How Digital Is Your Company?

Moreover, the revolutionary dimension of Dell's digital way of doing business shows up in its consumer accounts. Because Dell receives payment from its customers immediately -- through credit cards, either online or over the phone -- the company has cash-in-hand roughly eight days before it has to pay its suppliers. Thus in one stroke the company has been able to flip the traditional manufacturing-finance model.

In the old system, manufacturers pay suppliers for components and raw material long before their products are finished -- much less shipped to market, bought by a customer, and paid for. Because of its digitalized system, Dell can operate with negative working capital: Its liabilities are always higher than its assets -- which means Dell actually increases its liquidity as its sales grow.

Here's how negative working capital looks on Dell's balance sheet for the 1997 fiscal year: Under assets the company lists accounts receivable, inventory, and other, totaling $1.7 billion. Under liabilities the company lists accounts payable, accrued, and other, totaling $2.7 billion. The $1 billion difference represents the company's negative working capital -- Dell's digital design has, in effect, eliminated the need for the company to raise capital.

The third breakthrough of digital finance -- and the companion to Dell's invention of negative working capital -- is Microsoft's creation of negative asset intensity, a financing feat that, in part, accounts for the company's remarkable stock-market valuation. Asset intensity is a measure of the dollars of assets or capital that a company needs to support a dollar of sales. If a typical manufacturing company is growing at 20% per year, and it requires $1 of assets to achieve $1 of sales, then it will need to raise a considerable amount of money to support its growth. Most software companies need roughly 20 cents of assets to generate $1 of sales. Remarkably -- almost miraculously -- Microsoft has achieved negative asset intensity: It needs minus 5 cents to generate $1 of sales!

Here's what negative asset intensity looks like on Microsoft's balance sheet for fiscal year 1997: Under assets the company lists property, plant and equipment, accounts receivable, and other, totaling $2.9 billion. Under liabilities the company lists accounts payable, accrued compensation, income taxes payable, unearned revenue, and other, totaling $3.6 billion. The difference -- minus $700 million -- represents Microsoft's ability to grow its sales with negative asset intensity. To Wall Street and investors, this capability is a stunning competitive advantage: Microsoft, in effect, can grow at 50% per year without having to raise extra cash or add assets. With both Dell and Microsoft the lesson is simple -- and powerful: Digital finance lets you substitute information for assets. The result is a financial model in which your customers fund your growth, and Wall Street and your investors multiply your market value -- all because you've demonstrated your genius by switching from atoms to bits.

How do you get talented people to recruit themselves?

Across the new economy, there is virtual agreement: talent determines the success or the failure of any enterprise. The process of identifying, recruiting, hiring, retaining, and developing talented people is a critical test of any fast company. And the faster a company is growing, the faster it needs to land talented people.

And yet in 1997, only 1.2 million resumes were processed electronically in the United States -- a measure of the extent to which most companies remain firmly rooted in the "atoms" side of the "atoms or bits" equation. Consequently, forward-looking companies that have digitized their recruiting efforts are establishing several powerful advantages over their competition. These advantages include reducing the cost of landing great people; increasing the likelihood that the people they are landing are, in fact, great; and increasing the likelihood that the jobs for which these great people are being hired are right for them. In the process, digitized companies are transferring a great deal of the responsibility and the cost of recruiting to the candidates themselves -- reinventing the whole approach to the talent game.

Think about the old-economy recruiting process most companies use: A company publishes an advertisement in a newspaper or a trade journal. Or maybe it hires an expensive headhunter. Either way, an expensive bureaucracy is needed to handle the blizzard of resumes the ad generates. Inevitably, the majority of the resumes simply don't fit the requirements of the job. Some do, and interviews are scheduled for those candidates. Either the interviews consume the time and effort of a significant number of the company's people -- in which case the encounters are often treated as an unwelcome interruption; or the interviews are handled by an HR person who screens the candidates -- in which case the encounters seem unconnected to the work for which the candidate is being selected. Finally a candidate is hired. And to this point, the process -- just the process! -- has cost the company, on average, between $30,000 and $90,000.