Globalization: Coming soon to a theatre near you
The Executives' Club of Chicago convened its healthcare reform summit at the Hilton Chicago on 20 February 2008, drawing on diverse expertise. Ian Morrison, Ph.D., healthcare futurist, gave the keynote and moderated two panels: first, the healthcare expertise panel with Dean Harrison, CEO Northwestern Memorial Healthcare; William Novelli, CEO AARP; Scott P. Serota, CEO BlueCross BlueShield Association; and second, the business executive panel with Andrew M. Appel, Chairman AON Consulting; John A. Edwardson, CEO, CDW; John B. Menzer, Vice Chairman and Administrative Officer, Wal-Mart Stores. Robert L. Parkinson, CEO, Baxter Healthcare gave an insightful point of view on recommended actions to close the event.
There was broad agreement that the U.S. healthcare system was broken, and speakers offered excellent insights and perspectives about how to fix the system. However, what they didn't say was as interesting as what they did, and I will address two key issues in Analysis and Conclusions: the pervasive lack of trust among all parties and the emerging consumer empowerment trend: what do Web 2.0-enabled consumers have to bring to the party?
Continue reading The U.S. Healthcare System: Can This Patient Be Saved?
The Long Tail is a watershed book that reflects many of the profound socioeconomic changes wrought by the transition from the Industrial Economy to the Knowledge Economy. The "Long Tail" represents the splintering of the mass market—what is happening, why and how you can thrive in the new era of the niche. Moreover, it shows how the mass market was a temporary phenomenon that developed because niches were not economically viable for producers to address.
Chris Anderson is editor-in-chief of Wired, and the book has an appreciation for culture, the economics of technology and the importance of innovation. It's also very well written: Anderson tackles some fairly abstract concepts, but the reader doesn't trip over them. It's possible to read the book quickly, but there is plenty of substance for a detailed, reflective reading as well. Difficult to over-recommend!
The Long Tail offers an insightful look into the byte-oriented Knowledge Economy and its movement away from the zero-sum, bits-oriented Industrial Economy—and what this holds for business and culture. The book has the technology/culture/innovation I associate with Wired, which makes it very insightful for understanding the implications of the changes. It includes numerous case studies and examples, many drawn from the entertainment industry, but also manufacturing and high technology.
Due to the book's importance, I've included some detailed chapter notes before adding Analysis and Conclusions at the end.
The Virtual Handshake is an immensely valuable book, both as a handbook to the virtual world for the business-oriented person and as a guide to purposeful networking. I was compelled to get it after seeing David Teten speak at a conference because he spoke with authority while explaining new things clearly. Allen and Teten have done a masterful job at writing an interesting book that is full of useful information. Moreover, they succeed at providing a conceptual framework, so the reader can make use of the information. It is also a fun read.
As a marketing executive and a management consultant (strategy) since the early 1990s, I have helped to build parts of the virtual world the authors describe. I am very familiar with the topics, and I found the book useful on two key levels:
Chicago, 29 November 2006—Today, the Global Human Capital Journal awarded Grace Bank, the top three credit card issuer, its notorious Web 0.2 Citation for inducing an acute spasm of customer yechsperience™.
This citation demonstrates how exceptionally poor service destroys brand despite kind words and happy pictures from Marketing. Although Grace employed a somewhat formulaic approach, it demonstrated laudable skill at producing customer irritation and angst.
Continue reading Our first Web 0.2 Citation—Grace Bank Lost in Commodityland
Three eminent diplomatic leaders and CEOs from Baxter, Financial Dynamics, ITW and Philips briefed Midwest executives on the current status and future directions of the world's largest trading relationship at the Executives' Club of Chicago's International Conference November 15. The half-day program featured several presentations, a CEO panel and a media round table. All speakers sought to impress upon the audience the pivotal importance of the transatlantic alliance for the United States and Europe, and most warned chief executives neither to take it for granted nor to be passive in the face of rising protectionism.
The fact that the importance of the E.U.—U.S. alliance had to be emphasized brought into sharp relief the relatively sudden rise of Asia as well as the shift from the Industrial Economy to the Knowledge Economy. Both megatrends pose opportunities and threats for the world's largest economies and enterprises, and the concomitant uncertainty emanated from the assembly hall. I will summarize speakers' remarks and question and answer sessions before adding conclusions.
His Excellency John Bruton, Head of the European Commission Delegation to the U.S. and former Prime Minister of Ireland during the "Irish Miracle," began by outlining some of the European Union's political and economic progress on integration. Most Americans are familiar with the E.U. as a trade confederation with 12-15 countries, but the nature of the union has been changing rapidly in recent years. Since 2004, the number of member countries will have almost doubled when Bulgaria and Romania join in January 2007—to 27 countries. In concert with this, the E.U. has been working hard to "federate" key political and economic functions by empowering the European government (Parliament, the Commission and the Judiciary). Ambassador Bruton emphasized that the E.U. was the world's only multinational democracy, as its Parliament was directly elected, and a key goal, in his opinion, was to govern globalization. Globalization should be a resource; it could be managed, so people would not be its victims. He emphasized that the U.S. and the E.U. shared common interests and values and that the transatlantic alliance could serve as an example for the rest of the world.
Ambassador Bruton is self-admittedly passionate about statistics, and he shared these (most 2005): together, the E.U. and the U.S. produce 57% of the world GDP. The E.U. represents 75% of the foreign investment in the U.S. About 66% of U.S. foreign R&D operations are in Europe due to its legal system and intellectual property protection. European firms accounted for 58% of $24 billion total foreign investment as well as for $8.5 billion of manufactured goods, services and commodities from Illinois, about one quarter of the global total. He underlined that U.S. companies obtain five times as many profits from their investments in The Netherlands than they do from all their investments in China. In other words, all the focus on China and India may lead U.S. business leaders to take their eyes off the ball and underestimate the value of the E.U. opportunity (more on this below). From a European perspective, U.S. limitations on foreign investment are intolerable because the U.S. is a free market beacon (several key sectors limit foreign investment, like airlines and telecoms). He warned against protectionism.
Discussing the E.U.'s protracted struggle with Microsoft during a Q&A session, Ambassador Bruton remarked that the E.U. was not keen on monopolies, that there was broad support for the idea of nurturing innovation. Jonathan Evans added that the Microsoft case was not representative of the E.U.'s competition policy and enforcement; a better example with the G.E.–Honeywell deal, which was ultimately scuttled in 2001. These days, E.U. and U.S. competition authorities are far better coordinated, and U.S. corporations are far more savvy about what to expect.
Responding to our questions about Europe's reaction to the waning of the Industrial Economy in favor of the Knowledge Economy, he emphasized that Europe was in an excellent position to leverage its industrial strength to supply Russia, China and India with industrial goods to build their infrastructure as well as consumer goods for their growing economies. He admitted that Europe was somewhat handicapped in the language-based Knowledge Economy by all of its members' languages.
The Honorable C. Boyden Gray, Representative of the U.S. to the European Union, echoed Ambassador Bruton's assertion that the relationship was critical to each party and that it was too easy to take it for granted. He focused his introductory comments on the importance of continued cooperation between the U.S. and the E.U. on harmonizing regulation because different regulations leech value out of economic transactions. For example, Sarbanes-Oxley is a significant problem for E.U. companies that operate in the U.S. He would like to see the central (European) government get more power to carry out reform of the regulatory issues. He also urged executives to oppose emerging protectionism by talking with government leaders.
Ambassador Gray pointed out that the E.U. was plagued by persistent unemployment, and here it could learn some lessons from the U.S., namely: 1) make immigration more a part of the culture in Europe as it is in the U.S. so that immigrants could succeed more and add more value to the economy; and 2) encourage growth of high technology by creating links between business and the universities. Although most U.S. government and university officials complain about how seldom technology commercialization succeeds, the E.U. has a far lower rate. Part of the challenge is that universities are largely free in most European countries. They do not have to conduct fund-raising as in the U.S., where business imposes its commercial point of view but also infuses universities with the importance of profit and accountability for meeting goals. In Europe, this dynamic is largely absent, which keeps university-led innovation too far removed from the commercial sector.
Jonathan Evans, Member, The European Parliament and President of The European Parliament Delegation for Relations with U.S. Congress, reiterated the dangers of protectionism and taking the E.U.–U.S. relationship for granted, but he added an interesting twist. The current European Commission (executive branch of the E.U. government) is the most free-market ever, and Europe is trying to emulate U.S. practices, so it is especially poignant to perceive that the U.S. may be succumbing to "economic patriotism" (the new term for protectionism). Free-market Europeans are alarmed about the U.S. legislators' vociferous reactions to the Dubai company's proposed contract to run six U.S. ports and their apathetic action on the trade bill with Vietnam, to which opposition in some quarters had a political ("they were the enemy") tone. He contrasted those attitudes with the U.K.'s vis à vis the NASDAQ's proposed acquisition of the London Stock Exchange (LSE). U.K. Economic Secretary Ed Balls has proposed legislation that would safeguard the hegemony of U.K. regulations in the event a foreign exchange (i.e. NASDAQ) would buy a U.K. exchange (LSE). The point is that it is less important who owns the LSE than who has regulatory authority over it, a thought-provoking idea to which we'll turn in more detail below.
A proponent of free-market principles, Mr. Evans sees that the U.S. and the E.U. have an opportunity to remove obstacles to trade, to prosper and hold up the example to the rest of the world. He criticized France's designation of strategic industries as a rationale for preventing foreign investment (i.e. M&A) as well as the U.S. restrictions on foreign investment in sectors considered strategic. He echoed Ambassadors Bruton and Gray by urging executives to stamp out economic nationalism and to press their legislators to simplify regulation. He held out the example of the fact that Heathrow was run by a Spanish company, despite significant protectionist opposition on nationalistic grounds. Another hopeful front was the progress of the E.U.'s Services Directive, which will facilitate the liberalization of the services sector across the E.U., albeit with significant restrictions. Much of the E.U.'s liberalization thus far has concerned manufactured goods; the adopted directive should make it much easier for service providers to conduct business in another E.U. member. Consumers will have more choice when they choose a service provider, and costs should fall.
On the political front, he urged U.S. executives to remember to not fret over polls that showed the U.S.'s falling popularity in Europe due to the U.S. and E.U. policies in Iraq. He reminded the audience that Europe had been deeply divided on Iraq and remarked that President Bush's initiatives to reach out to Europe after his reelection had been very effective. Most important, business is separate from politics on both sides of the Atlantic: the same way that Europeans cannot assume that U.S. foreign policy is supported by all Americans, Americans should not assume that E.U. business leaders think ill of the U.S. He did fret over some U.S. legislators' "lack of engagement," remarking that 70% of the members of Congress did not even have passports. (!)
The CEO panel gave the audience an appreciation for how four global enterprises saw the U.S.–E.U. relationship, from historical, current and future perspectives. CEOs from Baxter International, Financial Dynamics, Illinois Tool Works and Royal Philips Electronics each gave prepared remarks about their companies' experiences with producing and selling globally before they fielded questions from the audience. As expected, they chorused the need in Europe to harmonize standards, but U.S. also garnered some items on their wish lists: more harmony among state regulations and taxes as well as Sarbanes-Oxley, which represents a significant cost on doing business. Fortune Senior Editor-at-Large Andrew Serwer moderated the session.
Mr. Kelly shared his unique perspective on the transatlantic partnership: he is an Irish national who manages the U.S. division of a global consultancy that he was instrumental in forming. In addition, he advises numerous global firms in marketing and public relations. Financial Dynamics is founded on the idea that global communications need to be executed locally, and the Firm has offices in financial centers around the world due to the hands-on nature of their business.
American firms face internal and external threats. The high cost of doing business in the U.S. continues to drive manufacturing to China, India and other countries. Knowledge jobs are growing much more quickly in China and India: according to the McKinsey Global Institute, life science researchers in China and India will reach 1.6 million by 2008 while the U.S. number will shrink to less than half of that. Mr. Kelly also cited Alan Greenspan, who pointed out that central banks are moving to the Euro, away from the dollar, while the combined GDPs of E.U. members now exceed that of the U.S. However, U.S. productivity significantly outpaces that of the E.U.
In today's global economy, enterprises cannot tie themselves to the economic interests of one country or even a group of countries, and the expansion of free trade creates value; it's not zero-sum. He advised executives to keep two things in mind: define a clear and strong global brand that they adapt to local markets. "Being relevant locally doesn't mean giving up your American identity or your global brand. But it does mean being close to your local customer, and nuancing your messages and ways of doing business to suit local norms."
Mr. Kelly offered some interesting reflections on "the Irish miracle" from 1994-1997, during which Ireland became known as the "Celtic Tiger" and its economy grew at an annual average rate of 8.7%. First, the miracle had started twenty years before, with the government's significant investments in higher education, which positioned its young population to become knowledge workers. Second, the government had the foresight to cut the corporate tax rate to 12%, which drove very high foreign investment, dovetailing with the well educated workforce. The point is, the impact of these policies multiplied over time; you have to take a long-term view. Third, Ireland proves that a country doesn't have to be large to succeed: Ireland is "a blip on the map," yet it has seen great success.
Executives can mitigate any political fallout of their home countries' foreign policies by presenting themselves as global countries rather than identifying themselves with the home country nationality. U.S. business executives especially need a more sophisticated approach in China. Mr. Kelly predicts that younger executives will increasingly run global companies: "We'll see an increasing number of companies run by people with no gray hair." To this end, he selects twelve people for Financial Dynamics' "Leadership Academy" to mentor for high achievement. He later added that many older executives do not appreciate the tremendous change that is currently happening in the world, and younger executives will step in to fill in the gap. Another example: in China, all business leaders are young.
Baxter International designs, manufactures and delivers medical equipment and supplies globally, and for than 75% of its revenues come from Europe and the U.S. One thing that would be of immense help to Baxter is the harmonization of standards and patents, for that would enable them to increase efficiency in Europe. It would enable the company to speed the pace of innovation as well.
Baxter is such a diverse company that it is difficult to leverage R&D investments among business units. Forty percent of Baxter's science groups are in the E.U., but encouraging sharing and efficiencies is difficult because their core disciplines are different.
Some U.S. executives still have a mindset in which they assume the U.S. is very free-market when the E.U. is less so. Both partners have to work hard to harmonize regulation that currently adds resistance to trade.
When asked about directing one's career in the new global environment, Mr. Parkinson strongly suggested to get involved with international assignments as soon as possible in one's career. "It will help to develop you as a person as well as a professional."
Illinois Tool Works (ITW) operates globally with a decentralized model that enables the company to work through local companies that are close to customers. ITW designs, produces and sells at the local level, which affords them some insulation from tariffs. A major concern is the need to liberalize regulations; for example, the E.U.'s Restriction of Hazardous Substances (RoHS) Directive, which restricts the use of six hazardous materials in the manufacture of various types of electronic and electrical equipment (lead, mercury, cadmium, hexavalent chromium, polybrominated biphenyls {PBB} and polybrominated diphenyl ether {PBDE}). RoHS affects several of ITW's products. In addition, getting patents in the E.U. is not centralized; therefore, patents must be filed separately in all countries (think of the different languages), resulting in significant delays and costs.
One of ITW's key strategies is acquiring companies with $30-50 million in revenue. ITW made 43 acquisitions in 2006, 21 of which were international. They use local management teams to find, acquire and integrate acquired companies. Today, ITW has 750 separate businesses. When asked his secret for successfully running such a diverse portfolio of companies, Mr. Speer replied wryly that he does not run them, they run themselves. ITW has only centralized certain corporate functions like financial reporting, legal and intellectual property. He added pointedly that Europe is tremendously important, but "Asia is the future."
ITW bought Chicago-based B2B software company Click Commerce this year, with an eye on deepening and extending its client relationships. Click sells supply chain and networking solutions to industrial customers and, although some of Click's and ITW's clients overlap, many do not. ITW is interested in Click's competency in creating and extending real-time networks to boost efficiency and responsiveness. Mr. Speer emphasized, though, that the tough part is deciding what information needs sharing; you have to invest in the thought process. When I asked him whether ITW has plans to leverage Click's competency to increase collaboration among its companies, he remarked that they would consider it but that wasn't the driving force behind the acquisition.
Philips was founded in The Netherlands in 1891 and operates globally today, producing a large part of its $37 billion in revenue in the U.S. Philips has long had a global footprint, and investing in people, sharing values and maintaining an external focus have been key to their success. Mr. Zeven shed some light on how companies can change their value propositions in light of commoditization: for years, Philips had strong lighting and consumer electronics businesses, both of which have been increasingly pressured by low-cost manufacturing in recent years, specifically China. Two of Philips' responses: 1) grow its medical equipment business due to its stable margins and the aging demographics of rich countries; 2) reorient its lighting business. Philips has been paring back its household lighting in favor of highly specialized lighting niches such as sports stadiums and hospitals. They are also steadily de-emphasizing the consumer electronics business; however, it extends the Philips brand, and its competency is valuable for other businesses: from a design standpoint, consumers want rich features and simplicity, and these competencies are valuable in medical equipment, for example.
For Philips, harmonizing the standards for the exchange of medical information is critical to improving patient care. Currently, innovation is hampered in Europe due to separate regulatory processes. Philips has been in China since the 1980s, and it sees explosive growth potential across the spectrum. From the producer perspective, China is extremely attractive: it has very high investments in higher education and R&D as well as growing foreign investment and low cost labor. It is already a vital supplier base to most large economies. Philips has 15 R&D centers, which are linked to top universities and three intellectual property academies in China. Mr. Zeven predicted that China would become an innovation powerhouse, and it would become increasingly concerned with protecting intellectual property. From the consumer viewpoint, China has an immense consumer market that is becoming international very quickly. It is also a potential threat to the TransAtlantic relationship.
Mr. Zeven emphasized that "the world is your market" to career-minded executives. In his observation, global companies are giving managers international exposure much earlier. Also, the age of top management is dropping, and this trend will accelerate. "Youth is the future" and new blood must challenge management. Senior management may push back at first, but he encouraged young leaders to have the courage of their convictions; in many cases, he predicted, they would listen and respond much better than one might expect. Mr. Kelly is living proof of Mr. Zeven's prediction of younger executives running global companies, as he's in his thirties and a top executive of a $540 million global enterprise.
As in all gatherings of such a political and economic ilk, what was not said was as interesting as what was, and I shall take the liberty to address both here. Let us make no mistake that the E.U. and the U.S. represent concentrated world influence, and the relationship between the two entities is of enormous importance. That said, developments outside the TransAtlantic Partnership are significant and have direct bearing on the partners' continued influence in the world. Although this point was not made directly, the conference clearly reflected that major shifts in the global balance of power were underway (mostly reflected by remarks about China's growth), and all parties were trying to discern what the future would hold. The situation is as if someone changed the music in the dance hall when no one was looking: hoop skirts and top hats are fine for waltzing, but they are difficult accoutrements to manage when jitterbugging. No one linked the emerging Knowledge Economy as a driver for global change, but I will tackle that after some reflections on the partnership itself.
All speakers firmly established the importance of the TransAtlantic Partnership in terms of the past and the present. The E.U. and U.S. economies and political sensibilities clearly are interdependent and resemble each other. Most U.S. and E.U. companies develop and sell a large portion of their products in each other's markets. The partners ' political agendas often coincide, and they continue to make significant progress in eliminating costly over-regulation.
The future of the TransAtlantic Partnership is less certain because the Industrial Economy in which its economics and politics were dominant is on the wane. The global context is changing significantly, and the partners will adapt to the changes at different speeds. I predict that the partners will help each other to grow into the new global economy that the Knowledge Economy is serving up, but there will be some uncertainty and turbulence along the way.
The bigger story here is that the world outside the TransAtlantic Partnership is changing dramatically around it, and this was the white elephant at the conference. The liberalization of trade, the proliferation of information technology and the digitalization of work processes is creating a global human capital market and hastening the shift to the Knowledge Economy. Europe is greatly hampered in its ability to deal with this shift due to its current internal focus. The U.S. will have to become far more externally focused to succeed.
In the past 15 years, "enterprise IT" has been transformed from an accounting support function to the driver-enabler for innovation and value creation. By no means has this been a smooth transformation, as businesses in all industries are besieged by globalization, new competitors and rampant commoditization. At many companies, executives around the boardroom table have had mixed feelings about IT in the face of huge expenditures and uncertain ROIs.
At the Executives' Club of Chicago High Technology Conference last week, Michael S. Carlin of Hospira, Richard Shellito of State Farm Insurance and Randy G. Burdick of OfficeMax shared their advice on keeping IT relevant in the boardroom. After their prepared remarks, Winifred A. Gillen of Capgemini moderated the panel during a Q&A session.
Mike Carlin pointed out the importance of developing a common understanding of a problem, and CIOs must continually work at it because they're on the firing line of implementation a key part of the solution. IT is a change agent, but the CIO must earnestly seek various perspectives on the problem and not assume understanding. Just as important, the CIO needs to explain IT's capabilities and limitations to his/her peers. He implied that it's a constant education opportunity. Another key point Mi de made was that the CIO had to fully appreciate the business point of view. That means adding value by killing techie projects that don't have clear business value.
Mike offered a particularly valuable lesson in being on the hot seat. When Hospira spun off from Abbott Laboratories in 2004, Mike was chosen to lead the IT transition. As mandated by the spin-off agreement, Hospira had two years to complete the separation from Abbott, and it was marked by a global SAP implementation that involved 18 countries and 70 distribution centers. They BPOed (business process outsourcing) distribution, accounts receivable and customer service. Due to the visibility, Hospira's board, including Abbot's CIO and CFO, had weekly marathon meetings that in which Mike was on the hot seat. He saw it as a tremendous opportunity to rise to the occasion, to add value in a very visible way. He was able to understand the complexity of what they were doing and to explain to the board in business terms.
Dick Shellito has led widespread change in State Farm's approach to IT. When he took on the CIO role six years ago, IT operations and organization were far too complex, to the point of being barely manageable. They had 1,400 IT projects and barely escaped a total ITO (IT outsourcing). Needless to say, the business did not understand what IT was doing or what value it was adding, so they worked hard to provide better focus and decrease work complexity. Dick got his place at the table through this mission, and kept it by meeting business colleagues on their own terms. He also couched many of the remarks in a transformation theme. He strongly felt that CIOs should avoid situations in which they are leading widespread enterprise transformation: although IT is integral to virtually every part of the enterprise, having IT lead transformation is a recipe for failure because it implies that IT and business are separate. Transformation is a multidisciplinary proposition.
Prior to undertaking transformation, CIOs need to have a clear understanding of the vision and strategy. They need a common understanding of the current state.. as well as the proposed future state. Transformation differs from "ordinary change" because it is much more ambitious, and IT is clearly on the critical path. IT has to collaborate with various parts of the business; it can add exceptional value because it touches every part of the enterprise and has a valuable perspective—when the CIO takes the time and trouble to really communicate with his/her peers. He recently concluded a major road trip to talk with several IT thought leaders and concludes that enterprises are facing another period of hyper-fast change; in other words, CIOs can't afford to wait to prepare their enterprises to the innovation wave.
Randy Burdick was hired as part of a new management team at OfficeMax to breathe new life into a poorly executed merger between OfficeMax, a retail office products company, and Boise Cascade, a paper company with a small B2B office supply division. His vision for CIOs is that they have a unique opportunity to add value because they have cross-functional visibility into every part of the enterprise. They have their hands on the pulse of the enterprise. CIOs should regularly put themselves in the position of a customer to understand the business. CIOs also have the opportunity to be change agents, but they way that they approach the role obviously depends on the company, culture and situation. Randy is a significant technologist himself, having been an engineer in semiconductors, and he also stressed that the CIO has to have his/her head thoroughly in the business. He regularly spends 20% of his time on business strategy.
IDC analysts Brian Bingham and Barry Rubenstein cited extensive IDC research to describe how outsourcing is developing as a business practice. Although they didn't explicitly delve into adoption itself, their treatment of ITO (IT outsourcing) and BPO (business process outsourcing) provided significant insight into how outsourcing is being adopted by global enterprises. ITO is several years ahead of BPO for several reasons, namely that IT has traditionally been managed as a support function and cost center in most enterprises and, as such, it has been a textbook candidate for outsourcing. BPO is often more intertwined with the business's core competencies; in addition, it almost always requires sophisticated IT support. Clearly, ITO had well publicized failures in the early 2000s, but this proved to be part of the normal learning curve, and ITO successes have emboldened buyers and providers to push further into the business. This contrast between ITO and BPO patterns is particularly instructive.
At the turn of the 21st Century, converging social, technological and political changes demand profound changes in how organizations relate to their customers. These changes question many of the assumptions on which 20th Century businesses are built. To turn this situation to their advantage, executives need to approach how they create value for their customers, quickly and proactively. They must build a collaborative network of partners to discover, design and deliver differentiated experience to customers.
The bottom line is that mobilized customers accelerate success and failure, and leaders will thrive by creating collaborative innovation processes.
The IDC Outsourcing Forum Midwest convened sourcing thought leaders from global enterprises, world-class outsourcing providers and IDC's leading analysts in Chicago September 11-12, 2006. They shared pioneering experiences that are pushing the transformational boundaries of outsourcing, one of the most important management practices to emerge in the 21st century. Case studies from the Williams Companies, AOL, Lucent, Barry-Wehmiller and Procter & Gamble explained how to use outsourcing to satisfy multifaceted business objectives, and a clear adoption curve is emerging that describes how outsourcing is reshaping the world's largest organizations.
The Forum revealed how outsourcing is transforming the world's organizations at an evolutionary pace—gradually and steadily—notwithstanding dealmakers' penchant for overusing the term. Organizations are clearly becoming more networked and collaborative, but most are doing it by managing to near-term business objectives rather than long-term strategic objectives. Conference chairman Bob Welch captured the current state of adoption:
"Transformation is a misnomer because companies aren't using outsourcing to change their businesses," Welch remarked. "Rather, they are changing the way they operate their businesses. For example, companies have focused their outsourcing activity in the 'back office' for the past five years, and now we're seeing them expanding their use of outsourcing in the so-called 'front office,' closer to customer facing activities, from call centers to product engineering."
In 2006, leading adopters of outsourcing are pursuing BPO (Business Process Outsourcing), which eclipsed ITO (IT Outsourcing) in the second quarter TPI Index in terms of contract value. All speakers described their experiences in terms of progressing from simpler, more discrete activities to more complex, integrated processes. Transformation is increasingly an actionable business objective in outsourcing strategy, but the context was consistently transformation of the business process, not transformation of the enterprise itself.
According to IDC analysts Brian Bingham and Barry Rubenstein, cost is still the major driver for outsourcing, but it is diminishing in importance, as both enterprises (buyers) and outsourcing providers gain experience and develop best practices. In IT, for example, gaining access to employees on demand is a growing strategic consideration. In several categories—ERP was cited by several presenters—companies cannot find and train workers quickly enough to meet volatile market demands, and they are realizing that competence in outsourcing enables them to mobilize resources quickly as needs emerge. As providers mature their processes and offerings, they can offer "drop in place" solutions such as Sarbanes-Oxley and other compliance services. In addition, the ITO provider market is very much in flux: on one hand, it has consolidated, with the top five providers owning 50% of market revenue. However, market leaders are losing share, and offshore challengers are making inroads. The top offshore deal this year, Tata Consulting Services' deal with Pearl Group, was worth $847 million.
Gary Schneider, Managing Director at neoIT and Bob Ferrari, Program Director at Manufacturing Insights, both mentioned global "centers of excellence" that are increasingly being tapped by enterprises from around the world in the emerging "services globalization" wave. It is truly evolving into a global market for buyers and sellers of highly sophisticated services. As specialists in helping enterprises to develop global portfolio outsourcing strategies, neoIT proposes that they fully leverage the increasingly diverse, high-value provider market. Gary cited several centers of excellence: multilingual call centers in Costa Rica, Hungary and Argentina, as well as IT and software talent in India and Eastern Europe. China is very strong in manufacturing and getting stronger. Particular challenges are intellectual property protection, which is quite reasonable in some places and difficult to enforce in others. Also, labor mobility is high in hot markets like Bangalore.
Several corporate executives who had led bet-the-company outsourcing initiatives explained how outsourcing had played a key role in making their companies more competitive.
The IDC Forum Midwest featured industry tracks in manufacturing and utilities. Bob Ferrari of Manufacturing Insights commented that vertical specialization was a key trend for outsourcing providers servicing manufacturers. There are two value poles: cost cutters and business transformation advisors. Manufacturers are squeezed by customers who need to respond to volatile demand changes with unprecedented quickness, and they need to cut costs constantly. They also need to tap emerging markets. Many manufacturers have managed global supply chains for years, so they are quick to embrace outsourcing services. They are pressured by constantly escalating costs in their commodity inputs. Due to competition, they cannot simply pass on these costs to customers.
There are three key drivers that are driving outsourcing trends among public utilities. Karen Blackmore, Program Director of Energy Retail Strategies at Energy Insights, emphasized the importance to changes in regulatory policy in Europe and the U.S. Europe is pushing for deregulation and competition. The U.S. Energy Policy Act is effecting many aspects of the energy industry since it incentivizes conservation, environmental behaviors and more frequent metering. It is also driving increased mergers and acquisitions. Many utilities are faced with aging workforces, and they see outsourcing as a way to assure their access to workers.
Several speakers and attendees observed that innovation will increasingly be a driver for outsourcing, and Bill Metz, Global Business Services & IT External Business Development Manager at Procter & Gamble, epitomized the trend. Like AOL, Bill highly recommended shared services as a way to prepare for outsourcing. P&G pursued shared services aggressively in the 1990s through its creation of P&G Global Business Services. GBS came to specialize in bundling services, offering "a working PC" to P&G rather than hardware, software and network services, and this was a key element of their success. One of Bill's roles is to offer or sell P&G process and service innovations, which have been developed to serve the corporation, to external customers. In addition, a large portion of P&G's new product ideas come from outside the company, and this trend is increasing. Bill also advised attendees on how to use governance to enhance the value of outsourcing relationships.
Alfred Binsford, Vice President at Unisys, offered some excellent examples of how outsourcing is transforming their clients. For instance, Washington Mutual made the surprising decision to outsource their check clearing operations. Keep in mind that check clearing has traditionally been a core bank offering and value proposition. However, WaMu found that outsourcing provider Unisys could increase the level of service and operate the process more efficiently, so they did it to improve customer service. In other words, WaMu realizes that they are in the customer experience business, not check clearing. In another case, Nordstrom outsources numerous IT functions that enable it to focus on improving the customer experience. For example, they manage customer experience based explicitly on the customer's lifetime value to Nordstrom. To whit, customers have individualized return policies. According to Binsford, all companies need to "variable-ize." Another example with which attendees were too familiar was the airline industry, which exports its inefficiency to customers, who spend an inordinate amount of time waiting in airports because they lack information to make decisions: if they make the stand-by, that drives decisions about how they use their time at the airport. "It's all about the delivery of relevant information," Binsford concluded.
One of the most intriguing trends to emerge from The Forum: how enterprises' growing competence with outsourcing will impact the mergers & acquisitions market. Many speakers cited situations in which they had used outsourcing to accelerate time to value after mergers or acquisitions: outsourcing human resources or IT of merger partners can significantly facilitate integration, and the process can subsequently be brought back in house if desired. Quentin Tse of Lucent, acknowledged the link, which is directly relevant to the current negotiations between Lucent and Alcatel, but he couldn't comment, citing merger negotiations.
Gary Schneider of neoIT believes that the link will be a growing market. In his experience, the impact of outsourcing on M&A value realization is so great that outsourcing advisors should be brought in to help structure the deal. The current practice is to involve outsourcing advisors as a part of post-merger integration, which leaves money on the table.
Outsourcing is serving as a catalyst to making global organizations much more collaborative, open and interdependent. Forum attendees clearly reflected a relatively rapid progression up the value curve in terms of process complexity. Moreover, outsourcing is clearly contributing to increased employment in the U.S. despite its reputation for layoffs in the near term. Several speakers credited their use of the practice with saving their companies from extinction. Moreover, the term "outsourcing" is rapidly becoming outdated because the trend is clearly global sourcing, in which enterprises employ a "best of breed" approach to procuring services wherever competencies emerge. Innovation will become the focus of sourcing and collaboration.
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Readers of U.S. and European press are too familiar with the plight of manufacturers—and how outsourcing is increasing cost pressures and sending even more jobs overseas. What is less known is that leading edge manufacturers are beginning to use outsourcing to increase local employment by making local companies more competitive.
Forum attendees will hear how Midwest U.S. manufacturer Barry-Wehmiller, which was featured in BusinessWeek's The Future of Outsourcing, is creating a new business that turns around manufacturers by improving their business processes, which makes them more competitive and ends up increasing local employment in many cases. Forum presenter Vasant Bennett is President of Barry-Wehmiller International Resources (BMIS) and a chief architect of BWIS's emerging service offerings. He spoke to the Global Human Capital Journal last week.
A manufacturer founded in 1885, Barry-Wehmiller knows the pain of struggling with business cycles and surviving by determination and innovation. BWIR began in 1994 as an IT (information technology) services firm that was purchased by Barry-Wehmiller in 2000, and today they provide multifaceted IT and engineering services to Barry-Wehmiller companies and third party manufacturers. They have deep and broad expertise in manufacturing IT, business process design and engineering—and extensive manufacturing-specific IT and engineering resources in India.
Many manufacturers have succeeded by knowing their core business extremely well, but management is often not knowledgeable about how to apply emerging management and technology trends to increase competitiveness, which is where BWIR comes in. They can use BWIR's resource pool to solve problems quickly. For instance, product life cycles have shrunk significantly in the past several years, which requires manufacturers, who may be accustomed to a 1-2 year cycle, to innovate constantly rather than periodically. They must change their business process.
"You can't even wait six months to introduce a new product anymore," Vasant Bennett remarked. "We are helping clients to significantly cut their time to market by using offshore resources to swarm their business challenges: we can pursue several concurrent solutions due to our manpower costs."
This is a new kind of problem-solving that isn't feasible for clients using in-house resources. Due to their costs, they usually have a detailed planning phase, which often results in one solution. If it ends up not working optimally, they're stuck. The swarming approach puts several teams on a problem, and they iterate potential solutions quickly and offer varied solutions.
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