The Little Engines That Could

When managers want business information, many now routinely look on the Internet. They use search engines like Alta Vista, Excite or HotBot to find what they need. But how good are these search engines, relative to one another, at finding management information? Marketing professors Eric T. Bradlow and David C. Schmittlein have investigated that issue in a study quaintly titled, “The Little Engines That Could: Modeling the Performance of World Wide Web Search Engines.”

Others have analyzed the performance of search engines in the past. What makes the Wharton study different, however, is that unlike previous investigations, it focuses specifically on management information. In effect, it tries to determine which of six popular search engines — AltaVista, Excite, HotBot, Infoseek, Northern Light and Lycos — might be most likely to find particular kinds of business information.

Bradlow and Schmittlein believe that using a search engine to find web pages is a little like fishing with a net. The results depend not only on the net’s size but also the area of the sea where it lands. Metaphorically, this is also true of World Wide Web search engines. Bradlow and Schmittlein tested their digital “nets” by searching for marketing phrases such as “second mover advantage,” “perceived value pricing,” and “umbrella branding” on various search engines, and comparing the results.

Their conclusions show that among the six search engines, Alta Vista and Northern Light were “the best single choices.” For example, Alta Vista turned up 38 web pages in response to the search term “umbrella branding,” while Northern Light returned 51, HotBot 21, Excite 7, Infoseek 4 and Lycos 0. Bradlow and Schmittlein discovered that Lycos offers little coverage of marketing phrases, but sometimes found web sites that did not show up in searches on other search engines. To return to the fishing metaphor, it caught some fish that other nets missed.

If this is true, which search engine should a busy, web-savvy marketing manager use? Bradlow and Schmittlein suggest that based on their results, Alta Vista is the best single search engine choice, since in their study it found some 50 percent of the web sites with marketing phrases. “This is pretty good, but there is still plenty to find,” they say. If someone wants to use a second engine for a follow-up search, Northern Light or HotBot are good choices. For those with more perseverance, Excite, Infoseek or Lycos may turn up some additional sites.

One other finding was that all six search engines together found only 89 percent of the relevant web sites, and missed 11 percent. In that regard, these little engines could — do better.

Eric T. Bradlow and David C. Schmittlein; The Little Engines That Could: Modeling the Performance of World Wide Web Search Engines

Finding the REIT Value

The past few years have seen a dramatic increase in the number of real estate firms tapping Wall Street for capital. In many cases, these companies have chosen to go public by reorganizing themselves as real estate investment trusts or REITs. REITs are required to pass along 95 percent of their earnings to shareholders — a structure liked by real estate executives since it exempts the firm from having to pay income tax at the corporate level. The present and future value of the REIT as a real estate investment vehicle, however, has rarely been closely examined.

That is just what Joseph Gyourko, director of the Samuel Zell and Robert Lurie Real Estate Center at Wharton, and Todd Sinai, an assistant professor in the school’s real estate department, set out to investigate. In a paper titled, “The REIT Vehicle: Its Value Today and in the Future,” the researchers point out that the Achilles heel of REITs is the difficulty of running a growing, capital intensive operating company without the ability to retain earnings at will. Still, REITs do have real tax advantages. For example, since they shield firms against corporate taxation, they do not have to engage in costly tax avoidance strategies. REITs are also a net benefit to the real estate industry. “In 1997, REITs retained $2 billion in cash,” says Prof. Gyourko. “We estimate that they could have retained nearly $7 billion if unconstrained by the 95 percent payout rule.” As a result, Gyourko and Sinai conclude that even for large, growing companies with significant capital needs due to acquisition or development programs, an alternative to the REIT format is unlikely to prove financially superior.

Joseph Gyourko and Todd Sinai; The REIT Vehicle: Its Value Today and in the Future

Can Number-Crunchers Become Geeks?

The way financial institutions use technology is an unpredictable exercise. While some banks have been savvy in their use of sophisticated computer systems and improved their performance, others have not. This is an important issue for financial institutions and also an expensive one. Banks typically spend as much as 15 percent of their non-interest expenses on information technology.

So what determines how a financial institution decides on and uses its technology? Operations and Information Management Professors Lorin Hitt and Patrick Harker and Francis Frei of Harvard explored that issue in a three-part study. First, they looked at how banks evaluate and manage their investments in information technology. Second, they probed how the banks’ practices compare with the theory about the way technology should be managed. And finally, they assessed the impact of technology management on the banks’ performance.

Hitt, Harker and Frei focused on decision processes about two information-technology projects: PC banking — which allows customers to access their accounts, transfer balances and pay bills by computer — and the development of corporate web sites. Their research points to three key conclusions. First, while the banks in the study generally excel at developing project ideas and managing projects underway, they were generally weaker and less rigorous in evaluating projects and allocating resources across projects. Second, “infrastructure” projects that lack a clear business sponsor tended to be managed in an ad hoc manner and often bypassed the formal decision process entirely. This was especially true for decisions regarding corporate web sites and Internet strategy.

Finally, in the case of PC banking, although there was a wide variety of benefits predicted in the project plan (cost savings, new customer acquisition, increased customer profitability) there is little evidence that these benefits were actually achieved. However, the PC banking product appears to be disproportionately adopted by the most profitable of the banks’ existing customers, suggesting that it may be a “competitive necessity” to retain high value accounts.

Lorin Hitt, Patrick Harker and Francis Frei; How Financial Institutions Decide on Technology

Should Managed Care Be Regulated?

If industries were ranked by popularity, managed care would probably show up near the bottom. Influenced by horror stories of patients being denied coverage by hard-hearted health maintenance organizations (HMOs), public opinion frequently ranks managed care on a par with industries like tobacco and arms trade. This unpopularity tends to trigger the political demand for tougher regulation of managed care. Should this be done?

Yes and no, reply Mark Pauly, professor of Health Care Systems and Public Policy and Management, and Marc L. Berger, a health policy researcher at Merck. In a paper titled, “Why Should Managed Care and Managed Care Insurance Be Regulated?” they support the notion of regulation as long as it increases the flow of information to consumers. But regulations that involve mandating specific types of care, Pauly and Berger argue, would be a bad idea.

Well-informed customers are good for managed care. For example, if regulations require managed care companies to inform consumers about the performance and quality of various health plans, this would allow them to make better choices. Forcing HMOs to tone down their promotional hype would also help. “Managed care has suffered as much from being oversold by its advocates as being criticized by its opponents,” say Pauly and Berger.

The researchers also analyze the reasons for consumer dissatisfaction with managed care. A key factor, they believe, is the federal tax subsidy for employment-related health care. Since employers pay managed care premia out of workers’ wages, this reduces the employees’ taxable income. That portion of income would have been taxed if workers were required to buy health insurance on the market, as they do auto insurance, for example. But the fact that most people have their employer arrange their health insurance distorts their expectations. As Pauly and Berger explain, it leads “consumers to the belief that their situations are not the best and that regulation could improve matters — even if in reality it could not.”

Mark Pauly and Marc L. Berger; Why Should Managed Care and Managed Care Insurance Be Regulated?