It is the time for creative destruction. Many great companies were born in recessionary times. Microsoft and Oracle in the mid 80'ies, Berkshire Hathaway in the 70'ies and Rockefeller and Carnegie a century before that. Strong established companies will go back to the drawing board the coming months and redesign their business. They should take a good look at their organization model. It is probably outdated for a world of uncertainty.
Ashish Sahni wrote in a comment to my Open Source blog: “Organizations create boundaries. There is no room for folks to choose and show initiative. Most employees just wait for an assignment, innovation is only talked about, the element of fun is missing, risk avoidance is the mantra rather than encouraging bold initiative taking attitude, reusability never even reaches beyond the drawing board. Lastly the most important element of management practice is ignored at all levels ‘Put the right people in right place with empowerment’, which eventually results in an organization with very little collaboration.” Rob van der Kooij commented: “ …The issue is the lack of innovation of enterprise design and culture. Since the industrial revolution nothing whatsoever happened there!”
Both have a point. Most organizational models are still variants of the traditional factory model with strict division of labor, specialization ad absurdum, and rigidly defined hierarchies. Primitive carrots and sticks remain the most important behavioral instruments. Despite the omnipresent, employee-sensitive Human Relations “professionals”, your boss can still fire you and determine your annual bonus. Decision-making is concentrated at the top and slow to percolate down. Markets tend to move faster than the companies serving them.
This makes the Open Source model even more intriguing. How can it be that the opposite of the factory model is so successful? Open Source teams are ad hoc organizations, without strict hierarchies or sticks and no carrots beyond peer recognition. They also tend to move faster than traditional organizations.
A quick analysis of highly innovative companies shows that they have more in common with the Open Source than the Factory model. They realized that knowledge is more valuable than physical assets and that innovation comes from all nooks and crannies of the company. Innovation bellwethers like Google and Apple have fluid organizations with multi-disciplinary teams continually creating new products and services. Google tells its employees to spend 20% of their time on company projects that personally interest them and are outside their current assignment and competency. These organizations stimulate spontaneous brainstorming sessions, rapid prototyping and, similar to Open Source organizations, they have self-governing mechanisms.
Taking a step back, these companies actually reflect pre-industrial social groups: there is a strong sense of community, alignment of individual and group interests and the team (not the leader) provides the pressure for its members to perform. In the factory model control and governance are top down, in the open source model it is bottom up. With increasingly complex and dynamic markets, the top down model is showing major cracks. Just look at what has happened to some of the largest banks in the world. While all of these companies spent hundreds of millions on risk management they failed to manage their exposure and they let trillions evaporate. Bringing responsibility and self governance down into the organization is a good way to get started to fix these organizations.
Wikipedia is a good example of how self-governance works in an open environment. Of course the concept that anyone can contribute, invites all kinds of rubbish. My kids used to run contests to see how long it would take for Wikipedia to spot the nonsense they posted and rectify it. To govern the quality of their site, Wikipedia is using extensive Patrols to watch over a class of pages and take any appropriate actions. They also have a mechanism for dispute resolution, in case of conflicting opinions. “Most patrol actions are performed by individual Wikipedians, but some are performed by bots or other tools that monitor for potential integrity breaches. Patrols focus on various pages, notice boards and feeds. Many of the well-known patrols have hundreds of users, and are directly responsible as a first line against vandalism, or other potential problems” , according to Wikipedia. The mechanisms to control the quality of content have become truly sophisticated and continue to evolve. There is no reason some of these cannot be applied to the modern organization, specifically to financial institutions.
There is indeed wisdom in the crowds; it is how you bring it out and have it rise among the clutter. The collective knowledge of all folks at the front, dealing daily with customers, probably gives you the best insight in what customers need. If you combine this with the ability of your customers to provide direct feedback on your products and services, you probably get a good pulse on quality and competitiveness. This insight, in turn, will help you improve on your products and services with the highest impact, at the lowest cost. When we launched online banking for Citibank in the mid-90s, I suggested that we would allow customers to give direct feedback on the service through a bulletin board (fashionable at that time) and vote on the features they wanted to see in the product. Marketing was against this, as it would put out our dirty laundry for all to see. When we finally did this (on a much smaller scale than I suggested), it turned out that Marketing’s assumptions about what customers want, was completely different from what customers expressed as their priorities.
Self governance and “crowd sourcing” sound like great concepts, but Erik Bouwer wonders to what extent the communities are managed by time/money restrictions, pace setting and required quality levels. It requires the company culture, values and incentive system to drive collaborative behavior. Leaders in these type of organizations act more like coaches than micro managers. They will motivate the teams to set clear objectives and have the team agree on the collaboration rules. Some simple rules like “every team member will stick to his/ her commitments, because others are dependent on it”, will go a long way. The work has to be guided by an architecture framework to parcel out the work and later assemble the final result. Deadlines need to be set and agreed, quality control should be in place and progress monitored. With other words, having a community approach doesn’t negate the need for old-fashioned project or operations management practices. But it allows for a much higher level of engagement and input from all participants than in traditional organization forms. And yes.. the coach in a business environment will need to have the authority to move things along, when necessary. So while sense of community and peer pressure and recognition play the biggest roles, there is nothing like a good stick to be waved at the right time.
Sunday, December 21, 2008
Sunday, December 7, 2008
You Have the Right to Remain Silent
In 1995 a film was released called the Net, starring Sandra Bullock. Her character is the victim of a program that hackers have slipped into the best-selling routers. As these Internet devices are installed at most companies, including banks, air-traffic control centers, telephone companies and the Federal Government, it has the potential to create major havoc. In this, somewhat cheesy, but maybe prescient movie, her identity gets stolen and transferred to someone else, and thus she vanishes from existence.
In 2008 cyber criminals rob computer users of an estimated $100 billion (the total GDP of a country like Peru), according to an estimate by the Organization for Security and Cooperation (OSCE) in Europe. Identities are traded online and the going rate for full personal details is around $120. In Saturday’s NY Times it is reported that a Russian company that sells fake antivirus software that actually takes over a computer pays its distributors as much as $5 million a year. Two of my bank accounts, one in Holland and one in the US, were hit with illicit ATM withdrawals in Odessa, Ukraine and some other towns in Eastern Europe that I didn’t know they existed until they appeared on my monthly statements. The Internet doesn’t take sides nor cares much about location. Hackers may operate from jurisdictions that don’t have the means or appetite to go after cyber criminals. It is a relatively low risk endeavor and pays extraordinarily well, judging from the amounts pulled from my accounts.
So-called “malware” is getting increasingly sophisticated and can operate on a large scale. It hides itself from anti-virus software installed on your PC and propagates through programs that spread out over the Net. Widely used programs like Facebook, have gaping holes when it comes to data protection. Any Facebook applications can pull profile information from every person that installs the program. The bottom-line is that everyone connected to the Net is exposed. This is about every company on the globe and every person with a PC or enhanced phone. Just making sure that you have the proper security software installed will not be sufficient.
You have to be conscious about the use and privacy you want to apply to your information. Start by categorizing your information with the traditional classification: public, confidential and secret. For confidential and secret data, you have to decide with whom you want to share this information. I assume that your credit card number falls in the category “secret”. However, in order to use it you have to share it with a trusted partner. Not everyone you deal with will keep your card data safe. In August it turned out that 40M credit card numbers had been stolen from the systems of reliable retailers, like Sears and Barnes & Noble. One way to address this risk would be to store your credit card number with a single trusted partner, for instance PayPal, and let them handle the payment to the retailer. For online purchases retailers should actually have an SMS based approval to avoid illicit charges being made from copied card numbers.
Passwords are “top secret”. They should authenticate the person who is logging on. Most new notebooks and keyboards now come with fingerprint readers. This technology is mature and cheap and therefore highly recommended to uniquely identify you.
At the other end of the spectrum is the public information. There is probably more of it about you than you had wished. Just go to White Pages and see what you can find on yourself. You can order a full background report on anyone for only $39.95! But these companies will give you the facts about you, not the information that you are not even aware of it existed. Companies like Experian, EquiFax and Fair Isaac are making a living from analyzing your life. They started out with credit scoring, assessing your credit worthiness, but moved way beyond this and are now profiling you to death. Google’s business model is based on very large scale data mining, analyzing the way you click, search and access information on the web, so that they can find the right ad for you at the moment, based on your profile and the current context. Your journeys on the web tell a story. By comparing you with similar users they start predicting your needs and preferences. Scary stuff.
It will be hard to always stay ahead of the hackers, data gleaners and analyzers. Close monitoring may alert to potential breaches. If someone withdraws money from an ATM every two minutes in Astana, Kazakhstan, it will be an indication of fraud. The Bank should block the card and send an SMS to the cardholder to verify that it’s her actually standing at the ATM of the First national Bank of Kazakhstan. Most banks use this type of “Fraud Early Warning” systems for their credit card operations, but haven’t installed it for their ATM and online banking systems. The future lies in this type of data-mining software that looks for extraordinary behavior on your computers or network. Like Fraud Early Warning, the behavioral analysis program notifies the user and inquires whether this is because of a conscious user action or suspicious activity of Bots, Worms, Viruses or other malware trying to pry information from your systems.
Meanwhile, keep your security software up-to-date, monitor your information and think carefully about what you want to put in on-line profiles and which pictures and comments you post online. This information will be used by someone, somewhere. Of course you have the right to remain silent online, but then you are missing out on some of the biggest opportunities of this age.
In 2008 cyber criminals rob computer users of an estimated $100 billion (the total GDP of a country like Peru), according to an estimate by the Organization for Security and Cooperation (OSCE) in Europe. Identities are traded online and the going rate for full personal details is around $120. In Saturday’s NY Times it is reported that a Russian company that sells fake antivirus software that actually takes over a computer pays its distributors as much as $5 million a year. Two of my bank accounts, one in Holland and one in the US, were hit with illicit ATM withdrawals in Odessa, Ukraine and some other towns in Eastern Europe that I didn’t know they existed until they appeared on my monthly statements. The Internet doesn’t take sides nor cares much about location. Hackers may operate from jurisdictions that don’t have the means or appetite to go after cyber criminals. It is a relatively low risk endeavor and pays extraordinarily well, judging from the amounts pulled from my accounts.
So-called “malware” is getting increasingly sophisticated and can operate on a large scale. It hides itself from anti-virus software installed on your PC and propagates through programs that spread out over the Net. Widely used programs like Facebook, have gaping holes when it comes to data protection. Any Facebook applications can pull profile information from every person that installs the program. The bottom-line is that everyone connected to the Net is exposed. This is about every company on the globe and every person with a PC or enhanced phone. Just making sure that you have the proper security software installed will not be sufficient.
You have to be conscious about the use and privacy you want to apply to your information. Start by categorizing your information with the traditional classification: public, confidential and secret. For confidential and secret data, you have to decide with whom you want to share this information. I assume that your credit card number falls in the category “secret”. However, in order to use it you have to share it with a trusted partner. Not everyone you deal with will keep your card data safe. In August it turned out that 40M credit card numbers had been stolen from the systems of reliable retailers, like Sears and Barnes & Noble. One way to address this risk would be to store your credit card number with a single trusted partner, for instance PayPal, and let them handle the payment to the retailer. For online purchases retailers should actually have an SMS based approval to avoid illicit charges being made from copied card numbers.
Passwords are “top secret”. They should authenticate the person who is logging on. Most new notebooks and keyboards now come with fingerprint readers. This technology is mature and cheap and therefore highly recommended to uniquely identify you.
At the other end of the spectrum is the public information. There is probably more of it about you than you had wished. Just go to White Pages and see what you can find on yourself. You can order a full background report on anyone for only $39.95! But these companies will give you the facts about you, not the information that you are not even aware of it existed. Companies like Experian, EquiFax and Fair Isaac are making a living from analyzing your life. They started out with credit scoring, assessing your credit worthiness, but moved way beyond this and are now profiling you to death. Google’s business model is based on very large scale data mining, analyzing the way you click, search and access information on the web, so that they can find the right ad for you at the moment, based on your profile and the current context. Your journeys on the web tell a story. By comparing you with similar users they start predicting your needs and preferences. Scary stuff.
It will be hard to always stay ahead of the hackers, data gleaners and analyzers. Close monitoring may alert to potential breaches. If someone withdraws money from an ATM every two minutes in Astana, Kazakhstan, it will be an indication of fraud. The Bank should block the card and send an SMS to the cardholder to verify that it’s her actually standing at the ATM of the First national Bank of Kazakhstan. Most banks use this type of “Fraud Early Warning” systems for their credit card operations, but haven’t installed it for their ATM and online banking systems. The future lies in this type of data-mining software that looks for extraordinary behavior on your computers or network. Like Fraud Early Warning, the behavioral analysis program notifies the user and inquires whether this is because of a conscious user action or suspicious activity of Bots, Worms, Viruses or other malware trying to pry information from your systems.
Meanwhile, keep your security software up-to-date, monitor your information and think carefully about what you want to put in on-line profiles and which pictures and comments you post online. This information will be used by someone, somewhere. Of course you have the right to remain silent online, but then you are missing out on some of the biggest opportunities of this age.
Tuesday, December 2, 2008
Open Source - Par for the Course
In high school our biology teacher explained to us that in the physical world, open systems adapt and evolve and that diverse gene pools have a higher chance of useful mutations, thereby creating better suited and stronger generations. Open organizations and open source software projects show similar characteristics.
The Open Source movement started with some programmers developing an application for their own use and then making it available freely to a wider audience. The reason for giving it away was that the assumed collective wisdom of a larger group, using and testing it, would improve the quality. Moreover, extensive use would lead to new features being added, thus creating a living and expanding body of software that would grow rapidly in functionality. A coordinator reviewed all contributions and decided on the next iteration of the product, which was then formally released back to the community. The benefits of this accrued to all participants and therefore each of the developers was willing to give up their right of ownership of the source code they developed.
These days, thousands of programmers from different parts of the world participate in large scale Open Source projects, working together on millions of lines of programming code. The LINUX operating system and Apache Web Server, which both have substantial market share, are examples of very robust, complex programs. Apache now runs a stunning 93M websites. Most of the people writing code for those projects have never met each other. Still, the software they produce tends to be of similar or better quality than commercial software. These programs can evolve much faster, because there are more eyes and brains involved to come up with new ideas and to diagnose and resolve problems. Interestingly none of these contributors are being paid for their efforts. For them it is par for the course. Peer recognition and being part of a community of like-minded geeks is more important than financial reward.
The "collective collaboration" model applies not only to software. Wikipedia has 75,000 active contributors, working on 10M articles in 250 languages, that get searched by 685M visitors a year. The quality of Wikipedia is considered to be similar to the venerated Encyclopedia Britannica. The ATLAS particle detector, at CERN in Geneva, will search for new discoveries in the head-on collisions of protons of extraordinarily high energy. This has the potential to rewrite the science of physics. Their website tells us: “ATLAS is a virtual United Nations of 37 countries. International collaboration has been essential to this success. These physicists come from more than 169 universities and laboratories and include 700 students. ATLAS is one of the largest collaborative efforts ever attempted in the physical sciences.” Using Internet collaboration and a highly excited community of academics around the globe, the way science is conducted is changing.
Some companies have seen the opportunity and built their business model around the concept of “crowd sourcing”, a term coined by Jeff Howe of Wired magazine. They essentially created completely open companies that are based on the contributions of their stakeholders and apply what is now called “open innovation”. Two online companies got quite a bit of buzz. The shirt retailer Threadless uses its customer base to design apparel online and they sell it through their catalogue. RYZ allows you to create your own sneakers (try it, it is fun!) and then runs a contest to select the best designs. These companies forge a tightly knit community of followers and a loyal customer base which gives continual feedback on their product lines. MIT professor Eric von Hippel states: “online design is becoming a substitute for in-house research and development while voting takes the place of conventional market research.”
Hybrid models are emerging as well. TopCoder organizes contests for the best software, for which it offers prize money. The quality is judged, not by some panel, but the candidate’s peers. They celebrate the developer of the month. Yes, as you already expected, this month’s winner in the algorithm category is Xao Xaoqing from China. Apple opened up its iPhone platform to allow 3rd party software developers to create applications and sell them through the iPhone Appstore. The Facebook Platform invites anyone to create applications to help them engage Facebook’s 120 M users. However, the Facebook platform may ultimately lose out because it is not as open and therefore not as popular as Google’s OpenSocial project.
How is it possible that in the average company you cannot get people who sit across the hall from each other to work together and that these guys collaborate “naturally”? How come that in your company most big projects are late, over budget or don’t complete at all, while these nerds create the best software?
The first step is to create a community of co-creators, testers and users. A community is non-hierarchical. It is a group of peers who share a common view and enthusiasm to jointly address a problem or create something new. There may be some friendly competition between members to show off skills and capabilities. The second step is to establish the architecture and processes to enable the work breakdown, so that bite-size activities can be parceled out. As the problem gets more complex, this will become more necessary, but also harder to do. Architecture design is usually done by a small tightly knit group, before it’s handed over for “crowd sourcing”. Then you need to ensure that the members keep moving in the targeted direction. Successful communities have a limited set of clear rules that all comply with. Their coordinators are seen as “primus inter pares”, leading among equals. There are published processes for conflict resultion. The last step is to ensure that once the product is out the bugs are removed. In Open Source this is a large part of the attraction of the model. In the words of the open-source guru Eric S. Raymond: “Given enough eyeballs, all bugs are shallow.” Most online companies, now release “beta” versions of their software to expose it as widely as possible but with lower user expectations. They would prefer for their users to locate and help resolve their problems.
There is no reason to assume that these models don’t apply to your organization. Most companies simply haven’t caught up yet with the opportunities of creative communities.
The Open Source movement started with some programmers developing an application for their own use and then making it available freely to a wider audience. The reason for giving it away was that the assumed collective wisdom of a larger group, using and testing it, would improve the quality. Moreover, extensive use would lead to new features being added, thus creating a living and expanding body of software that would grow rapidly in functionality. A coordinator reviewed all contributions and decided on the next iteration of the product, which was then formally released back to the community. The benefits of this accrued to all participants and therefore each of the developers was willing to give up their right of ownership of the source code they developed.
These days, thousands of programmers from different parts of the world participate in large scale Open Source projects, working together on millions of lines of programming code. The LINUX operating system and Apache Web Server, which both have substantial market share, are examples of very robust, complex programs. Apache now runs a stunning 93M websites. Most of the people writing code for those projects have never met each other. Still, the software they produce tends to be of similar or better quality than commercial software. These programs can evolve much faster, because there are more eyes and brains involved to come up with new ideas and to diagnose and resolve problems. Interestingly none of these contributors are being paid for their efforts. For them it is par for the course. Peer recognition and being part of a community of like-minded geeks is more important than financial reward.
The "collective collaboration" model applies not only to software. Wikipedia has 75,000 active contributors, working on 10M articles in 250 languages, that get searched by 685M visitors a year. The quality of Wikipedia is considered to be similar to the venerated Encyclopedia Britannica. The ATLAS particle detector, at CERN in Geneva, will search for new discoveries in the head-on collisions of protons of extraordinarily high energy. This has the potential to rewrite the science of physics. Their website tells us: “ATLAS is a virtual United Nations of 37 countries. International collaboration has been essential to this success. These physicists come from more than 169 universities and laboratories and include 700 students. ATLAS is one of the largest collaborative efforts ever attempted in the physical sciences.” Using Internet collaboration and a highly excited community of academics around the globe, the way science is conducted is changing.
Some companies have seen the opportunity and built their business model around the concept of “crowd sourcing”, a term coined by Jeff Howe of Wired magazine. They essentially created completely open companies that are based on the contributions of their stakeholders and apply what is now called “open innovation”. Two online companies got quite a bit of buzz. The shirt retailer Threadless uses its customer base to design apparel online and they sell it through their catalogue. RYZ allows you to create your own sneakers (try it, it is fun!) and then runs a contest to select the best designs. These companies forge a tightly knit community of followers and a loyal customer base which gives continual feedback on their product lines. MIT professor Eric von Hippel states: “online design is becoming a substitute for in-house research and development while voting takes the place of conventional market research.”
Hybrid models are emerging as well. TopCoder organizes contests for the best software, for which it offers prize money. The quality is judged, not by some panel, but the candidate’s peers. They celebrate the developer of the month. Yes, as you already expected, this month’s winner in the algorithm category is Xao Xaoqing from China. Apple opened up its iPhone platform to allow 3rd party software developers to create applications and sell them through the iPhone Appstore. The Facebook Platform invites anyone to create applications to help them engage Facebook’s 120 M users. However, the Facebook platform may ultimately lose out because it is not as open and therefore not as popular as Google’s OpenSocial project.
How is it possible that in the average company you cannot get people who sit across the hall from each other to work together and that these guys collaborate “naturally”? How come that in your company most big projects are late, over budget or don’t complete at all, while these nerds create the best software?
The first step is to create a community of co-creators, testers and users. A community is non-hierarchical. It is a group of peers who share a common view and enthusiasm to jointly address a problem or create something new. There may be some friendly competition between members to show off skills and capabilities. The second step is to establish the architecture and processes to enable the work breakdown, so that bite-size activities can be parceled out. As the problem gets more complex, this will become more necessary, but also harder to do. Architecture design is usually done by a small tightly knit group, before it’s handed over for “crowd sourcing”. Then you need to ensure that the members keep moving in the targeted direction. Successful communities have a limited set of clear rules that all comply with. Their coordinators are seen as “primus inter pares”, leading among equals. There are published processes for conflict resultion. The last step is to ensure that once the product is out the bugs are removed. In Open Source this is a large part of the attraction of the model. In the words of the open-source guru Eric S. Raymond: “Given enough eyeballs, all bugs are shallow.” Most online companies, now release “beta” versions of their software to expose it as widely as possible but with lower user expectations. They would prefer for their users to locate and help resolve their problems.
There is no reason to assume that these models don’t apply to your organization. Most companies simply haven’t caught up yet with the opportunities of creative communities.
Tuesday, November 25, 2008
The Net Gen comes to Office
When I grew up in the Netherlands in the sixties the world was small and organized. Life carried on along the lines of the so called “columns”, the confessional political groups. The Catholics had their own schools, universities, and radio and television stations. So did the Protestants, Liberals and Socialists. You were supposed to think, communicate and behave within the confines of the column. Holland had two television channels, later expanded to three with tightly regulated content. We were all synchronized: watching the same program (a horrible quiz show) on Friday night. The coverage was primarily local. There were rigid behavioral forms. Phone calls were kept restricted to avoid the astronomical charges. Our world was simple, formal and manageable.
Today we have a couple of thousand TV channels with the additional option to take an Extreme Sports, Latvian or Korean package. I can read the Dutch newspaper online in the morning and get the New York Times on my phone on the way to work. This has dramatically increased the exposure to information, available from a myriad of broadcasting sources, at any time of the day. But broadcasting is one-way traffic. Just consuming information is not nearly as interesting and engaging as interacting. Nowadays most kids define themselves online and express their thoughts within their social network or the bigger world. They exchange blogs, comments, videos and pictures with friends around the globe. They communicate ad hoc and continuously: if you’re online we chat, if not I’ll post a message. They upload as much as they download.
My 18-year old daughter Kim lives in London. She has 700-odd friends, who communicate with her on a daily basis, from LA to NY to Amsterdam and Bucharest. They write on her Facebook wall, they text (yes this is a verb) or Skype (also a verb). Marlene and I see her every day, on video, at $0 cost. My son, Aki, is friends on Facebook with Akina Tashiro, a girl from Japan, who happens to have his name embedded in hers. Recently he posted a brief video that he made while on vacation and within days he had hundreds of people watching it. These days he works on projects with his class mates by messaging his contributions on Facebook. My kids are just like all the other kids that age (and social class), whether they are in Brooklyn, NY; Breukelen, Holland or Brasilia, Brazil.
Don Tapscott just released a great book, “Grown Up Digital”, about this generation, the first one to grow up digitally. He calls them the Net Generation, or Net Geners. According to Tapscott “They are smarter, quicker and more tolerant of diversity than their predecessors. These empowered young people are beginning to transform every institution of modern life. They care strongly about justice, and are actively trying to improve society—witness their role in the recent Obama campaign, in which they organized themselves through the internet and mobile phones and campaigned on YouTube.”
The Net Generation is now joining the labor market. And what they find at work does not fit their world view. For starters, most companies block social networking sites because of "productivity" and security concerns. Only a few forward thinking companies are effectively using Web 2.0 technologies to their advantage and promote communication, collaboration and knowledge sharing. Net Geners are more interested in the opinions of their peers than those of their managers. For instance, when they buy a PC online, they don’t care what the experts say, they base their decision on the reports of people like them. They have grown up to collaborate, not to be directed in some formal structure with rigid hierarchies. They like to participate in the design and evaluation of products; they want to be prosumers, not just consumers.
Most white collar jobs these days require more and more processing of information from the world outside the walls of the company. Yet the structure, culture and systems of most companies don’t promote this. Net Geners like to work in an open environment. For them the borders between work and play, personal and public life have blurred. In many ways they are better suited to deal with highly dynamic, global markets than professionals from our generation.
You can ignore this at your own peril. John McCain did, while Barack Obama cleverly tapped into to the huge potential of NetGeners.
Today we have a couple of thousand TV channels with the additional option to take an Extreme Sports, Latvian or Korean package. I can read the Dutch newspaper online in the morning and get the New York Times on my phone on the way to work. This has dramatically increased the exposure to information, available from a myriad of broadcasting sources, at any time of the day. But broadcasting is one-way traffic. Just consuming information is not nearly as interesting and engaging as interacting. Nowadays most kids define themselves online and express their thoughts within their social network or the bigger world. They exchange blogs, comments, videos and pictures with friends around the globe. They communicate ad hoc and continuously: if you’re online we chat, if not I’ll post a message. They upload as much as they download.
My 18-year old daughter Kim lives in London. She has 700-odd friends, who communicate with her on a daily basis, from LA to NY to Amsterdam and Bucharest. They write on her Facebook wall, they text (yes this is a verb) or Skype (also a verb). Marlene and I see her every day, on video, at $0 cost. My son, Aki, is friends on Facebook with Akina Tashiro, a girl from Japan, who happens to have his name embedded in hers. Recently he posted a brief video that he made while on vacation and within days he had hundreds of people watching it. These days he works on projects with his class mates by messaging his contributions on Facebook. My kids are just like all the other kids that age (and social class), whether they are in Brooklyn, NY; Breukelen, Holland or Brasilia, Brazil.
Don Tapscott just released a great book, “Grown Up Digital”, about this generation, the first one to grow up digitally. He calls them the Net Generation, or Net Geners. According to Tapscott “They are smarter, quicker and more tolerant of diversity than their predecessors. These empowered young people are beginning to transform every institution of modern life. They care strongly about justice, and are actively trying to improve society—witness their role in the recent Obama campaign, in which they organized themselves through the internet and mobile phones and campaigned on YouTube.”
The Net Generation is now joining the labor market. And what they find at work does not fit their world view. For starters, most companies block social networking sites because of "productivity" and security concerns. Only a few forward thinking companies are effectively using Web 2.0 technologies to their advantage and promote communication, collaboration and knowledge sharing. Net Geners are more interested in the opinions of their peers than those of their managers. For instance, when they buy a PC online, they don’t care what the experts say, they base their decision on the reports of people like them. They have grown up to collaborate, not to be directed in some formal structure with rigid hierarchies. They like to participate in the design and evaluation of products; they want to be prosumers, not just consumers.
Most white collar jobs these days require more and more processing of information from the world outside the walls of the company. Yet the structure, culture and systems of most companies don’t promote this. Net Geners like to work in an open environment. For them the borders between work and play, personal and public life have blurred. In many ways they are better suited to deal with highly dynamic, global markets than professionals from our generation.
You can ignore this at your own peril. John McCain did, while Barack Obama cleverly tapped into to the huge potential of NetGeners.
Sunday, November 23, 2008
Innovate and Perish
Shares in Citigroup dropped to $3.77 last Friday. Down from $50 a year back.
When I joined Citibank in the early nineties it was the most successful bank in the world. It had built the first truly global retail banking brand. The majority of their profits came from their successful franchise in emerging markets. They leveraged technology better than any other financial institution at the time. They could process all transactions 24x7 in real time, while their competitors still had to close for end of day processing. Their ATMs were years ahead with astounding ergonomics. The electronic banking services were innovative in its simplicity, just like the iPod or Google’s home page. New services were designed to make it easy to move money anywhere around the world. Innovation was focused on helping people to manage their money as efficiently as possible. The culture of the bank was global. The CEO (John Reed) had grown up in Argentina, one of the vice chairmen was from Holland (Onno Ruding), the other from India (Victor Menezes). Having an accent was actually an advantage. This was one of the first financial services companies with their back office in India, credit card operations in Singapore and headquarters in NY.
In the last years Citigroup stopped expanding their branches in the US and being innovative in their services to retail clients. Like their peers, they put the best brains on the creation of new financial services instruments. They based these products on sophisticated models, so complex that they defied human judgment of their inner workings. The intent was to spread risk; instead it was hidden in the bowels of an intricate web of derivatives, credit swaps and other esoteric instruments. While the regular, boring business of deposit taking is subject to regulation and insurances, these markets evolved unchecked and rapidly ran away from the models. This was hurried on by greed of the players, from consumers deluded into easy money for the ever-increasing value of the homes to the twenty-somethings getting six-figure bonuses for trading billions of dollars a day in asset backed securities. In this case the happy trinity of innovation, deregulation and globalization turned out to be the source of collapse.
“Innovation can be a dangerous game,” says Andrew W. Lo, an economist and professor of finance at the Sloan School of Management of the Massachusetts Institute of Technology. “The technology got ahead of our ability to use it in responsible ways.” When Enron and WorldCom got really innovative with their accounting they hastened the demise of these companies and with it the public trust in corporate America. Nassim Talib, a former trader, presciently wrote a couple of years back: “Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans (unpredictable events [JT]). ..Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard.”
This doesn’t mean that globalization, open markets and innovation should be looked at with disdain. On the contrary, they remain the key ingredients for economic growth. Financial markets require a guided hand. Innovation should be focused on the creation of new products and services for the increased well being of the consumer. People, ideas and products should be able to flow effortless across borders.
When I joined Citibank in the early nineties it was the most successful bank in the world. It had built the first truly global retail banking brand. The majority of their profits came from their successful franchise in emerging markets. They leveraged technology better than any other financial institution at the time. They could process all transactions 24x7 in real time, while their competitors still had to close for end of day processing. Their ATMs were years ahead with astounding ergonomics. The electronic banking services were innovative in its simplicity, just like the iPod or Google’s home page. New services were designed to make it easy to move money anywhere around the world. Innovation was focused on helping people to manage their money as efficiently as possible. The culture of the bank was global. The CEO (John Reed) had grown up in Argentina, one of the vice chairmen was from Holland (Onno Ruding), the other from India (Victor Menezes). Having an accent was actually an advantage. This was one of the first financial services companies with their back office in India, credit card operations in Singapore and headquarters in NY.
In the last years Citigroup stopped expanding their branches in the US and being innovative in their services to retail clients. Like their peers, they put the best brains on the creation of new financial services instruments. They based these products on sophisticated models, so complex that they defied human judgment of their inner workings. The intent was to spread risk; instead it was hidden in the bowels of an intricate web of derivatives, credit swaps and other esoteric instruments. While the regular, boring business of deposit taking is subject to regulation and insurances, these markets evolved unchecked and rapidly ran away from the models. This was hurried on by greed of the players, from consumers deluded into easy money for the ever-increasing value of the homes to the twenty-somethings getting six-figure bonuses for trading billions of dollars a day in asset backed securities. In this case the happy trinity of innovation, deregulation and globalization turned out to be the source of collapse.
“Innovation can be a dangerous game,” says Andrew W. Lo, an economist and professor of finance at the Sloan School of Management of the Massachusetts Institute of Technology. “The technology got ahead of our ability to use it in responsible ways.” When Enron and WorldCom got really innovative with their accounting they hastened the demise of these companies and with it the public trust in corporate America. Nassim Talib, a former trader, presciently wrote a couple of years back: “Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans (unpredictable events [JT]). ..Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard.”
This doesn’t mean that globalization, open markets and innovation should be looked at with disdain. On the contrary, they remain the key ingredients for economic growth. Financial markets require a guided hand. Innovation should be focused on the creation of new products and services for the increased well being of the consumer. People, ideas and products should be able to flow effortless across borders.
Friday, November 21, 2008
Driving into Oblivion
Ford is a text book example of innovation: it pioneered standardized vehicle design and low cost mass production. Unfortunately this was 80 years ago. These days Ford and its Detroit brethren, GM and Chrysler, are a pathetic bunch. Lack of innovation, misguided trust that gas-guzzling SUVs would pay the bills, investment in lobbying rather than fuel-efficient solutions and an overburdened healthcare and pension burden brought these companies down. This is not sudden death. Detroit has been in steady decline for the last couple of years, even before oil hit a high of $150 a barrel and the financial markets froze.
Thomas Friedman gives the following advice: “Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol. Lastly, somebody ought to call Steve Jobs, who doesn’t need to be bribed to do innovation, and ask him if he’d like to do national service and run a car company for a year. I’d bet it wouldn’t take him much longer than that to come up with the G.M. iCar.”
In other parts of the world there are car companies that have made innovation a core value. The obvious one is Toyota. Since the eighties, Toyota and Honda have rapidly moved up the value chain and manufactured ever increasingly sophisticated and targeted products. The Toyota Corolla remains one of the world's most popular cars and its Lexus brand stands out among the luxury makes. When the Japanese car companies first competed with the Americans the focus was on low cost, high quality cars. They started innovating feverishly. Toyota’s operational innovations are the stuff of legends and concepts like Kaizen and Just-in-time delivery have made inroads into the larger manufacturing world. The next level of innovation was the introduction of “architected cars” with modular engineering designs and componentized production, allowing the company to create families of car models that fit closely with the needs of different market segments and quickly adjust to changing customer requirements. Their cars were customized to the pocketbooks and road systems of the countries they sold into. Finally, new business models focused on “co-creating”, close cooperation with a limited number of suppliers, who are involved from the early stages of design to production. Toyota was the first to understand that hybrid technology was both an important market statement and a major step towards cleaner, lower CO2 cars.
Last year Tata of India introduced the Nano. At the same time they acquired the luxury Jaguar and Rover brands. The Economist says “At $2,500 the Nano is not just very cheap; to be so cheap it also has to be very clever.” The main effort went into design. Out-of-the-box thinking and a highly iterative process finally delivered what is probably the most modular car in the world. Each of these modules can easily be assembled from kits, which lowers the cost of distribution and maintenance. Like Toyota, Tata worked closely with its supplier and urged them to follow the same “Gandhian”, frugal engineering techniques. You don’t need to be a clairvoyant to predict that Tata will be the next Toyota.
Unless Detroit starts focusing on fuel efficient cars, modular designs and make the move from being a car company to a transportation company, we are wasting our tax dollars. Pouring more fuel in the tank is like putting fuel on the fire. The fact that GM and Ford's CEOs used their private jets to fly to Washington to beg Congress for $25Bn in loans tells you enough about the mindset of the leadership of these companies. Let Chapter 11 do the job, fire the senior management and restructure the car companies to innovative, global companies, following the examples of Toyota, Honda and maybe Tata.
Thomas Friedman gives the following advice: “Any car company that gets taxpayer money must demonstrate a plan for transforming every vehicle in its fleet to a hybrid-electric engine with flex-fuel capability, so its entire fleet can also run on next generation cellulosic ethanol. Lastly, somebody ought to call Steve Jobs, who doesn’t need to be bribed to do innovation, and ask him if he’d like to do national service and run a car company for a year. I’d bet it wouldn’t take him much longer than that to come up with the G.M. iCar.”
In other parts of the world there are car companies that have made innovation a core value. The obvious one is Toyota. Since the eighties, Toyota and Honda have rapidly moved up the value chain and manufactured ever increasingly sophisticated and targeted products. The Toyota Corolla remains one of the world's most popular cars and its Lexus brand stands out among the luxury makes. When the Japanese car companies first competed with the Americans the focus was on low cost, high quality cars. They started innovating feverishly. Toyota’s operational innovations are the stuff of legends and concepts like Kaizen and Just-in-time delivery have made inroads into the larger manufacturing world. The next level of innovation was the introduction of “architected cars” with modular engineering designs and componentized production, allowing the company to create families of car models that fit closely with the needs of different market segments and quickly adjust to changing customer requirements. Their cars were customized to the pocketbooks and road systems of the countries they sold into. Finally, new business models focused on “co-creating”, close cooperation with a limited number of suppliers, who are involved from the early stages of design to production. Toyota was the first to understand that hybrid technology was both an important market statement and a major step towards cleaner, lower CO2 cars.
Last year Tata of India introduced the Nano. At the same time they acquired the luxury Jaguar and Rover brands. The Economist says “At $2,500 the Nano is not just very cheap; to be so cheap it also has to be very clever.” The main effort went into design. Out-of-the-box thinking and a highly iterative process finally delivered what is probably the most modular car in the world. Each of these modules can easily be assembled from kits, which lowers the cost of distribution and maintenance. Like Toyota, Tata worked closely with its supplier and urged them to follow the same “Gandhian”, frugal engineering techniques. You don’t need to be a clairvoyant to predict that Tata will be the next Toyota.
Unless Detroit starts focusing on fuel efficient cars, modular designs and make the move from being a car company to a transportation company, we are wasting our tax dollars. Pouring more fuel in the tank is like putting fuel on the fire. The fact that GM and Ford's CEOs used their private jets to fly to Washington to beg Congress for $25Bn in loans tells you enough about the mindset of the leadership of these companies. Let Chapter 11 do the job, fire the senior management and restructure the car companies to innovative, global companies, following the examples of Toyota, Honda and maybe Tata.
Wednesday, November 19, 2008
The Antiquated IT Shop
Markets are global, highly complex and dynamic. Large, well known companies can disappear or fall down quickly because they have lost touch with the markets, stopped innovating or just don’t react fast enough. Recent examples are Lehman Brothers, a generally well regarded investment bank, or AIG, the world’s largest insurer. Chrysler, GM and Ford seem to be in final decline. Chrysler consistently makes the top of the list of the worst performing cars. American and United Airlines barely keep afloat and Sun Microsystems just laid off 18% of its workforce.
Innovative companies, like Apple in Silicon Valley or Bharti in India, have highly flexible business models, nurturing ecosystems with supply chains and partnerships around the globe. They forge strong, transparent relationships with organizations and individuals outside the walls of the enterprise. Those companies understand that both their customers and suppliers expect real time information, interactions and transactions, 24 hours a day.
Being in touch with your clients. Closely monitoring competition. Strengthening links with your supply chain partners. Establishing a sense of belonging for your employees. Having real-time insight in your operations. Mining the knowledge that exists scattered around the organization. Fostering innovation. It seems that all of this is critical to run a 21st century company. Modern technology and, more importantly, modern technology management can play a key role in addressing these needs.
Actually that is not the way Information Technology is managed is at the majority of the companies. Around 80% of the IT budget is spent on just keeping the shop running. Only 20% is spent on the creation of new business functionality. Of this 20%, the majority goes to operational and administrative systems and very little is allocated to integration with clients and suppliers, knowledge management, collaboration and interaction. And these are the key success areas for a dynamic company.
IT is rapidly becoming a millstone, making adaptation to a changing environment difficult or sometimes impossible. The vast majority of the systems are gobbled together. Multiple applications support bits and pieces of the business processes. Whenever a new product needs to be introduced, the IT organization takes forever to implement the necessary changes. Let alone when a new market is entered or a company acquired. Projects are late, over budget and generally disappoint. Too many changes, too many dependencies and too much custom development are necessary for simple changes in a business process. The replacement of custom applications with large ERP packages such as SAP and Oracle hasn’t delivered any relief. These too are heavy and hard to change. As they say "implementing SAP is like pouring concrete in the foundation of your company".
Most IT organizations are poorly equipped to deal with the challenges of an agile, global company. Many CIOs still believe that they should execute everything in-house. The fact is that the majority of the IT organizations don’t have the business expertise to "design for agility". They lack the insight in major new technologies such as cloud computing, business process management and business intelligence. They are not equipped to run their systems efficiently in a secure way, 24x7 on a scalable, high bandwidth infrastructure.
IT organizations should separate operating existing systems from development of new ones. Running IT systems is an operations job with focus on flawless execution. Should you run your own IT infrastructure? Most companies don’t have the scale and expertise to do this effectively and are better off to outsource to companies like HP or IBM. Even new players like Amazon and Google are now offering low cost, high availability computing power in secure environments.
The design and implementation of new systems has to be based on deep understanding of the business processes. Expertise is required in assembly and integration rather than from scratch development. New solutions should leverage cloud computing, using services like Salesforce, Oracle-on Demand, Google Apps and Amazon AWS.
The IT organization should open up. Get close to the business. Step up collaboration with customers and partners. Invite the experts in. Establish strategic alliances to get access to deep industry and technology knowledge and tap into global delivery for flexible, low cost delivery.
Innovative companies, like Apple in Silicon Valley or Bharti in India, have highly flexible business models, nurturing ecosystems with supply chains and partnerships around the globe. They forge strong, transparent relationships with organizations and individuals outside the walls of the enterprise. Those companies understand that both their customers and suppliers expect real time information, interactions and transactions, 24 hours a day.
Being in touch with your clients. Closely monitoring competition. Strengthening links with your supply chain partners. Establishing a sense of belonging for your employees. Having real-time insight in your operations. Mining the knowledge that exists scattered around the organization. Fostering innovation. It seems that all of this is critical to run a 21st century company. Modern technology and, more importantly, modern technology management can play a key role in addressing these needs.
Actually that is not the way Information Technology is managed is at the majority of the companies. Around 80% of the IT budget is spent on just keeping the shop running. Only 20% is spent on the creation of new business functionality. Of this 20%, the majority goes to operational and administrative systems and very little is allocated to integration with clients and suppliers, knowledge management, collaboration and interaction. And these are the key success areas for a dynamic company.
IT is rapidly becoming a millstone, making adaptation to a changing environment difficult or sometimes impossible. The vast majority of the systems are gobbled together. Multiple applications support bits and pieces of the business processes. Whenever a new product needs to be introduced, the IT organization takes forever to implement the necessary changes. Let alone when a new market is entered or a company acquired. Projects are late, over budget and generally disappoint. Too many changes, too many dependencies and too much custom development are necessary for simple changes in a business process. The replacement of custom applications with large ERP packages such as SAP and Oracle hasn’t delivered any relief. These too are heavy and hard to change. As they say "implementing SAP is like pouring concrete in the foundation of your company".
Most IT organizations are poorly equipped to deal with the challenges of an agile, global company. Many CIOs still believe that they should execute everything in-house. The fact is that the majority of the IT organizations don’t have the business expertise to "design for agility". They lack the insight in major new technologies such as cloud computing, business process management and business intelligence. They are not equipped to run their systems efficiently in a secure way, 24x7 on a scalable, high bandwidth infrastructure.
IT organizations should separate operating existing systems from development of new ones. Running IT systems is an operations job with focus on flawless execution. Should you run your own IT infrastructure? Most companies don’t have the scale and expertise to do this effectively and are better off to outsource to companies like HP or IBM. Even new players like Amazon and Google are now offering low cost, high availability computing power in secure environments.
The design and implementation of new systems has to be based on deep understanding of the business processes. Expertise is required in assembly and integration rather than from scratch development. New solutions should leverage cloud computing, using services like Salesforce, Oracle-on Demand, Google Apps and Amazon AWS.
The IT organization should open up. Get close to the business. Step up collaboration with customers and partners. Invite the experts in. Establish strategic alliances to get access to deep industry and technology knowledge and tap into global delivery for flexible, low cost delivery.
Tuesday, November 18, 2008
The Hi Tech President
The Obama campaign has been using technology extensively to reach out and engage (potential) supporters. Check out http://my.barackobama.com/. The website has the same look and feel as highly popular social networking sites like FaceBook, LinkedIn and Plaxo. It is a virtual place to communicate and collaborate. User and usage data are collected and databases are sliced and diced to obtain actionable information about voters, their preferences and propensities. It not only gives the president-elect good insight in his supporter base, it provides him with a tool to engage and seek input from a very large numbers of active participants. Obama can directly interact with millions. This will change the way politics and government will be conducted in the coming years. In many ways we will see the opposite of the secrecy and exclusive style of the Bush administration. Obama will create transparency and a highly inclusive approach to solving the tremendous problems that the US and by extension the world is facing.
An interesting article in the Herald Tribune puts it as follows: “As a result, when he arrives at the White House, Obama will have not just a political base, but a database, millions of names of supporters who can be engaged almost instantly. And there's every reason to believe that he will use the network not just to campaign, but to govern…. More profoundly, while many people think that Obama is a gift to the Democratic Party, he could actually hasten its demise. Political parties supply brand, ground troops, money and relationships, all things that Obama already owns.”
Under the banner “Web 2.0” a host of new capabilities has come to the Internet. Web 2.0 is about on-line communities and web-based collaboration. The idea of the online community is to bring people together, exchange ideas, create excitement and prompt action, independent of their location or time of the day. The most important aspect is the multi-directional exchange of information, either through real-time interaction or posting of messages and information. While web 1.0 was primarily broadcasting, web 2.0 is as much about as uploading as downloading, more “engaging” than “entertaining”. The tech world is full of jargon and we have been deluded before in the dot.com era, but look closer and you see the ground swell that will change politics, entertainment and even the way we interact with friends and family.
An interesting article in the Herald Tribune puts it as follows: “As a result, when he arrives at the White House, Obama will have not just a political base, but a database, millions of names of supporters who can be engaged almost instantly. And there's every reason to believe that he will use the network not just to campaign, but to govern…. More profoundly, while many people think that Obama is a gift to the Democratic Party, he could actually hasten its demise. Political parties supply brand, ground troops, money and relationships, all things that Obama already owns.”
Under the banner “Web 2.0” a host of new capabilities has come to the Internet. Web 2.0 is about on-line communities and web-based collaboration. The idea of the online community is to bring people together, exchange ideas, create excitement and prompt action, independent of their location or time of the day. The most important aspect is the multi-directional exchange of information, either through real-time interaction or posting of messages and information. While web 1.0 was primarily broadcasting, web 2.0 is as much about as uploading as downloading, more “engaging” than “entertaining”. The tech world is full of jargon and we have been deluded before in the dot.com era, but look closer and you see the ground swell that will change politics, entertainment and even the way we interact with friends and family.
Friday, November 14, 2008
The Global Company
Some companies have understood what globalization can mean to their business. Philips is a well respected brand in India. They have gone through the 3 phases of globalization:
1. Representative office to sell western products
2. Local factories to manufacture cheaply
3. A true global delivery system, that leverages the local resources and creates products that meet the market needs of many, not just the happy few.
They have leveraged their world famous design capabilities to come up with products that improve the lives of the poor: a wood burning oven that makes cooking safe, their SMILE Sustainable Model In Lighting Everywhere lighting initiative for people with limited electricity and very low cost water purifiers. This is not just an exercise in philanthropy; it is a healthy $4Bn business. Philips runs factories, a large R&D lab in India as well as their global finance and accounting back-office. Many Indians think that Philips is actually an Indian company. Of course moving their HQ from Eindhoven to Amsterdam was a big move, but the company should make the next big move and become truly global, maybe have their other HQ in Beijing or Delhi. Running a global business is not just for the big guys.
Take for instance the Dutch Hospital Group, Maasstad Ziekenhuis. They couldn’t find the accountants to manage their financial administration and turned to our company to help them out. They have saved 30% of their administration cost. They now ramp up and down their administration staff as the needs arise. At the end of the month when the books have to be closed the team can work in shifts around the clock. It will not take a big leap for them to collaborate with an Indian hospital group to have records maintained and X-rays examined or get second opinions on treatments by doctors in India overnight. An Indian doctor may even perform remote surgery. Or if that is too farfetched, the patient can travel to Asia to have the treatment delivered in one of the world class hospitals. My son was born at Bumrungrad hospital in Bangkok. He was the only blond baby in a room of 40 dark skinned babies. The doctor who delivered him was educated in Germany. My wife had a huge private room with a seating area and a kitchenette, as well as 24 hour private nurse. This was in 1991 and we were about the first westerners there. Last year this hospital treated 400,000 patients from 150 countries, fully covered by their insurance!
The other day I talked to the CEO of Princess, Aad Ouburg, a medium sized kitchen appliances company. He told me the company has headquarters both in Amsterdam and Shanghai. The products are designed and marketed from Holland, but manufactured in China. The company could have never grown without this dual citizenship.
The advantages of global sourcing are obvious:
- Cost advantages: Executing the work overseas should give you cost savings of over 30+% compared to local alternatives.
- Flexibility: With markets becoming more dynamic and events like mergers and acquisitions leading to sudden spikes in resource needs, working with and offshore partner can help you with rapid ramping up and down of project teams. A change in demand (for instance when a recession looms) allows you to quickly scale down without incurring the cost.
- Response time improvements: Working in shifts across the globe can collapse the time to complete an urgent project by as much as 30%.
- Skill availability: In many of the professions, like accounting, sciences, ITC or healthcare, the required talent may not be available in the local market.
And now increasingly innovation capabilities: most Hi tech companies have R&D labs in India and China. With China investing $600Bn to boost its economy, there will be new opportunities in this market. The Economist: "When Deng Xiaoping set China on the road of economic reforms in 1978, Western economists argued that 'Only capitalism can save China.' Exactly 30 years later, some pundits are claiming that 'Only China can save capitalism.'"
1. Representative office to sell western products
2. Local factories to manufacture cheaply
3. A true global delivery system, that leverages the local resources and creates products that meet the market needs of many, not just the happy few.
They have leveraged their world famous design capabilities to come up with products that improve the lives of the poor: a wood burning oven that makes cooking safe, their SMILE Sustainable Model In Lighting Everywhere lighting initiative for people with limited electricity and very low cost water purifiers. This is not just an exercise in philanthropy; it is a healthy $4Bn business. Philips runs factories, a large R&D lab in India as well as their global finance and accounting back-office. Many Indians think that Philips is actually an Indian company. Of course moving their HQ from Eindhoven to Amsterdam was a big move, but the company should make the next big move and become truly global, maybe have their other HQ in Beijing or Delhi. Running a global business is not just for the big guys.
Take for instance the Dutch Hospital Group, Maasstad Ziekenhuis. They couldn’t find the accountants to manage their financial administration and turned to our company to help them out. They have saved 30% of their administration cost. They now ramp up and down their administration staff as the needs arise. At the end of the month when the books have to be closed the team can work in shifts around the clock. It will not take a big leap for them to collaborate with an Indian hospital group to have records maintained and X-rays examined or get second opinions on treatments by doctors in India overnight. An Indian doctor may even perform remote surgery. Or if that is too farfetched, the patient can travel to Asia to have the treatment delivered in one of the world class hospitals. My son was born at Bumrungrad hospital in Bangkok. He was the only blond baby in a room of 40 dark skinned babies. The doctor who delivered him was educated in Germany. My wife had a huge private room with a seating area and a kitchenette, as well as 24 hour private nurse. This was in 1991 and we were about the first westerners there. Last year this hospital treated 400,000 patients from 150 countries, fully covered by their insurance!
The other day I talked to the CEO of Princess, Aad Ouburg, a medium sized kitchen appliances company. He told me the company has headquarters both in Amsterdam and Shanghai. The products are designed and marketed from Holland, but manufactured in China. The company could have never grown without this dual citizenship.
The advantages of global sourcing are obvious:
- Cost advantages: Executing the work overseas should give you cost savings of over 30+% compared to local alternatives.
- Flexibility: With markets becoming more dynamic and events like mergers and acquisitions leading to sudden spikes in resource needs, working with and offshore partner can help you with rapid ramping up and down of project teams. A change in demand (for instance when a recession looms) allows you to quickly scale down without incurring the cost.
- Response time improvements: Working in shifts across the globe can collapse the time to complete an urgent project by as much as 30%.
- Skill availability: In many of the professions, like accounting, sciences, ITC or healthcare, the required talent may not be available in the local market.
And now increasingly innovation capabilities: most Hi tech companies have R&D labs in India and China. With China investing $600Bn to boost its economy, there will be new opportunities in this market. The Economist: "When Deng Xiaoping set China on the road of economic reforms in 1978, Western economists argued that 'Only capitalism can save China.' Exactly 30 years later, some pundits are claiming that 'Only China can save capitalism.'"
Wednesday, November 12, 2008
The Global President
Globalization…In Rio they party on the beaches. Obama, Japan: the namesake town celebrates with song and dance. In Sydney jubilant crowds roam the streets. The first global president has been elected. He combines black and white, Christian and Muslim, the US and Africa and Asia.
Globalization is the result of an increasingly connected world. None of the major issues facing us today, from a financial meltdown to global warming, can be solved by a single nation. No company can bring its products to the market without components obtained abroad. Markets are intertwined, operate 24 hours a day and are highly dynamic. A ripple in one place can become a tsunami in another.
The last months proved again that there is no such thing as a local market. At first Europe thought they could escape the impact of the bottom falling out of the financial markets. Shortly afterwards governments around Europe had to bail out one bank after another. Who would expect that a little island on the edge of the world, called Iceland, would get so affected by frozen markets!!! So get used to it: your world has become bigger, more complex and more interconnected than ever. And this will only accelerate…..
The Bush Doctrine has crashed and burned and the Obama Doctrine of engagement and collaboration has risen out of its ashes, reactivating the American Dream and establishing the USA again as an open place where talent from the whole world can come together, study, innovate and build companies. When my Indian business partner Jerry Rao and I started our company, MphasiS, 50% of the new companies in Silicon Valley were started by people who were born outside the US. After 9/11 it has become harder for foreign talent to study and work in the US. This led to a reverse brain drain back to India and China where the opportunities suddenly looked brighter. With an Obama administration it is expected that the US will again become engaging and innovative by investing in the next generation of ITC, healthcare, biotechnology and green energy innovation.
In 2006 and 2007, 124 countries grew their economies at over 4 percent a year, while countries like Holland grew barely 2%. China and India have dramatically changed the global landscape. China has moved in a mere 20 years from a backwater to a manufacturing powerhouse. You have seen the Olympics. This is only a glimpse of things to come. A country of 1.3B, growing consistently at 10% a year. This is mindboggling. Even India, a country many people still consider to be an oddly curious, overpopulated place full of beggars, snake charmers and gurus, is charging ahead at 8% CAGR. Its companies and managers are among the best in the world. India and China educate the majority of scientists and engineers in the world. There is a sense of self confidence and ambition. The largest infrastructure projects are in these countries. For instance, mobile networks are more sophisticated than those in the West. A cell phone call from Cochin is clearer than one from Connecticut.
In the mean time we are trying to cling on to what we have. We hope that innovation will still come from the western world. Don’t hold your breath; if you’re not educating the people to carry out the R&D you’re not going to innovate. Globalization means new players (BRIC: Brazil, Russia, India, China) on both the economic and geopolitical fronts. Those who have the economic power will have the political power. The US will be busy the coming years to get out of the hole dug by the highly incompetent Bush administration. To quote Fareed Zakaria: we are entering the post American era. Hopefully the USA will find its bearings again under Obama's leadership.
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