Analysis of Fonterra's ICT Implementations
Business processes, the supply chain, and the associated information flows to support these activities, determine Fonterra's technology investments. The business drives technology, not the other way around. This is critically important in a supply chain integration process. Integrating activities without first having a sound grasp of how the various activities interrelate risks merely replicating existing inefficient processes, and does not encourage the firms along the entire supply chain to think carefully about the nature and ownership of the information and processes necessary to such a chain (Barua et al, 2000).9 It also does not encourage firms to think about information and processes as separate and distinct assets, irrespective of the nature (electronic or non-electronic) of those assets.
Likely Productivity Gains
Fonterra's experiences with ICTs appear to follow the patterns most likely to result in longer-term productivity gains, as described by Brynjolfsson and Hitt. Whilst considerable investment is being undertaken currently in specific technologies and applications (the SAP database and the software being developed to support Fonterra activities; the rural broadband network), there is also an organisation-wide investment in complementary systems and processes in order to take best advantage of capital invested in information and computer technologies. Whilst it is too early to tell yet whether the JEDI or Shareholder Services applications have delivered any tangible productivity returns, the theory predicts that the way in which Fonterra has undertaken its developments maximises the chances that returns will be generated.
There is also some confidence that the reduction in duplication of data ("one source of the truth") will improve the quality of decision-making by removing uncertainty about the accuracy of data employed. These benefits may translate into improved profitability and competitiveness, as long as the "single source of the truth" selected for storage in the system design is the best measure available to the firm. Reduction in reliance on human data stores should also remove the ability for individuals to "hold the organisation to ransom", thereby improving overall performance. The company management also appears to have a clear understanding of the distinction between humans as "stores of data", which can be replicated in electronic and other systems, and human information processing, undertaken using human capital, for processes that are either unsuited or unable to be adapted into electronic systems.
Business Strategy Determines ICT Investments
The new Fonterra processes are based upon a rethinking of the entire business processes of the organisation. The technology supports, rather than drives, this process. The organisation's management, at the production, marketing and distribution levels at least, appears to have a clear understanding of the roles of information and its value in its business processes. The firm's strategy determines the nature of the technology investments, which in turn reflect the information and product flows of the company. The impetus for strategic and operational change, in conjunction with the technology investment, has removed many of the obstacles caused by entrenched processes that Brynjolfsson and Hitt find delay the accrual of benefits in the United States companies they studied, and ensures that concurrent investments are made in developing new organisational applications alongside the ICT applications.
It is less clear, however, that this same process rethinking has yet occurred comprehensively at the Shareholder Services interface with farmers. Although aware of the potential, Fonterra staff are also aware that as agents of the shareholder-farmers, they can only move along this path as fast as the shareholder-farmers will allow them. Whilst Fonterra is a single business over which management can exert co-ordination and control, at the farmer level, the co-operative is effectively thirteen thousand individual businesses that can achieve integration of systems and processes only by agreement and standardisation amongst all of these businesses. This is a costly exercise (Jensen and Meckling, 1979),10 as it requires considerable investment in farmer education and the governance processes of the co-operative. It is also difficult to secure farmer-shareholder support for projects based upon returns that are not especially clearly defined at the current point in time. It is not surprising, therefore, that Fonterra has prioritised information management developments in the production, marketing and distribution, where control is clear-cut and easily exercised. This is undoubtedly the area where the returns to investment in the technology are more likely to be accrued quickly, and with a minimum of transaction costs from complicated co-ordination requirements.
However, ongoing systems development in accordance with the strategic direction requires that farmer-Fonterra interfaces be addressed in the future. Returns to the investments already made in the web portals and the rural broadband network have been harder to identify, as they accrue not necessarily to Fonterra in the aggregate, but to each of the individual shareholder-farmers' businesses. There is evidence that such developments have been delayed due to an element of farmer resistance towards developing applications where Fonterra controls farmer information. Concerns have arisen about a lack of certainty about data security and importantly, data privacy (e.g. can other farmers ever have access to an individual farmer's data) despite Fonterra assurances that privacy is paramount. Concern also surrounds the ambiguity about who "owns" the information about individual farms that may be used in the future for yet-to-be developed applications. This is of particular concern with respect to information gathered about individual farmer purchasing behaviours on the RD1.com marketplace, and is common to most developments where increased collection and storage of data is required.
Nonetheless, Fonterra's co-operative structure may have already offered the organisation a co-ordination advantage in the commissioning of its rural broadband network over competitor companies where individual farmers do not own the processing company. None of Fonterra's competitors (either for-profit or co-operative) have succeeded in developing a nationwide (or even region-wide) network of the sort being developed by Fonterra to service rural locations. Fonterra has been able to take a world lead in the dairy industry in implementing such a system in part because the existing co-operative structure lowers the costs of co-ordinating the decision amongst shareholders to invest, and aligns the incentives of both farmer-supplier and processor in ways not easily achieved in markets where these parties do not share common ownership. Fonterra shareholders face no loss of profits from building a system that passes the bulk of the benefits accrued from better information provision to farmers, as the farmers who internalise the benefits are the shareholders of the company making the decision to invest. This makes the decision to invest easier for the directors of the processing company, even though the returns may not accrue on the books to that entity. Whilst Fonterra is not alone in the world dairy industry in having a co-operative form, it does appear to have incurred a temporary strategic advantage over other co-operatives with this infrastructure investment.
Farmers are also more likely to trust and use a system that they own than one provided by a "stranger" company. This may be especially important in the future when Fonterra comes to develop systems requiring farmers to share on-farm information with the company in order to better co-ordinate production, marketing and distribution activities. Whereas a farmer may be reluctant to share information that may be used subsequently to exploit him (e.g. price discrimination), if the farmer is the owner of company through co-operative membership, the incentive to exploit is removed as any profiteering at the expense of the farmer is merely returned to him in the form of a return on the assets of the company. It is noted that there may be elements of re-distribution between farmers as a result of the structure. Considerable education is still required, as there is currently not a high level of understanding amongst shareholders about the uses and implications of ownership of information assets. Nonetheless, Fonterra is well placed to initiate such education, given the extensive education role already undertaken by Shareholder Services.
Productivity and Competitive Advantage
Fonterra management also has very realistic objectives about what the technology investments can deliver. Whilst measurable productivity gains are expected (Fonterra anticipates processing the same inputs with fewer staff, and generating products with higher value as a result of JEDI), management is conscious that the systems and applications used are neither rare nor inimitable (Barney, 1995).11 Hence they are not expected to be a source of sustainable competitive advantage for the company. They can provide at best a short-term advantage if Fonterra can incorporate them into the operation of the organisation (the "ways things are done around here") better than their competitors. If the company can implement them at least as well as competitors, then the existing advantages will maintain the company in its current leading position for the time being.
The benefits that accrue from Fonterra's investments will ultimately be measurable in national statistics. However, the gains may take some time to become evident. At the firm level, there may even be short-term declines in productivity as employees abandon old methods and learn to use the new ones. Over time, greater productivity will ensue. In addition, as the new databases accrue longer histories of "one source of the truth", they become significantly more valuable and underpin significantly more accurate forecasting exercises. These should lead to improvements in outputs relative to inputs, as the costs of producing forecasts should not change in real terms as the forecasts get more accurate.
Thus, the benefits may be seen in the firm and national accounts not necessarily in the next two or three years, but several years out in the future. Indeed, in the short term, due to the size of the Fonterra investment and its relative importance to national productivity measures, it is feasible that national measures may reflect any drop in productivity from new systems and the use of temporary staff to fill positions. The most likely manifestation of this will be a lower-than-expected productivity growth rate, as occurred in the 1980s whilst other restructuring in the key exporting sectors was undertaken. However, as Buckle and McLellan (2004)12 have shown from the New Zealand context, and Brynjolfsson and Hitt (2000)13 have shown in the United States context, this is likely to be followed by a real, but lagged, output performance.
Complementary Investments
Whilst ordinarily Brynjolfsson and Hitt predict that it may take some years for the anticipated productivity gains to ensue, due to the need to make complementary investments in systems and processes supporting the technology investment, the benefits in Fonterra's case may accrue sooner than in the literature evidence. Firstly, the complementary investments in systems are being made at the same time as the new computer technology is being introduced. Secondly, Fonterra has already accumulated significant human capital in the management and operation of computer systems development and ongoing system operation through its previous applications. Thirdly, the firm has committed significant sums to the development of human and organisational capital through the secondment of staff to project JEDI. Theoretically, this places the company in a strong position to capitalise upon the benefits sooner than a firm investing in computerisation for the first time, or one which undertakes the investment in organisational and human capital after acquisition of the systems, and must then alter processes and undertake more learning-by-doing in order to accrue gains.
The main risk faced by Fonterra in the concurrent development of applications and technology implementation is that the rigidity of the new system once developed ("no exceptions") may make it more difficult to adapt processes where "learning-by-doing" with the new ICTs indicates further organisational redesign is necessary in order to maximise the benefits. Thus Fonterra faces tensions between the desirability of localised improvements and system-wide simplicity. Brynjolfsson and Hitt imply that such changes may occur with any new ICT implementation. Fonterra would be advised to ensure that processes are in place to detect the possibility of such performance improvements, and implement additional improvements. If not, the simplicity of the system may itself become rigidity over time that prevents Fonterra from benefiting from a natural occurrence of technology investments.
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