Recommended Reading

A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance

Two outstanding books have contributed significantly to my continuing professional education this last week, to the extent that I want to share them with you, and suggest that you too may benefit from reading them.

The first is titled The Services Shift: Seizing the Ultimate Offshore Opportunity, by Robert E. Kennedy with Ajay Sharma. This book could be retitled ‘Everything you always wanted to know about offshoring but didn’t know who to ask’ because, once you read it, you will have a pretty good understanding of both what is already happening, and perhaps more importantly, what will likely happen next.  If you are a corporate decision maker considering an offshore service solution, or a public policy maker struggling with the issue of balancing the demands for better cost efficiency in government with a public distaste for shipping American jobs offshore, you will gain a great deal of very useful insight from The Services Shift.  If you are involved in the outsourcing industry, whether your employer is based in the US or in an offshore ‘destination’ you can’t afford not to read it. To help you find and buy it, I have put a link to the website for the book in my Blogroll section.

I had the pleasure of being a panelist with Bob Kennedy recently, on an EquaTerra webcast on the subject of Managing Risk in Offshore Services, and this provides a nice link to my second recommendation – The Fat Tail: The Power of Political Knowledge for Strategic Investing, by Ian Bremmer and Preston Keat.  The connection is this – that political risk is a critical dimenison in any consideration of offshoring services, but is perhaps the most difficult aspect of risk to qualify and quantify.  The Fat Tail looks at the wide variety of political risks that impact global businesses, and offers insights for investors in how to manage them (the name comes from a characteristic of a frequency/impact curve that implies that political impacts are both more common than we might intuitively think and have much more sever conequences).  As I read the book, it became obvious to me that any organization making a decision about offshoring services is in fact an ‘investor’ in global business, and the analysis and advice contained in this book is directly applicable to making offshoring decisions and mitigating the risk inherent in offshore solutions. While I have not (yet) had the pleasure of meeting Mr. Bremmer or Mr. Keat, I have also provided a link to their book and think that buying (and reading) it would be a strategic investment for anyone in the global Business Process Transformation industry.

The Bottom Line: These two books will significantly increase your knowledge and understanding of offshore services, and will help you make good decsions whether you be a legislator, a policy maker, a strategist, or a business leader.

Copyright © 2009 Mark H. Robinson All Rights Reserved

Outsourcing Alert: Risks of Automaker & Banking Sector Financial Problems

A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance

The continued problems of the American financial services and automobile industries have potentially serious consequences for the prosperity of some outsourcing service providers.  Between them, the big three auto makers, their top ten supply chain partners and the top ten banks and insurance companies account for billions of dollars a year in ITO and BPO contracts, which constitute an appreciable fraction of the total revenues of many outsourcing companies.  Increasingly, much of that revenue must be considered at risk, as the auto and financial services industries flirt with bankruptcy on the one hand or nationalization on the other.  At a minimum, the volumes of work within many of the outsourcing contracts in these industries has declined precipitously, and will likely continue to decline, reducing their value to the service providers.

Existing Outsourcing Customers

As an existing customer for outsourced services, this means that you must pay closer attention to the financial health of your service provider(s) if they have any exposure to the auto or financial services sectors (and most do).  Put them on credit watch, check on the provisions in your contracts regarding credit ratings and insolvency, and develop contingency plans in the event that they should become unable to perform the services.  Evaluate whether your interests would be best served by renegotiating your contract – if you are solvent, and have solid demand, your business is worth more to your service provider than it was, and you may be able to gain more advantageous terms or pricing.

Prospective Outsourcing Customers

As a potential new customer, ensure that part of your selection process includes a deep analysis of the current financial health of your prospective service providers, and considers the scale and potential impact of their aggregate exposure to automotive or financial services clients.  Give extra weight to terms that provide you with step-in or termination options in the event that your service provider’s credit ratings decline below a threshold value.  Consider mitigating risk by contracting with a portfolio of service providers rather than entering into a single monolithic contract, even if this does not result in the lowest cost solution.

The Bottom Line: Outsourcing is a critical survival tool in the depression economy – but it will cut both ways if your service provider fails, so be smart, protect yourself, and consider the financial health of your service provider to be as important as your own.

Copyright © 2009 Mark H. Robinson All Rights Reserved

New Life for Shared Services?

A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance

While the impact of the economic crisis and the results of the US election on the outsourcing industry have attracted much attention (including some from me), there has been little consideration of the consequences for the shared services movement – which is somewhat remiss of us all.  I will try to make amends for that neglect in this post – and incidentally, for those not sure what shared services means, or not sure what this writer intends when referring to shared services, please refer to my Defined Words and Terms page.

To set the scene, my thoughts on shared services arise out of the following set of general assumptions regarding key economic and socio-political trends:

The Economic Context

The economic crisis will impact every enterprise, whether public or private, by constraining revenue and restricting the availability of capital.  Constrained revenue (whether from lower sales volumes at lower prices or from reductions in federal, state, local and charitable funding) means that support services must be cut back and/or performed at lower cost.  Restricted access to capital means that project activities must compete harder for funding, will be required to meet a higher business case threshold for approval, and will in many instances be deferred.  Many private sector enterprises will experience large scale forced restructuring through bankruptcy (or in an attempt to stave off bankruptcy), with plant closures, layoffs, divestitures.  Others will be acquired (or will be making acquisitions) as consolidation accelerates in many sectors in pursuit of sufficient scale to ensure survival.

The Socio-political Context

The probable impact of the US elections is harder to assess, but based on campaign promises and subsequent events, several consequences seem likely:

1.  The public sector, and private enterprises heavily dependent on the public sector, will find that outsourcing generally (and outsourcing to offshore destinations specifically) is discouraged, if not outright prohibited.

2.  More stringent oversight and more binding regulation will be imposed upon the banking and financial services industry that will both increase the cost of being in those industries, and make it harder to outsource the effort required to assure compliance (by extension of principle, other currently regulated sectors, such as health care, life sciences, energy, transportation, broadcast media and telecommunications, may also see tighter regulation).

3.  The federal government’s rescue packages will come with strings attached that will both apply restrictions to the use of the funds and at the same time seek performance improvements from the enterprises accepting the funding.

4.  The US tax climate is likely to become less favorable for business over time, making it harder yet to deliver acceptable returns for investors and applying additional pressure on back office costs.

5.  US consumer spending is unlikely to recover quickly while the affluent consumers that account for a disproportionate share of consumer activity remain unsure of the scale and timing of promised tax hikes

Implications for the Shared Services Movement

So now we have a contextual framework, what does it all mean for the shared services movement?  Both public and private sector enterprises will continue to feel a squeeze that requires them to improve the efficiency of their back office business process – in the case of the public sector, to release funds to support programs that would otherwise have to be cut, and in the case of the private sector, to remain profitable or minimize losses in order to survive until better times return.  The use of outsourcing generally will be limited in the public sector, and offshoring specifically will all but disappear.  In some areas of the private sector, outsourcing generally, and offshoring specifically, will be subject to some new controls.  

This will result in increasing acceptance of shared services solutions in the public sector, and a new lease of life for shared services solutions in the private sector, as impacted enterprises seek to drive out the necessary efficiencies without resorting to outsourcing.  However, to some extent the shape of shared services initiatives may change.  One tool that has been readily available, the creation of new offshore captives, may be harder to execute because it looks so much like offshoring.  In some cases, that will result in entities retaining their existing offshore captives when they had previously been contemplating selling them off.  In many cases, it will result in the transfer of significant additional volumes of work to the offshore captives, because it is a low visibility way to gain the advantages of lower labor costs. Finally, there will be some cases where because of regulatory pressures, enterprises are pressured to dispose of their offshore captives and bring their work back to the US.

Another implication for shared services initiatives (new and existing) is that they will be placed under much more pressure to accelerate the delivery of planned improvements in efficiency and effectiveness, and in many cases accept even more demanding targets, while at the same time the availability of capital to fund transformational programs is constrained.  This may result in an increase in the consumption of advisory services, as in-house teams may not have the skills and experience necessary to achieve this acceleration.

To summarize, there will be increasing momentum for the shared services movement, resulting in the launch of many new initiatives and giving a fresh lease of life for existing initiatives.  Enterprise expectations for the performance of shared services will be increased, and timeframes for the delivery of planned benefits will be reduced.  New offshore captives may be harder to establish, and existing offshore captives may need to grow to accommodate expanded volumes, while some may have to be disposed of. The use of advisory services will grow, as enterprises seek to source the premium skills necessary to go faster and get more benefits while working with less capital for transformation.

The Bottom Line:  The Shared Services Movement will prosper and grow over the next several years, but will need to deliver performance closer to that of world class outsourcing to do so.  Consulting firms should beef up their shared services advisory capacity accordingly.

Copyright ©2008 Mark H. Robinson All Rights Reserved

The Beginning of the End of Uncertainty…

A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance

The mood of most people I talk to could best be described as ‘jittery.’  

They are uncertain as to what will happen with the election, the economy, and the wars in Iraq and Afghanistan.  Many sources show the Democrats with an unassailable lead, but some put the Republicans neck and neck, claiming polling techniques and models are fatally flawed in the current circumstances.  The Dow swings wildly, with multi-hundred point positive to negative ranges commonplace within a single trading day – yet volumes are very light.  Commentators on the war in Iraq offer the enticing prospect of ‘victory’ or, at least, stability – yet others paint a picture of a never-ending commitment that will drain us economically and spiritually.   Above all, people are uncertain as to how any of these issues will affect them, their families, their businesses and their nation. 

In the context of this uncertainty, prevarication has become the general order, as people (and all to many of our leaders) seek to defer both everyday and critical decisions until they can feel more confident of the outlook.  It is common wisdom that the best strategy for survival is risk avoidance – going to cash, deferring investment, cutting costs, exiting marginal markets.  While understandable, this approach has a nasty kicker, thanks to the law of unintended consequences – it has a negative reinforcing effect on the economic downturn, as both consumer spending and business investment execute a parallel collapse, and as low trading volumes allow short sellers to drive stock values down.  Abstaining from economic activity has the effect of allowing the most pessimistic people to have a disproportionate impact on the outcome. To paraphrase, all that is needed for disaster to prevail is for people with good intentions to stand by and do nothing.  

So let me present a contrarian view.  

All this deferral behavior leaves many opportunities to prosper from the present economic dislocation unclaimed.  Regardless of the current parlous state of the stock market, and our inability to project forward values for individual stocks, the US indexes are loaded with fine, healthy businesses trading at significant discounts to even the most conservative valuation of their assets.  Smart leaders should see that they are faced with a once-in-a-lifetime opportunity to create future value through M&A activity.

In my opinion, this is not a time for timidity – it is a time for strong leadership and decisive action, constrained by a sensible perspective on risk.  Entrepreneurs and executives should not be taking excessive risks – however, they should not be excessively risk averse, either.  They should be be sifting carefully through the embarrassment of riches that the current market presents, and assertively pursuing opportunities that would have been exciting a few months ago, had they even dared to dream of them, but were way out of reach then.  

The bottom line:  Don’t bet the company, but don’t stay away from the tables either. The beginning of the end of uncertainty is in sight, and with it will come a sharp reduction in opportunity. Make smart plays now to position for the next phase of the game.

Copyright ©2008 Mark H. Robinson All Rights Reserved

Innovate or Die

A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance

These are certainly interesting times, the like of which few people now living recollect and nobody now living has experience of dealing with.  We are watching a slow-motion explosion.  A shock wave has torn through the financial services industry, destroying many household brands and changing others beyond recognition, leaving some precariously standing but extremely vulnerable to even the slightest adverse circumstance.  The credit market is non-existent, and many otherwise completely sound businesses in every sector are gasping for the oxygen of working capital.  Consumer confidence is on life support, and consumer spending has naturally collapsed alongside it, depriving many businesses of revenue and causing massive build-ups in inventory.

Watch out as the shock wave continues, tearing through our now fragile economy and causing sudden failures in the manufacturing, transportation and logistics, retail, automotive, and travel & leisure sectors over the next few months, as much needed holiday spending fails to materialize.  This shock wave, like the massive blast when the island of Krakatoa detonated in 1883, will circle the globe repeatedly, and the fallout from it will continue for years to come, regardless of the success of world governments in stabilizing the banking and financial services industry.

In this climate, only the innovators and fast-adapters, those whose strategies enable them to outrun the current crisis by outperforming against expectations, will buy themselves a reasonable shot at survival.  Cost cutting is an inevitable component of any survival strategy, but it is how costs are cut, which costs are cut, and what is done with the remaining budgets, that will distinguish winners from losers.  Across-the-board, slash-and-burn approaches will only benefit those entities already trembling on the brink, and in most cases will only gain them a temporary reprieve.  Entities should develop an intelligent strategy that:

• preserves the best of their human capital
• transforms fixed costs to variable costs
• transforms capital investments to revenue expenses
• links the services they consume to the volatility in demand that they experience
• focuses on reducing administrative and operational costs
• sustains programs aimed at revenue generation
• keeps their brand in front of their customers

Those that do so will do better now and, importantly, will be best positioned to accelerate away from their competitive set once the inevitable upturn materializes.

Service providers, like their customers, must adapt to the new realities of their marketplace – those willing to work with customers already in survival mode on their own terms will be best placed to continue to win their business, and will also win their when those customers once again adopt expansionist programs.  Service providers must examine their own appetites for risk and willingness to defer profit in favor of establishing the solid long-term relationships that will pay future dividends – and in a way must play Russian roulette, because even some of the enterprise that adopt intelligent strategies will fall victim to circumstances beyond their control before the chaos subsides.

The bottom line is the same for both sides of the industry: Innovate, or Die.

Copyright ©2008 Mark H. Robinson All Rights Reserved

URGENT: Advice for outsourcing customers

A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance

Back in October of last year, William C. Dudley, executive vice president of the Markets Group at the Federal Reserve Bank of New York, gave a speech entitled “May you live in interesting times” (title borrowed from an english translation of a allegedly Chinese curse) in which he listed a number of market events that had come to pass which he had never, ever expected to see in his lifetime.  More recently, in May, he was forced to add to that list, and if we asked him today, I am sure it would be longer still.  If these are not interesting times, I don’t know what would be.  We are living in a period when economic and market volatility in the US, and the contingent impact of that volatility on the rest of the world, is approaching the chaotic.  As proponents of chaos theory are fond to say, a butterfly flapping a wing a thousand miles away may influence the path of a hurricane – and the US economy is far more than a butterfly wing…

Why am I writing about change, chaos and butterfly wings, you may ask, when I entitled this blog “URGENT: Advice for outsourcing customers”?  Simply put, US economic and market turmoil will have an impact on whatever your enterprise might do, in whatever sector it may reside, in whatever country you may be reading this – and it will also impact your investors, customers, trading partners, suppliers and service providers.

Of course this is obvious to those of you who are smart enough to be reading this blog – but have you taken any time yet to think this through in terms of your outsourced services portfolio?  Perhaps not, given all the other screaming demands on your time right now, and this is where the URGENT advice comes in.

As you make continuous strategic, tactical and operational adjustments in the interests of survival or (if you are one of the lucky ones) to take advantage of the sudden opportunities opening up for you, there will likely be one or more of the following events that impact your enterprise (and therefore impact your outsourced services):

• Increase in volume volatility
• Decrease in demand predictability
• Change in the range of services required
• Adjustments to the quality of services required
• Divestiture of business units from your enterprise
• Merger and acquisition activities
• Filing for bankruptcy protection
• Lawsuits requiring preservation of evidence
• Changes to inflation rates in one or more of your markets
• Currency exchange rate fluctuations

Similarly, one or more of your portfolio of outsourced service providers will probably be impacted by one or more of the following events:

• Increases in aggregate demand volatility (volume, content and quality)
• Decreases in the aggregate demand predictability (time horizon and accuracy)
• Merger, acquisition and divestiture activity across their customer portfolio
• Bankruptcy protection  orders for multiple customers
• Adverse inflationary impact on labor cost
• Adverse currency exchange rate fluctuations
• Merger, acquisition or divestiture involving the outsourcer directly
• Tightening of the credit market affecting their ability to finance working capital and assets

Given these high-probability, high impact changes affecting both the demand side (you, the customer) and supply side (your service providers) of the outsourcing industry, shouldn’t you be doing something?  Of course you should, and here are six things you should be doing right now!  By the way, if you used quality outside counsel and quality third party advisors when you entered into your outsourcing relationships in the first place, this is where you will be eternally glad that you did so!

1. Find and dust off (if you don’t already have them neatly filed in front of you) all those outsourcing contracts you haven’t paid much attention to since transition was complete and you settled in to the rhythm of the relationships
2. Inventory all of the language in each regarding change and termination – pay specific attention to:
   (i) changes in the nature or volume of the services
   (ii) changes in service levels
   (iii) changes in pricing
   (iv) changes in inflation and currency exchange rates
   (v) termination of services in whole or in part
   (vi) divestitures of customer business units
   (vii) changes in control of customer or service provider
   (vii) provisions regarding insolvency of customer and of service provider
3. Review all of these provisions carefully, have your general counsel’s office review them, have your procurement people review them, and ensure that you are all thoroughly familiar with them all.
4. Institute a market watch via a clipping service, and a credit watch, on all of your outsourced service providers – you need as much advanced notice as possible of any events that might impact your providers and their ability to serve you.
   HINT: Do some research to find who your service providers largest customers are, and put a market watch and a credit watch on them too – events that impact those customers will have a disproportionate impact on your service providers.
5. Reach out within your own organization to  ensure that anyone who may be contemplating divestitures, mergers or acquisitions, is aware of any contractual provisions regarding such in your outsourcing agreements (and ideally agrees to include you in the planning team).
6. Do some contingency planning to address as a minimum the following scenarios:
   (i) internally imposed requirements for cost cutting
   (ii) re-pricing events triggered by volume changes
   (iii) re-pricing events triggered by inflationary or exchange rate impacts
   (iv) termination events triggered by elimination of demand for services,
   (v) termination events triggered by non-performance of the service provider
   (vi) change of control events (yours and theirs)
   (vii) divestitures (yours – theirs constitute changes in control).
   HINT: The more notice you have, the more control you will have, and the more advantageous an outcome you will be able to secure.

The bottom line: change will happen, some of it will be bad, and you will have to deal with it.  Be prepared, plan ahead, and remember that the contract is only the start for negotiations and the last resort in case they fail.

Copyright ©2008 Mark H. Robinson All Rights Reserved

Crisis? Outsourcing, carpe diem!

A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance

There seem to be only two topics people want to talk about today – the ‘financial crisis’ and the US Presidential election – but the general perspective on both is quite different from the outsourcing industry viewpoint.

The general public, inspired by sensationalist media coverage, are simply terrified that we face Armageddon in the financial markets, with a spillover impact into the broader economy that will have catastrophic results.  This is rapidly becoming a self-fulfilling fear, as consumers reign in their spending and dump luxury for utility – look at the automotive industry as an example, which just reported its lowest unit sales in fifteen years.  All over America (and to an increasing extent, all over the world), the sound of wallets snapping shut is convincing industries dependent on the consumer to shelve plans for expansion and look to ensuring their survival.  From a global perspective, the collapse in US consumer spending is a double whammy coming as it does hot on the heels of the Made-in-America sub-prime debt crisis.  While we may be at or close to the low point of domestic impact, the echoes of our current problems will be felt around the world for at least the next several years.

Contrast this general public viewpoint, if you will, with the outsourcing industry perspective:  recessionary forces are great news for the outsourcing industry in two ways.

First, a vast array of enterprises are under enormous pressure to reduce costs as a way of minimizing the impact of collapsing demand on their bottom line – and at this point in its maturity, outsourcing generally and IT outsourcing specifically are understood by most C-suite executives to be viable means of accelerating cost reduction initiatives.

Secondly, and perhaps more importantly for the industry, where customer demand had evolved towards outsourcing for a longer term focus on transformation in capability, it has suddenly reversed direction to a shorter term focus on cost management and predictability.  What this means, particularly in BPO, is that outsourcers who had been losing money writing transformational deals because of the difficulty of pricing transformational risk are back on firm ground pricing operational cost reduction – and sectors like HRO, which had been suffering as a result of some negative experiences with larger scale transformational deals, are starting to show signs of life again.

Now let’s take a quick look at the political scene.  Without a doubt after eight years of the current administration, America is looking for change – but in the usual urgent search for middle ground that characterizes elections here, the candidates are offering ‘change you can believe in’ or ‘change you can afford’ and look more and more like they are usurping the most effective messages from each others campaigns each day.  Outsourcing is one such area – could you, for example, tell me which side wants to keep American jobs in America, and which side deplores the unfair advantages enjoyed by offshore competitors?  Or, which side is more likely to enact legislation aimed at reducing the drain on the American economy that outsourcing represents?

Of course, readers of my earlier articles will recognize that our politicians, like the media, have a vested interest in maintaining their willful ignorance about the differences between outsourcing, offshoring and globalization so that they can capitalize on the reflexive xenophobia of the US electorate – but what is the reality, and what will the post-election world look like?

Once again, this is basically good news for the outsourcing industry.  Despite their rhetoric, most politicians (or their staffers) are smart enough to understand just how difficult it would be to draft, introduce, pass and enforce anti-outsourcing statutes aimed at regulating private sector behaviors – and ‘offshoring’ has been effectively excluded from public sector ‘privatization’ (outsourcing by another name) initiatives for years as a result of an unholy alliance between organized labor and the permanent establishment of government.  So from that perspective, all the manufactured controversy around outsourcing will fade away once it has served its political purpose.

However, the reality is that government too is operating in the economic environment established by the sub-prime crisis – and it will have a real impact on either party’s ability to fund the initiatives they are promising their voters.  The failure of large firms, and the failure to make a profit at many others, will reduce the national and local corporate income tax take – and the loss of jobs and the loss of bonuses in the financial sector, combined with the loss of secondary business that existed to serve the failed enterprises, will have a direct impact on the state and local tax take in some regions (think New York, for example).  Regardless of their distaste for it, government at all levels will be forced to re-evaluate the potential benefits of privatization as a means to get more for less, or push through tax hikes that will be deeply unpopular with the electorate and ensure that the administration executing them gets only a single term in office.

The bottom line: the financial crisis and the US election both, in their own ways, represent opportunities for the outsourcing industry – and the best thinkers in the industry are already recognizing that fact and adjusting their strategies accordingly.

Copyright ©2008 Mark H. Robinson All Rights Reserved

The Global Village (a US perspective…)

A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance

Outsourcing is often confused with ‘offshoring,’ which in turn is often confused with ‘globalization.’ In reality, these are distinct but related concepts. The marketplace generally, and the broadcast media specifically, would benefit from adopting clearer definitions – so here’s my version:

Outsourcing: “The practice where an enterprise contracts with a third party to provide as services, using assets and labor that they control, work that was previously done using assets and labor controlled directly by the enterprise”

Outsourcing is here to stay, as it offers an enterprise the opportunity to focus on its strategic activities whilst leveraging the benefits of a competitive marketplace for business support processes. Large scale enterprises already regard outsourcing as a basic and default tool for attaining and maintaining operational efficiency, and start-up enterprises don’t even think of doing support processes themselves, staying fleet of foot and flexible by buying in everything they can, and sustaining this model even as they mature. Most US outsourcing is in fact a transfer of jobs to service providers in the US.

Offshoring: “the practice of outsourcing to an offshore service provider to take advantage of labor cost arbitrage”

Offshoring is a transitional phase driven primarily by economic disparities between nations. Experience in India has shown that labor cost arbitrage opportunity erodes as local market conditions drive wage cost inflation at a far faster rate than labor costs in developed nations, ultimately leveling the economic playing field (and doing more for the economy of the emerging nation and its interconnectedness with the rest of the world than any financial aid program). Incidentally, most US offshoring is actually to the foreign subsidiaries of US service providers, so even when the work goes overseas, much of the profit comes home and is both taxed and re-invested in the US economy.

Globalization: “the practice of sourcing products and services based on economic quality (the optimal combination of fit-for-purpose with timeliness and fully burdened cost), regardless of location of origin”

Globalization is the inevitable future model for the assembly of effective, competitive and successful enterprises, and again India serves as a great example. As the leading India-based service providers have grown and prospered, they have themselves become global players, making investments and creating jobs in the very countries that moved work offshore to them in the first place, whilst in parallel the internal services market in India is booming as the Indian economy ignites, providing opportunities for US-based service providers to compete for business in India.

The US will be a strong beneficiary of the globalization wave, as our education, research and development capabilities and our technology, marketing and sales know-how are truly world class (and other nations do and will continue to buy those services from us). Also, we have the most vibrant and innovative capital markets in the world, and entrepreneurs will continue to come here to start the next generation of global scale enterprises.

Additionally, nations with strong trade ties and significant interdependencies rarely go to war, and are more likely to find common cause in acting to support the peaceful stability of the world economy. It is no accident that it is the established economies that are the core of the global alliance against terrorism, and no surprise that nations like India and China, emerging onto the world stage, are signing up to the same agenda.

Closing Thoughts

So for all those sloppy thinkers who habitually misuse (or in some cases deliberately abuse) the ‘outsourcing’ word as a pejorative in their campaign against ‘offshoring,’ here’s the bottom line:

Burying its head in the sand does not save the ostrich, it just dies with its eyes closed, without knowing why.

Copyright ©2008 Mark H. Robinson All Rights Reserved

Government, the deficit and privatization

A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance

All the numbers in this fascinating episode were taken or derived directly from the official 2002 publications of the US Census Bureau’s Census of Government reports. The Census of Government is undertaken every five years, and the 2007 data is not yet available (but ALL the numbers are larger in 2007 than they were in 2002.  Any errors are entirely my own and are a result of the research being conducted in the early hours of the morning…

In 2002 there were 87,900 government units in the United States. These included one federal government, 50 state governments, 3,034 county governments, 19,431 municipal governments, 16,506 township governments, 13,522 school district governments and 35,356 special district governments (such as fire and water districts). Between them, these government entities employed 21,039,000 people in full and part time roles, or 18,160,000 full time equivalents.

The annual payroll for these employees was $767,070,000,000 (over $767 billion), or 42% of the $1,807,573,000,000 (over $1.8 trillion) in total government revenues. However, that enormous revenue – $6,276 per legal resident of the USA in 2002 – still wasn’t enough. Collectively, these government entities spent $2,048,719,000,000 (over $2 trillion), or the equivalent of $7,113 per legal resident, and created an operating deficit of $241,146,000,000 (over $241 billion). The deficit equated to 13% of revenues (and that was a good year!).

I am not here to argue for smaller government (although on another occasion and in another forum you might well hear me do just that), but to point out something very basic. No enterprise, be it public or private, can run at a deficit for ever without failing catastrophically.  It is only necessary to look at the consequences of the collapse of the housing bubble, created on the fiction of rising house values driven by insane credit policies and amplified yet further by the risk-addicted banks development of securitized bundles of high-risk loans that somehow were massaged into apparently safe investments, to see how much worse it would be for all of us if our entire economy collapsed under the weight of its accumulated deficit.  This writing argues for economic sanity and a concerted effort to eliminate deficit financing.

As a realist, I recognize it would take the kind of extraordinary courage in leadership that is conspicuously lacking in politics today to address the tendency of the permanent establishment of government to inflate itself (and consequently inflate its cost). We are therefore limited to addressing not the disease itself, but the symptoms. In other words, we must find ways to do what government does for less money – and, as government seeks to do more each passing year, we must continuously reduce its cost in order to fund its expansion.

The governments of other countries have been and are facing similar challenges, and many of them are rising to the challenge. Among others, governments in the UK, the Netherlands, the Scandinavian countries and Australia, have adopted strategies for reducing the operating cost of government while improving the quality of the services it provides. It should come as no surprise to a thinking person that, when challenged to improve the efficiency and effectiveness of their ‘business’ processes, these governments (national and local) have borrowed from the private sector the business process transformation strategies that have kept private sector productivity rising and fueled the economies of the world for decades.

These strategies are:

1.    Automation – use increasingly sophisticated software and systems solutions to replace bureaucratic processes and the paper they generate and consume to automate the activities of government
2.    Self Service – allow citizens to interact directly with the new automated systems to effect for themselves the transactions that previously required government employees to facilitate
3.    Self Certification – rely upon citizens’ and regulated entities’ affirmations (backed up by comprehensive statistical and random physical audits) rather than on the physical presentation and manual verification of documents, to drive government processes and eliminate paper processing wherever prudent security and fiscal constraints permit
4.    Shared Services – aggregate transaction processing and people contact activities across traditional organizational boundaries to create highly efficient processing centers
5.    Privatization – allow the private sector to compete to perform work currently performed by direct government employees (the public sector equivalent of outsourcing in the private sector)

Much of government in the USA reacts with abject horror to some of these tools, and with absolute hysteria to the suggestion of privatization. Readers of previous episodes of this blog will recall that privatization and outsourcing are not synonyms for exporting American jobs, a distinction that is all too often lost in translation when the subject is covered in the media or commented on by activists and politicians. The disinformation (and deliberate disinformation) on this topic presented to the voting public, either out of ignorance of the facts or in furtherance of special interest agendas, has made the subject of privatization such a political hot potato that politicians generally avoid it at all costs.

Yet the reality is the private sector can do more for less by applying technology and adopting innovative operational disciplines and modern organizational principles, and if we collectively are not prepared to address our addiction to ever-expanding government, we must reduce the cost of that government to a level we can afford.

I leave you with this thought. The statistics in the opening paragraphs of this episode show a 2002 operating deficit of 13% of revenue. Do you really believe that we could not, by using the tools pioneered in the private sector and increasingly adopted by the governments of other nations and by local communities within those nations, reduce the cost of government by 13% while preserving the integrity of the programs it provides? As a leader active these last two decades in transforming business processes, in both public and private sectors and in the USA and many other countries, I am entirely confident that we could.

The bottom line: start lobbying whichever politicians from whichever party you support to find enough courage to address the deep-seated deficit financing problem that threatens the economic health of our nation, and adopt the mission of modernizing government using all the tools available – including privatization!

Copyright (c) 2008 Mark H. Robinson All Rights Reserved

Globalization as an economic Darwinian force…

A Personal (And Sometimes Provocative) Perspective on Issues and Events in the World of Transforming Business Performance

!!! Warning – readers from both sides of the great political divide may find some of the positions taken in this writing offensive to their refined sensibilities, for which I make absolutely no apology…

In the most simplistic analysis, economic evolution can be thought of (with apologies to all professional economic historians) as comprising five broad Phases:

Phase One – Hunter-Gatherer

Phase Two – Agricultural

Phase Three – Industrial

Phase Four – Service

Phase Five – Innovation

Although the Fifth Phase has commonly been called the Knowledge economy, I think that the ‘Innovation’ economy is a better label. It is by applying knowledge to drive invention that we improve the efficiency and/or effectiveness of existing processes, products or services, or create new processes, products or services. This is how economic value is multiplied, and it is through controlling how invention is leveraged into innovation that the additional economic value is captured.

Globalization, often ignorantly attacked as exporting American jobs, is critical in our inevitable transition to a Fifth Phase economy (inevitable, that is, unless we prefer to descend into chaos or guarantee ourselves a slow decline through isolationist and protectionist policies). In previous writing, I have defined Globalization as “the practice of sourcing products and services based on economic quality (the best combination of fit-for-purpose with timeliness and fully burdened cost), regardless of location of origin.”

Globalization, operating in a (relatively) free market, is the Darwinian force driving the US headlong towards becoming an Innovation economy. This is a good thing, because we are (mostly – exceptions for extreme high tech and anything at the leading edge of innovation) unable to compete on economic quality for manufactured goods and basic services with emerging nations. Even after their own cost base has risen to levels that approximate ours today, we will still likely struggle to compete effectively because they will have the highly leverageable advantages of specialization, concentration and scale.

However, if there is one attribute that Americans have in more abundance than any other nation, it is the feverish, relentless invention that is the raw material of a Fifth Phase economy. It is this quality that we must recognize and leverage to protect our future and preserve our influence on the world stage.

Our major challengers in Fifth Phase economics today comprise our traditional competitors – the developed nations of Europe, together with Japan, Taiwan and South Korea. Additionally, the populous powerhouse economies of India, China and Brazil have begun to emerge as players in specific knowledge niches. None of these competitors (so far) have America’s twin advantages of our culturally institutionalized inventiveness and our free- market capacity to identify, fund and profit from innovation. In the next decade we must consciously work to expand upon the competitive edge our culture and capital provides, as we can be sure our competitors will work to leverage their own advantages of high population and lower standards of living to erode it.

Several interlinked areas of policy will critically impact our success or failure in this endeavor:

Promoting Democracy and Capitalism

We must continue to encourage democratization and capitalism in foreign nations, because these two levers acting together will keep our competitors’ governments focused on satisfying their voters’ economic and lifestyle aspirations, which will be shaped by their consumption of American cultural exports. We also need to continue to encourage investment in research and development, and provide the free flow of capital that facilitates the incubation of start-ups from concept to conquest

Educating the World

We must do everything we can to boost the number of very smart, well-educated, entrepreneurial graduates our education system produces, including encouraging and if necessary subsidizing foreign students, who will want to stay here and integrate themselves into the fabric of our society as strong contributors to invention and innovation – and if they don’t, they will go home inculcated with the key concepts of democracy and capitalism and will be predisposed to think well of America and to continue a relationship with us throughout their careers.

Welcoming Qualified Immigrants

We must make it much easier for bright, successful foreign students to come to and stay in America and leverage their education here during their most productive years, and we must also facilitate the immigration of economic and scientific outperformers from everywhere in the world. This is another double whammy – we get to keep them, and our competitors lose them. We must also make it much harder for unskilled immigrants to enter and stay here (whether legally or illegally) so that Americans will be encouraged to perform the necessarily local jobs that such immigration displaced them from by keeping wages artificially low

Global Sourcing of Products and Services

We must keep our competitors focused outwards on fulfilling our manufacturing and service needs, so that we can continue to dominate the Fifth Phase around innovation. American low-end manufacturing and service jobs will continue to migrate overseas, but these jobs will be replaced by high-end manufacturing and service jobs as well as knowledge and knowledge support jobs. Investment from our competitors will flow into the US as they seek to establish bases onshore to extend the range of products and services they can supply to us, which will have the double-whammy effect of creating new jobs for Americans and attracting the brightest and most successful overseas entrepreneurs and knowledge workers here, where they will be seduced by our lifestyle, assimilated into our culture and wish to stay

From an entirely practical perspective, as someone engaged daily in working with clients and service providers to transform the efficiency and effectiveness of business processes, globalization is a key strategy I use to allocate value contributions according to economic quality. Whether outsourcing to service providers who relocate components of the work to emerging markets, or leveraging organizations’ existing global workforce to better advantage, this re-distribution of work is one of the most valuable business model innovations of the last few decades.

If we continue to aggressively globalize our non-strategic manufacturing and base services, and continue to innovate around the process models used to do so, I believe we will continue to capture the lion’s share of the economic value created, and will continue to dominate the global economy.

The bottom line: far from being the Chinese Century (although I applaud the rise of China as an economic powerhouse, and welcome them as a new market for America innovation and as a vibrant competitor that will help keep us strong by the necessity of survival), we can make this the Second American Century if we focus on our strengths, adopt rational policies in support of them, and quit pandering to short-sighted Luddites determined not to let the future happen on their watch.

Copyright ©2008 Mark H. Robinson All Rights Reserved