Work, business & professional services

Off-shoring innovation

It’s been long argued that companies should outsource operations that are not at the very core of their business to low-cost sub-contractors. This usually means manufacturing and services are sent to countries such as China and India respectively. However, the flow of work that is deemed ‘non-strategic’ has started to include elements of engineering and design, and most recently there has been a trend to outsourcing research and development, especially in IT, to India. Other pockets of brainpower are now being outsourced to Thailand, Brazil and Eastern Europe – especially the former Soviet Union. Theoretically, innovation is a core strategic competency, so the question of whether it should be outsourced is an interesting one. Nevertheless the trend is undoubtedly towards doing do.For example, in the 1990s Rolls Royce conducted 98%per cent of it’s R&D in the UK. This figure has now dropped to less than 40% per cent. Part of the reason for this is cost savings but it’s also to do with the shortage of skilled labour in domestic markets. For example, the US graduated 220,000 engineers last year while China graduated 660,000. Booz Allen/NASSCOM estimates that as many as 6 million engineers are available for hire in emerging markets such as Asia. So what’s going to happen in the future? First, the pool of low-cost labour will shift to include regions such as Eastern Europe, Vietnam and the Philippines. Secondly, outsourced innovation will move upstream in terms of strategic content. Indeed, there will be a reverse ‘brain-drain’ with innovators returning to work in their home countries. People (companies) in countries such as India and South Korea will then compete directly with countries like the US.To some extent this makes good business sense. For example, Nokia has established a design centre in Beijing that develops products for the Chinese market. This facility is closer to the Chinese customer, which enables it to swiftly customise products for that market. However, one can’t help wondering whether teaching other companies how to innovate is good sense in the longer term. Moreover, if companies outsource innovation, design, manufacturing, customer contact and even strategy to consultants what exactly are they left with?

The tension between today and tomorrow

Of the first Forbes 100 companies that were analysed in 1917 only 13 still exist today in an independent form. The rest have either been swallowed by competitors or gone out of business. The same is more or less true with many of the ‘world class’ companies identified in books such as ‘In Search of Excellence’ and ‘Built to Last’. Indeed, according to McKinsey only 0.5 per cent of all companies perform well over several decades. So why, in an age of management science, is it so difficult to be successful over a long period of time? Why don’t high-performing companies last and why don’t long-term adapters perform well over the short term? The answer is that companies need to simultaneously perform two seemingly opposite tasks. First, they must execute flawlessly in the present. This exploitation requires strict control and tight hierarchies that reward individuals with extensive skills and experience. However, this experience and expertise can create barriers that prevent the organisation from adapting to changed circumstances in the future – especially sudden change. In other words, companies are disabled by their own success because senior executives develop mental models about what ‘is’ and ‘what works’ based on historical experience and success. Moreover, successful organisations tend to evolve into large networks that become grid-locked because any change inevitably affects someone negatively and is therefore resisted. For example, given the success of Dell’s business model why didn’t companies like IBM, Compaq and HP copy it? The answer is that all of these companies had invested heavily in other models and did not have the freedom to change. Indeed, change would have been chaotic. This analysis partly explains why most radical innovation comes from young people and small start-ups. In short, they are less heavily invested in the past and have less to lose if something goes wrong. In-built mental resistance also partly explains why most large company turnarounds involve new management teams that are more open to ‘what is’ and ‘what if’. So what can you do to create an organisation that is more adaptive to sudden change?Reducing hierarchy, increasing individual and group autonomy and encouraging diversity are certainly steps in the right direction but these are essentially ‘hardware’ fixes. For an organisation to perform optimally over a long period its ‘software’ (norms and culture) need to become flexible too. For example, younger employees need to be able to safely challenge senior management and human resources and strategic planning need to encourage exploration and experimentation.

Womenomics

The Economist magazine is not well known for coining trendy catch phrases but the term ‘womenomics’ was recently used by the magazine to describe the feminisation of Gross Domestic Product (GDP). Have they lost their mind? Not entirely. In America two-thirds of women of working age are now active in the workforce – double the number 50 years ago – and 25 per cent of workers in the US work for a woman-owned company. Moreover, in many markets women make somewhere between 50 per cent and 90 per cent of all purchasing decisions so in theory putting more women in charge of female-focused corporations would seem to make sense. This is something that Tom Peters has been pointing out for years. Indeed, according to the analysis in the Economist, the appearance of women in the paid labour market has contributed far more to the growth of global GDP than either China or new technologies like the Internet. Moreover, at the risk of generalising, I’d suggest that in the future women will be preferred over men for many jobs because of empathy and intuition – both of which will be in high demand. Furthermore, their emotional intelligence translates into a higher level of concern for the well-being of others be that customers or other employees.

Build it and they will come ...

What would happen if managers thought more like designers? This is a question recently raised by Boss magazine and while some of the answers are far from enlightening the question does raise some interesting points. First of all, strategists tend to start conversations with current constraints with the result that solutions tend to be linear extrapolations of what already exists. Designers, in contrast, tend to cast away practical constraints and start with the question: ‘what if anything was possible?’ This can be rather annoying at times because budget and time constraints are often thrown away but it often brings new perspectives to the table and one can end up somewhere quite surprising. Another advantage that designers have over strategists is that they create physical manifestations of possible futures that tap into our emotions, whereas strategists tend to deal purely in the logic of words and numbers. For example, its interesting that the fashion and automotive industries are among the few where design is at the very core of the industry and are almost unique in the creation of prototypes that are shown to competitors, customers and the media. What, I wonder, is the strategic equivalent of the Geneva Motor show, a Paris catwalk or a Formula One team?

Wild uncertainty

Traditionally, studies of uncertainty and risk have kept close to the ‘bell-curve’ – a symmetrical graph that represents the probable distribution of any given outcome or event. However, there’s a problem. Bell curve analysis ignores, or at least underplays, outcomes or events that are very low probability but very high impact. These days we all live in a world that is connected. Everything, increasingly, is connected to everything else and concentrations develop that can dominate an entire network. Moreover, so-called ‘wild uncertainty’ is becoming more commonplace, especially events that are man-made, so perhaps it is the exceptional rather than the average or ‘ordinary’ that is worth studying from a risk and consequence point of view?