster strikes.

The final step in our process is the enhancement of the plan. After every incident, leadership must mandate that the plan be review to incorporate lessons learn. And yes, this may result in additional testing, shouldn’t it? , Exercising the plan in a test environment, documenting what happens and developing lessons learned must become an ongoing, no shortcuts allowed, rhythm of the organization.

Taking the time to actually conduct this process and to get senior executives in your organization to support you efforts is no simple task. This is especially true in tough financial times like these! My experience in the wild fires clearly demonstrated the risks of not having an effective risk management program. While we were able to scramble to recover our web capabilities and expand our 211 services, it took time and valuable resources that could have been of service elsewhere. And the time spent scurrying was time when our customers, the citizens were not being properly serviced, which was completely counter to our mission. We would have been much better off if we had followed our process and been more prepared in the face of a disaster. Bottom line, is your organization prepared? Do you know? Don’t you think it’s time to find out?

William A. Crowell, Principal

Magellan Associates, LLC

http://www.magellan-associates.com/

Running IT as a Business

After 35 years in the field of information technology, I’ve decided to semi-retire from the active management of the IT function within both the private and public sector and have joined a small but  powerful IT consulting firm, Magellan Associates (magellan-associates.com). One the prime attractions is their philosophy of “Running IT as a Business” which I totally agree with and have practiced during my years as a CIO. I’ll be writing this blog to share this philosophy and to pass along the lessons we’ve learned during our active careers as CIO’s.

I will be covering a broad array of topics including leadership, strategic planning, customer service, developing a marketing plan, organization structure, communications, team building, risk management and many other topics. I’ll also work to cover contemporary topics of interest and provide a former CIO’s perspective. I’ve also decided I’ll keep my blog postings short but posted more frequently as a series. It’s been my experience or maybe I should say preference not to read blog postings that are longer than one page. Again this is my preference but I would be interested in your comments on this strategy.

My first series will start tomorrow and focus on the impact of open source technology on managing IT as a business.  Why open Source?  It is in my opinion the most significant new trend in IT and will have a dramatic impact on the operation of businesses in both the public and private sectors.  I will be discussing these impacts in this series and look forward to hearing your views and opinions.

William A. Crowell, Principal

Magellan Associates, LLC

www.magellan-associates.com

Pursuing An Open Desktop, Why Not!

A key aspect of running IT as a business is to remain alert to opportunities to significantly reduce costs or increase revenues for your organization. This is true for both private and public sector organizations. Open Source represents a major opportunity to lower operating costs and/or increase revenues.

In this series I will be presenting some of these opportunities that are being created by open source technologies but appear to be overlooked by many if not most CIO’s. For me the prime example is implementing an open source desktop. The estimates that I have seen indicate that an organization can reduce the hardware and software costs of a desktop or laptop computer by potentially as much as $1,000 per unit. When I was a CIO in the State of Oregon we had approximately 35,000 desktop/laptops, the potential savings was around $35.0 million.

So why was the State bureaucracy so hesitant about going after these potential savings. Yes, one can argue that changing the desktop is a significant effort but so are the rewards significant. My assessment was that the major roadblock was fear of change and the potential backlash from a major commercial vendor. Interesting given that the Governor had declared that Oregon is the epicenter of the Open Source industry, which indeed it is. No that change and vendor objections aren’t real concerns, look at the experience in Massachusetts, but I can’t personally imagine telling my boss that I won’t pursue such an opportunity for purely political reasons.

In these cases the driving principle for me is what I would do if it were my money and I recently faced this very issue. I had purchased a new laptop computer which included at no cost a version of Microsoft Office. It was the basic word processor, spreadsheet and presentation software but there was a catch. I could use the software 30 times and then I had to purchase a license. My new laptop ran the new Vista operating system and I had a desktop running Windows XP. Since it was my money, I went to the Oregon State University web site and downloaded the open office suite rather that continue to use Windows Office. The suite works great and includes Open Office Draw, Math and Database applications in addition to a word processor, spreadsheet and presentation applications. In addition to saving a bundle of money, the look and feel is intuitive and an easy adjustment, you can save in a number of formates to make exchange of documents quite easy. I especially like the button that creates and stores the document as a pdf file.

To me the open source office application suite is an obvious cost savings opportunity that is being overlooked by both private and public sector CIO’s. I’ll be discussing other opportunities in coming postings.

William A. Crowell

Principal

Magellan Associates, LLC

http://www.magellan-associates.com/

What Happened, The Market Implosion?

This situation is hardly rocket science, although listening to the politicians and media you would think so. Here’s my interpretation of what happened, why it happened, and what we need to do to correct the problem.

Banks and savings & loans have traditionally lent money to borrowers to purchase homes and taken a mortgage or lien on the property to secure the loan. When this was the banks money, they required certain things from the borrower. They would typically require a 20% down payment to protect their interests if the value of the property declined. The monthly mortgage payment was generally not allowed to exceed 30% of the borrower’s income and the borrower needed to have a good credit rating. Essentially, the financial institutions understood the risks and took steps to minimize these risks.

Fannie Mae and Freddie Mac were created to increase the liquidity of the mortgage market. A 30 year mortgage is not a very liquid asset and financial institutions could not afford to own large portfolios of mortgages and this restrained the size of the mortgage market. Fannie and Freddie (quasi-government organizations) enter the market and offered to buy these mortgages at a profit for the local bank, thereby freeing up their capital to make more mortgage loans. Fannie and Freddie then created marketable securities based upon the underlying mortgages and sold them to investment firms such as Lehman Brothers, Goldman Sacs, AIG, etc… These securities were “marketable” and therefore quite liquid.

In this new market a new player also emerged the mortgage processor. These firms, sometime large banks, took on responsibility of processing the original borrowers loan payments and making local property tax and insurance payments for a processing fee. I’m not sure exactly how the principle and interest payments were tied back to the marketable securities but would be very interested in learning more about this.

The implicit assumption underlying this market was that Fannie and Freddie were purchasing sound mortgages and that their securities were backed by the full faith and credit of the United States. However, when Fannie and Freddie, with the encouragement of the Federal government (Administration and Congress) agreed to purchase mortgages that were of questionable quality to achieve a social objective of greater home ownership, the incentives were set in place for this systems eventual collapse. Everyone involved had discovered a new way to print money.

The so called sub-prime debacle is simple to explain. The banks no longer had any risks from lending money for mortgages and could quickly turn these mortgages around and into cash at a profit. The competitive pressures lead to lowering lending standards. No down payment, no minimum income requirements, no minimum credit score, and low introductory rates (sub-prime) to stimulate demand. A boom in the housing market and in mortgage lending resulted all backed by substandard loans.

When the housing market started to contract and house values fell, the real assets backing these securities became more and more questionable. Moreover, the borrowers were losing their jobs or their adjustable rates were increasing to the point that they couldn’t afford the mortgage payments. I’m guessing, but I expect that Fannie and Freddie could not easily track specific non-performing mortgages back to the related securities that they had created.

This becomes a truly critical problem because you have no idea how many under performing mortgages are related to a specific security. If this is true and it appears to be, the value of specific Fannie and Freddie securities becomes an unknown and this unknown value freezes the market. Would you be willing to invest in a security if you didn’t know exactly how many bad mortgages were underlying it (1 or 2%) or maybe (50 to 60%)? Of course not, unless your Warren Buffet and willing to take on these risks, which are probably not that great.

So what’s the solution, short term. Have the US Treasury buy up the frozen Fannie and Freddie mortgaged backed securities. Then begin the process of bundling these securities to determine the actual status of the underlying mortgages. The preforming mortgages that are supported by adequate down payments, adequate income levels and credit scores can then be re-bundled and sold. The non-performing mortgages will be held by the government until the underlying real estate is sold and the proceeds are realized or the terms are re-negotiated and the loan again becomes a performing mortgage. No one knows how this will exactly work out so that’s why the Government can not determine a precise figure.

Long term, we must return to our historic quality standards for mortgages based upon adequate down payments, adequate income coverage of the monthly loan payment and adequate credit scores of the borrowers. It would also appear that we need systems that closely tracks the underlying mortgage’s payment status from the mortgage processor and the reporting of this information to the security owners. They could then better judge the underlying risks and their impact on these securities value.

This is a disaster, of the man made variety. Is IT ready to play its part and develop the tracking system I suggest is needed? I sense there is going to be a surge in the need to develop this type of system to provide the information needed to increase the liquidity of our financial markets.

I may not be 100% correct in my analysis but I bet I’m pretty close. Please use the comment feature of this blog to correct any inaccuracies.

William A. Crowell, Principal

Magellan Associates, LLC

http://www.magellan-associates.com/

Bailout Done, So What Is Next?

As a follow up to my blog posting on September 27th titled “What Happened, The Market Implosion?”, our Congress has now passed and the President has signed the bailout legislation providing $700 billion to purchased distressed mortgage backed securities. From all I have read on the subject, The US Department of the Treasury has been given great latitude in how it sets up the process to actually purchase these securities from the private sector and has been working on developing this process for some time, with support from the Federal Reserve, SEC, etc…

The key question is how to value these securities, since there is no market for them. There is a single buyer, the US taxpayer through the Treasury. There are valuation models including the Monte Carlo method and/or the Binomial Tree solution but these appear to be flawed in this particular situation.

One method I like which puts the responsibility on the organization that is looking to sell their mortgage backed securities to the Treasury is “Discounted Cash Flow” or DCF for short. It’s transparent and would work as follows. The firm wishing to sell their securities to the Treasury would develop a forecast and fully document all their assumptions of the future cash flows of the security. This would be done based upon the terms of each of the underlying mortgages and would include amortization of principle (borrowers expected principle payments over the life of the mortgage), interest income based upon mortgage contract rates (including assumption of future rates for adjustable rate mortgages), borrower prepayments assumptions (generated when a borrower sells their property and pays off their mortgage early), and estimated reductions in cash flows for deferrals of borrower payments due to default and foreclosures.

Given this information, the Treasury need only decide what the taxpayer wants in return for agreeing to purchase the security and this is based the discount rate or interest rate that it will apply to the projected cash flows. The value of the security is simply the net present value of the projected future cash flows that the security will produce if held to maturity.

All of the above information can be maintained for each security in a database and used by the General Accounting Office (GAO) to provide a fully and transparent audit trail of how each security was valued including all the assumptions and what income or cash flow the security produced during the time the security was held by the Treasury and the value obtained when the security is eventually sold. The GAO can also easily calculate the return generated for the taxpayers in bailing out the markets.

In addition to transparency, the above approach might encourage private sector firms to enter into the auctioning of these distressed securities. For example, let’s assume that Treasury decides it wants a return of 15% on the projected future cash flows of a specific security and bids a value based upon a 15% discount rate. Maybe Goldman Sacks or Warren Buffet would be willing to set a value on the security using a 12% or 14% discount rate. Since the lower the discount rate the higher the value to the seller, the final value would be based upon a rate of return set by the market.

I’m sure there are nuances to this idea that need to be considered, such as setting the risk factor based upon the composition of the underlying mortgages (for example how much of the portfolio are prime vs. sub-prime mortgages). However, I believe the above approach will provide the public the information we need to know to assure that the Treasury is properly investing the taxpayers dollars.

So what can we do as CIO’s to assist in this national challenge. Here are some ideas: 1) send this idea to your Congressman and Senator, 2) send this idea to leaders at the Treasury, SEC, Federal Reserve, etc…, 3) let’s suggest that the oversight board form a commission of CIO to help quickly develop the database that can track the forecast cash flows and assumption used to value these securities and to track the return they generate for the taxpayer. This is an important issue for all of us and I look forward to your sharing your thoughts.

William A. Crowell, Principal
Magellan Associates, LLC
http://www.magellan-associates.com/

Collaborative Software Development – A Must To Explore

Collaborative development of non-strategic applications.  It’s a mouth full and probably the biggest opportunity for the CIO to reduce the costs and increase the value of IT within their organizations.  There have been a number of successful collaborative software development initiatives using an open source development model.  Some examples: of course there is Linux which is governed by what was the Open Source Development Lab in Beaverton, Oregon (now The Linux Foundation ), and the Eclipse Foundation an organization providing a universal tool set for development of open source software, and one of my favorites the Kuali Foundation a consortium of Universities that are developing, sustaining and evolving a comprehensive suite of administrative software that meet their financial, research, student community and infrastructure needs.

What each of these initiatives represent: major technology companies (Linux), software development companies (Eclipse) and universities (Kuali), is the realization that it is in their individual and collective interests to work collaboratively using an open source development model to create software applications that do not have strategic value to any of the individual participants.  In this climate, a new company has emerged in Beaverton Oregon called the Collaborative Software Initiative (www.csinitiative.com).  CSI is looking to extend the collaborative software development model in both the public and private sectors and the opportunities seem almost endless.

A prime target market is the social service programs that are administered by the Federal, State and Local governments in the United States.  For example, the Federal government funds a health insurance program for the poor called Medicaid.  The program is administered by the States who enroll their citizens in Medicaid and pay their benefits to the health care service providers.  The program is administered under federal rules and regulations and is therefore largely identical in all 50 states.  Moreover the software that has been developed over the years to administer Medicaid is in the public domain because it was largely funded through federal dollars and is therefore available to form the foundation of an open source initiative.

With all this in mind, Oregon is in the process of implementing a new, modern system to administer their Medicaid program at a price tag of over $70 million.  If all 50 States spent this amount every 7 to 10 years to keep their applications up to date, the overall price tag would be $3.5 billion to the tax payers and since the Federal government funds these systems at 90%, their cost would be $3.2 billion.  This seems to be ample incentive to have all 50 states come together in a consortium to apply the proven open source development model to create a single universal system for the administration of the Medicaid program.

Hopefully this will happen in my life time,

William A. Crowell, Principal
Magellan Associates, LLC
www.magellan-associates.com