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.
Tuesday, November 25, 2008
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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