The change imperative: it's back-to-basics time

Even though you are probably more interested in the breed of puppy Barack is going to buy his girls, I have had a chance to ponder the realities of the recession.

In a nutshell, we have reached a crucial juncture in our economic history:  gone are the days we can borrow whatever we want to subsidize ambitious business ideas, buy houses we cannot really afford, or fritter money away on expensive holidays. Walking down Boyslton Street at 7.30pm on Friday night - one of Boston's prime restaurant areas - every restaurant had vacant tables and was taking walk-ins.  It really hit home to me that things have finally changed.  Years of over-spending have finally caught up with us and we're now feeling the pinch.  But whether this was to be a rapid banking meltdown, or a long painful slowdown, this had to happen eventually. 

I recall sitting on a panel at at outsourcing conference in New York City back in 2004

, and there were protesters outside, demonstrating their frustration about US jobs "moving offshore".  In response, a sourcing attorney declared, "outsourcing provides a great opportunity for the US - we can offload low-value jobs and focus on higher-value, more innovative work".  I recall thinking to myself, even then, that that argument didn't quite add up. 

While it sounds like a nirvana, the reality is we're competing globally for labor, for making cheaper, better cars, for delivering good quality IT services, for delivering quality finance, HR and supply chain support.  If the US is to truly deliver "higher-value", the government needs to invest in education programs that develop this talent.  The reality is that the rest of the world caught up.  People in Chennai, Manila, Bucharest, Guatemala City, Guangzhou etc are being trained to compete with American, British, French and German workers, and the Internet and new technology have been a huge enabler to make this happen.  A good friend who works for one of the leading India-based BPOs confided in me recently, "we should bring over the training leaders from the top Indian outsourcers and have them work with US businesses to get their act together".

What continues to irk me, is the fact that industry has become so focused on making its quarterly numbers that it has taken its eye off the long-term picture.  We saw this financial meltdown coming - and did nothing (wasn't the Asian crisis of the '90s warning enough?).  We are seeing further deterioration of the environment - and still do little.  We saw the US automotive industry grind down to its current predicament - and have done nothing.  And we are seeing the IT and BPO industry rapidly develop across the globe - and have blissfully ignored it to meet these cost-containment targets. 

And how to we respond?  Bailouts.  We're now talking about bailing out the flagging automotive industry.  How did it come to this?  Years of greed, a deterioration of our work-ethics, and eager developing nations determined to get a taste of what we have.  It's as if we had a major cardiac arrest and are now hoping we can recover fully from open-heart surgery. 

And this time when we do recover (and we will), we simply have to make sure this never happens again.  Some will argue this is all about natural economics of globalization and a free market - and they are probably right.  However, this time we have truly reached an inflection point. 

It's about accepting we now operate in a global economy and that we are competing at a level where we need to work as hard, and as smart, as the next nation.  I hope President-Elect Obama can help instill a new work culture in the US.  The US people have spoken that they want change, and they have voted in a President promising change.  The core question now is whether they are really prepared to change.

Comments

[Butch Ackman]

Some of us older people remember the devastation our economy went through in the early 80's. Obviously there are some differences but the root cause even back then was our declining ability to compete in the global marketplace. Unlike the current situation, the administration at that time (and I'm trying to keep this apolitical) quickly sized up the situation and implemented an effective, private sector driven solution. It was called the "Socrates Project" headed by Michael Sekora. Using a variety of 1980’s technology, Sekora and his team developed and implemented the first and only economic development program powered by a computer-based intelligence system that enabled us to target critical military and commercial areas; identify competitor vulnerabilities, access the related technologies and exploit competitive advantage through technology superiority. Socrates has been credited with the resultant market dominance in key target areas that we achieved briefly during that time and the subsequent years of prosperity we experienced. The program was defunded by Bush 1 after the Soviet Union went down and some of our trading allies complained that we had potentially tipped the playing field so far in our direction that their economies would surely suffer. As a side note, in addition to commercially related advances, Socrates produced Star Wars and the Stealth technology. Michael Sekora is at the University of Texas currently working with a special projects lab to revive Socrates and enable the computer-based system with 21st century technology. Here's the interesting part, no one in government, and we have talked with many, are willing to even try to get their arms around this. Something strange is happening. I have been in this business for over 20 years and have seen nothing like it. Talk about resistance to change. The only advice I can give is to grab your back sides and hang on to a generation (or more) of financial shell-games and power grabs in Washington that will bring politicians and business leaders together – but to what end?
Butch - Austin, TX.

[S. Kishore Kumar]

It is the "developing hydrogen-powered or hybrid vehicles" part which I am focusing on. This is innovation which the American auto industry missed (their focus was on SUVs). This kind of innovation is not something that my countrymen in India are "trained" to do! Americans (and Europeans) still have a fantastic edge here that Chinese and Indians are far from catching up with. Hence, if you keep the innovation going you will be fine.

I have heard a lot of complaints about American schooling being poor; however that may be, American Universities are still among the best in the world. Hence, I do not think you have too much to worry about there.

Let me rephrase my perspective: the idea of Indians and Chinese being ready to compete with Americans is highly overrated. Your native ingenuity, creativity and innovation capability sets you apart and will continue to do so in the foreseeable future. Hence, worrying about competition from developing nations is non-essential.

Focus back on innovation and creativity. Once you innovate, Indians and Chinese will follow two steps behind you. I don't see them catching up.

As for the current crisis, the fundamental issue is of America living way beyond her means. It is a self made problem and has nothing to do with China and India catching up with America. Back to basics here means back to the old fashioned virtue of living within ones means!

The situation between the USA and Chindia is like the Eloi-Morlock binding. But, H. G. Wells vision was too pessimistic I feel. You will never get into that situation!

[Phil Fersht]

Hi Kishore,

I'm not sure where you have been these past few months, but the US eonomy is staring over a very precarious precipice right now. And if the US goes down, India's and several other nations' economies will fall with it. This may no longer be the case in another 10 years' time, but it is the current reality we face.

Unfotunately, 3g iphones and the latest release of Vista isn't going to save the US economy on this occasion, and I think you'll find many of these "innovative" products do not create huge numbers of onshore jobs for Americans, and certainly (as Vinnie points out) do not drive a lot of consumer spending in the US. The focus needs to shift from the investor to the consumer - commodity prices need to be lowered and more jobs created.

Don't get me wrong, I love the innovation argument, and if you can find offshore services to deliver good quality services at lower costs that allow your business to "innovate", that is the natural pathway for a business to follow. My argument is that the US needs to become part of that pathway also. And if that means re-investing in new "innovation" - i.e. developing hydrogen-powered or hybrid vehicles, or new ways of producing energy, that can provide new jobs and improve the environment, then I applaud efforts to do this.

My take is the US needs to go back-to-basics to find new avenues to re-invigorate its economy, to create new jobs that drive new demand and spending. Moreover, this meltdown wasn't something that happened overnight, it has been years in the making, which means there are some deep fundamental issues and attitudes that need to be transformed. My concern is that, while the US people have spoken up very clearly that they want change, that change needs to come from the bottom-up, and not simply from few stimulus packages. Innovation is bred through new ideas, through better knowledge and education, through hard work. These are qualities that we see from many developing nations - hence my comments that the "rest of the world caught up".

If I am "re-hashing" views from other media sources, then I am glad I am not the only one recognizing these issues.

Thanks for speaking up with your views. Sometimes things have to be said, and this is a critical time when we need to get these arguments on the table,

PF

[S. Kishore Kumar]

Sorry to say this Phil, but this post just re-hashes what the western press has been saying for a few months now. Miss your usual penetrative thought process in this one!

This crisis is not about hard work, cheap labor, responsibility etc., but about American innovation. The kind that Steve Jobs does, Michael Dell did, IBM does and yes Microsoft did (horrors!) - those innovations are what differentiate the USA from India and China.

It is also the misuse of innovation by the US financial sector that got the world into this mess today.

Renew your innovation leadership, please!

[Marc Kauffmann]

Phil:

Excellent essay.

Unfortunately, we've put ourselves in this predicament. If Wall Street firms (i.e.- Merrill Lynch's derivatives initiatives) weren't so greedy we wouldn't be in economic distress. My hope is that the CEO's of these organizations analyze and learn from the mistakes of the past and be more prudent in their decision making going forward.

Marc Kauffmann

[Allison Sagraves]

You are right on...two articles from the Boston Globe and NYT in the last day that point to the competitive educational challenge we face with with China and India...

http://www.boston.com/news/world/asia/articles/2008/11/09/colleges_scour_china_for_top_students/

http://bits.blogs.nytimes.com/2008/11/03/indian-math-tutors-math-deficient-americans/?scp=1&sq=teaching%20indian%20math&st=cse

[Esteban Herrera]

What? I read all this and nobody knows what kind of puppy it will be?

In all seriousness, the quality of thought in this post and comments explains why this blog is so popular, provocative, entertaining.

Though I generally advocate a bailout of the auto industry, I think we need to be careful that its not an excuse to build crap. Same goes for any other industry. As markets open up--and I share Vinnie and Phil's view that they need to open up a lot more, consumers will ultimately gravitate to the best value products and services. These competitive products and services will swing from region to region from time to to time--and they should.

The numbers of offshored jobs (there's an old McKinsey study that is fairly convincing in its argument that offshoring creates more value for the client economy than the host economy) shouldnt concer policy makers (or us). What should concern us is competing with good stuff on a global playing field. We can do it.

[Clark O'Brien]

Phil,

The productivity of the American worker is the highest in the world:

Over 90% of patents belong to americans.
Over 70% of the Nobel prizes have been awarded to Americans.

The "global economy" is beginning to look more and more like two not so wise bilateral agreements that favor cheap labor over increased productivity.

Most offshoring strategies include a long range goal of benefiting from
the markets they hope are created. With the global downturn companies are going to have to realize that these goals are further out and heigher risk then they previously thought. Possibly a realization is in the offing that economies that are not the result of value creation cannot endure.

Links:
http://www.nytimes.com/2007/09/04/business/worldbusiness/04output.html
http://NobelPrize.org

Clark O'Brien

[Bruce McCracken]

Phil,

That was an excellent essay. I think we will be alright but worry about the future and the younger generation. No, not that we will leave them a mess. I worry because too many kids feel entitled to things and don't have to work for anything. If they do something wrong, there are no consequences. There is very little accountability. They float through the schools and come out having learned very little. India graduates more students with bachelors and masters degrees than the US. It is even bleaker when broken down into engineering, math, and sciences.

Here is another example. We have all seen this too. When you go a hospital or a pharmacy, how often do you see doctors, nurses, or pharmacists that are not originally from this country? There is an acute shortage of people in these fields. The American educational system does not graduate enough candidates out of high school that can cut the mustard at the university level in these disciplines.

Cheers,

Bruce

[vinnie mirchandani]

for years now, people have though I was a socialist and worse for saying customer focus before investor focus. If we don't put the customer higher than investor we seek short term markets, we seek out markets where margins are x times R&D - a sure recipe for low innovation etc etc.

Instead of tax breaks I want to see prices lowered along with commodity prices having dropped in half, the dollar stronger etc. That would be putting customer ahead of investor and a more natural economic "stimulus package".

When it comes to overseas markets with a slight difference I want customers put ahead of labor. The US cannot be the sole consumption growth engine. German, Japanese, French need to open up their markets for their consumers. Same with India and China. Enough surpluses...allow your consumers to buy the best from wherever.

In the protectionist mood today, what I say may be considered heresy. But in the end you focus on the customer and labor, investors, government all benefit...

[kalpak Barde]

I am really interested to see what steps will big 3 auto makers will initiate.
My advice would be-
Go green, put synergies into smaller version cars (even in the US & Canada as well)
To remain healthier invest resources into developing nations where markets are still growing
(India- where market is still dominated by smaller version compact/family cars & I really wonder why GM/Ford of the world are not coming with their version of smaller cars)

Concentrate on core business of designing & selling of the cars rather than financing them...

My last suggestion (may be outrageous)would be reuse/recycle old cars instead of scrapping them in junk yard...Concentrate on used cars market as well

May be thoughts are still not refined but think these auto makers are disregarding their fundamentals

[Bill Kutik]

Personally, I am shocked, shocked to discover that Naomi earns more than $250,000 a year and will pay higher taxes under the President-elect's plan.

Seriously, an excellent post, Phil, and I think once the immediate crisis is alleviated the long-term solution is education.

As former President Bill Clinton once said, "The muscle jobs just aren't coming back here. Their muscle is cheaper."

Now not everyone is qualified through the accident of heredity to become a knowledge worker but nearly everyone can do better than flipping burgers at McDonald's with the proper educational opportunities.

Project Head Start (helping pre-schoolers) is the most successful program since the Johnson administration 44 years ago. Let's hope we see more of the same.

[Naomi Bloom]

Mentioning no names, I've had some clients say that I worked everyone too hard, set too high a standard for their deliverables (as to clarity of analysis and of the writing), and was unbending in trying to do what was best for my client's company even when it was uncomfortable for my client. I would love to see high personal standards, including work habits, become the norm again here at home. No country has a lock on great ideas, great talent, great work habits or great government, and no where is it written (history tells us quite the opposite) that any country has a lock a durably higher standard of living that its neighbors. In this far more global economy, Americans, young and older, will be out-gunned unless our government and we as individuals makes the right investment decisions. For my part, I'm ready to pay those higher taxes promised by Obama as long as we're investing in those areas that will take us into a successful future.

[Robert Chautard Jensen]

The Auto Industry should move to match the terms and conditions of its competitors, otherwise costs will remain unsustainable.

Chapter 11 is just around the corner and may be inevitable as the stakeholders all argue against change in the Auto Industry.

There is a long list of known costs that have nothing to do with making a vehicle and all to do with past management and government decisions.

The US needs to fix social services and tax otherwise they will remain uncompetitive, which is a tragedy because the World needs the US to be strong.

By the way, chartering a plane to take a group of executives to Washington is probably very good sense when your leaders need to be there for a one hour meeting.

Robert Chautard Jensen