Why economies don't grow faster?

During a recent research project I was shocked when I discovered that economic growth in the last 100 years has shown a surprisingly consistent behavior: an almost constant rate of long run growth of GDP of 2,5-3% per year. This is traditionally known as the “technology frontier”, implying that for a developed economy to continue growing it must innovate, but that this innovation is only translated into economic growth via increased productivity, at the mentioned rate of 3% per year.

In contrast with this view of the growth rate of developed economies, we have the speed of technological innovation that can be seen across multiple industries like semiconductors, biotechnology, nanotechnology, genomics, IT, etc. In these and multiple other areas, the innovation rate is much faster than a 3% per year. In fact, in many cases we can see exponential growth rates with constant or even accelerating growth factors that multiply, not merely add, to the previous year situation. For example we can see how the Moore Law predicts double capacity of integrated circuits every 18 months (and this law has been happening for the last 20 years).
So why does it happen that the very fast technological innovation that we see across multiple industries is only translated into economic growth at a 3% per year?

In the end, technological innovation is at the center of economic growth. However, there seem to be significant differences between the speed at which different firms, sectors and countries adopt the same technologies.

For example, looking at the impact of IT in US and Europe, we see that during the period 1995-2001, in the US, productivity growth accelerated by 3.5 percentage points per annum in the ICT-using sectors (from 1.2 per cent p.a. pre-1995 to 4.7 per cent p.a. post 1995). This did not happen in Europe, which remained at a constant 2% growth rate in the same period. Since IT is available throughout the world at broadly similar prices– why were European firms not able to reap the same benefits from IT as their US counterparts?

The answer has to do with the market structures, institutions, protections and incentives to adoption that different firms have in different markets. If IT brings an increase in productivity and I'm in a competitive market, I'll adopt IT to remain competitive. If I'm in a protected market, why should I?

As many specialists have well described, it's not innovation per se what matters for economic development; it's innovation adoption within a country that will bring the growth for that country. This should be known for those countries that try to establish themselves as innovative. In some cases they would be much better off by simply improving conditions for adoption of existing innovations in their markets rather thah trying to establish themselves as the champions in innovation.

The mystery of transaction costs, Information Management and Organizational Design

....or why your company may not survive an era of Google outside and not inside.

The traditional Theory of the Firm used to explain that jobs performed inside the firm implied lower transaction costs than those performed outside. In essence, the firm avoids the necessity of using the price mechanism for performing its actions, and instead it is replaced by the direction of managers. The moment the cost of performing those actions inside the firm is bigger than performing them outside, then that transaction will be performed in the market. Two of the most relevant transaction costs are the cost of finding the relevant information and the cost of coordinating activities.

Today there are two dimensions that have significantly altered the relationships inside the firm and the associated transaction costs: (1) technology and (2) knowledge-intensive works.

1- We've seen the development of IT that has brought interaction costs down to nearly zero in the modern world. Talking to someone in a remote location, or accessing corporate information is today a very easy task. However, the difficulty of accessing the appropriate information inside an organization these days is growing all the time. We've all experienced situations in which finding information outside our company is much easier than finding it inside.

IT and Information Management are today disciplines that play a key role in maintaining the entity of the firm. If Search technologies, Enterprise Content Management, Business Intelligence systems are not effective inside the company, the cost of acquiring the relevant information simply goes to high and the reason to work for a firm looses a lot of sense.

2- Frequently in modern companies, knowledge-intensive complex and value added tasks need to be performed by groups of individuals that have to collaborate. However, the design of the organization does not make it easy to collaborate: silos, departmental walls, make it difficult to collaborate.

If organizational designs do not facilitate collaboration, sharing and interaction, another important cost of transaction goes high and another reason to keep the firm united disappears.

The two aspects mentioned above are probably the biggest threats to most of the modern corporations. I'm reading with interest the book "Mobilizing Minds" that explores some of the above mentioned issues and I hope it Will provide me with some answers.

INSEAD Knowledgecasts-Building Employee Commitment

INSEAD Knowledgecasts

Building on my previous post about future of management in talent intensive worlds, I just found a great podcast from INSEAD Charles Galunic, Professor of Organisational Behaviour and Dean of the EMBA Programme called "Building Employee Commitment" (Knowledgecast nº 8).

Amongst other things, he reached to a similar conclusion to the one I mentioned. Based on some research they found that companies do two types of investments for their employees:
- Firm specific, very much related to the specific characteristics of that firm
- General investment, that in turn make people more mobile (I called it more employable) like general management, leadership development or technology.
They found out that investments made in more general things, actually secure more commitment from employees!!

Of course this is a much better way to put it, but we share the same underlying idea.

The Future of Work- and of management

Javier Cabrerizo: The Future of Work

After my previous post on the future of work I realized about the following: in a few days I've come across the special report from Business Week "The Future of Work" , a new book from two McKinsey researchers under the title "Mobilizing Minds: Creating wealth from talent in the 21st century organization", and the Management Innovation Lab where a friend of mine acts as the executive director.

Obviously the theme of managing talent has been popular for a while but now it's becoming even more popular. And more serious research is being thrown into it, which is something to celebrate.

Based on experience in managing highly talented teams internationally I've come to one basic conclusion:

Employees are more committed and show less turnover or attrition rates when they feel the company is investing in their "employability". This is counter-intuitive but crucial: the more a company invests in employees (trainings, soft skills development, ...) the more value the employee perceives in staying with the company.

Now if you're managing a team of highly educated professionals, are you the type of person that's afraid of investing in developing their skills and capabilities because they may leave? Or are you the type of manager who understands that, in reality, that's precisely the only way to retain them?

I expect to see these ideas developed with the new research that is being conducted about the topic and I hope it will help change the mentality of obsolete managers that are just too abundant.

Forrester Information and Knowledge Management: The New Software Industry – Forces At Play, Business In Motion

Forrester Information and Knowledge Management: The New Software Industry – Forces At Play, Business In Motion

This blog entry from Forrester brings back the discussion about the business model of the software industry. What is the impact of SaaS in the industry? Are mature software companies forced to increase the contribution of services to their revenue streams more than new licenses do?

The most important question to ask here, I believe is: what are customers buying? Do they buy tools or do they buy the outcome of using those tools?

If you think they continue to buy tools, the traditional packaged licensing model applies. If you think they buy the result of applying that software to their business, then it's not that clear.

The presentation from Michael Cusumano describes in detail the evolution of software firms and the combination of software and services. He appears to detect a rule that applies to software companies: when they reach the age of 23 years old, services (including maintenance) surpass license as the larges contributor to company revenue.

The interesting factor is that, although services can have positive contribution to the net profit, investors typically place too much value on products over services. Is this sustainable?

However, there is a terminology confusion with the "service" concept: do we talk about the services economy, or are we talking about IT-enabled services? One of the most attractive ways of looking at it is: when to "servitize" products and when to productize services.

Whenever you can codify or formalize specific actions, those can become IT executable services, with clearly defined rules of execution. That means you can "productize" a service. Whenever you need to add differentiation and pay for utilization not for capacity, you have an opportunity to "servitize".

The transformation in the software industry is notorious and fascinating. Can this be transplanted to other industries?

Entrepreneurs inside your company

Is it possible to have entrepreneurs inside large corporations? That's an interesting question.
I think the answer is YES.

Then, the next question is, are they going to last?. Mmm, that's a different story and how to make it happen is a very interesting managerial challenge.

In a recent conversation with someone who knows the technology industry very well, he mentioned: "this company is much more entrepreneurial than that other one.." Can an entrepreneurial culture retain entrepreneurs inside?

The fact of the matter is that entrepreneurs, at least my understanding of entrepreneurs, are motivated by two things: following their guts to transform reality and make money with it. Many companies with the so called "entrepreneurial spirit" can provide the freedom to do the first. But very few companies will also provide the second element.

One could argue that if you want to make money, you should go out and run the risk. True. However, I think there's a balance to be achieved here. It's in the interest of the company to identify and invest in new areas and to do that, they will be better off leveraging the entrepreneurial skills of employees. However, these will only be interested in pursuing the opportunity, if the associated compensation reflects the risks in their careers.

There is opportunity for creating the mechanisms that can recognize contribution to business growth through new endeavours inside large organizations. This recognition should come in the form of higher monetary premium. Of course, the risk-reward equation cannot be the same as if the opportunity was pursued outside the company. The same opportunity outside the umbrella of a large organization, should provide higher upside, simply because it also encompasses a higher downside.

The question then is: how many companies have the internal mechanisms that discriminate compensation according to achievements? Are successful entrepreneurs inside large companies capturing a bigger premium than their more static peers?

As Jack Welch has tirelessly explained, top performers should be making x2 or x3 what your average performers are doing. For enterprise entrepreneurs, that should be x10.

IBM - Expanding the Innovation Horizon Global CEO Study 2006 - United States

IBM - Expanding the Innovation Horizon Global CEO Study 2006 - United States

In recent weeks I've found myself having some very interesting discussions about innovation in large corporations. Amongst them, I would remark one with the director for innovation of one of the leading bank in Europe and another one with the head of strategic consulting in a large professional services organization.

I normally recommend this study from IBM, as well as the Global CEO 2006 study . However, I found myself in both cases describing my own experience practicing with innovation and some of the lessons learned for a day to day effective management of innovation within large corporations. And since I've been asked in previous occasions to articulate these findings, here they go:
1- We had a structured approach to innovation. We clearly differentiated invention (a moment of magic inspiration) from innovation (a day to day obsession with improving results) and simply looked for ways to programmatically find new areas of improvement. A portfolio analysis of your business, using BCG matrix or Ansoff matrix can very well help to start with.
2- You want to have a model for decision making that incorporates all relevant stakeholders. You don't necessarily need to agree on everything, but everyone needs to agree on a model. Importantly, people must agree to disagree. In large corporations dealing with matrix like structures, with countries and divisions, this will be crucial.
3- Get the sponsoring of the senior management. Once the group has decided that an opportunity will be pursued, there will be times when other priorities will jeopardize the existence of the embryonic business. Senior management support helps ensure that there are frequent conversations at all levels that help rise visibility and monitor progress of the initiative.
4- Get an entrepreneur. Large organizations (and small) are inertial: you will need high levels of passion and energy to move the beast, so don't try to emulate: it won't work. Find someone passionate about the project, who knows about it, and can be credible about the topic.
5- Ensure focus and ownership. Once you decide for something, give someone full ownership for it. Give it 1, 2 years to see if it flies. If it doesn't, then kill it, but make sure that during the test time, there is full dedication to it. People in the organization will be too busy doing everything else they are doing now, so avoid the euphemism of 50% of time. Also, define clear boundaries and ownership; in other words: no where to hide for the good or bad.
6- Provide organizational support. Small things won't reach the needed critical mass to enter in the radar of large marketing organizations. Also, it will be immaterial in large P&L of regions or countries. You need to ensure a parallel organizational structure that ensures time, resources and support.
7- This is about innovation for results, so ensure regular reporting and business review. Again, it is important to distinguish here the invention and innovation worlds: you really want to bring results, so measure them. Don't accept the "We'll give it our best shot type of approach". Results are sacrosanct.

Yes, I know, nothing new. But with the fanfare about innovation that we frequently read, we forget that the whole purpose is to improve results. Rest assured that some people will not like this model. But that's exactly when you can start to distinguish the inventors from the innovators in the organization.

Chaos by design- an inside story of Google

http://money.cnn.com/magazines/fortune/fortune_archive/2006/10/02/8387489/index.htm?postversion=2006100210

I was about to name this post "innovation with no direction", which I believe is the most important managerial lesson we can get from this article. The guys at Google have got it right when it comes to innovation (and other things as well).
In today's world, innovation happens more outside organizations driven by self-assembling groups that pursue their own targets, than inside companies with a well dictated agenda for innovation. Why not try to make it as emergent inside as it is outside?
Well, you can do that if you're prepared to adapt your own business model depending on the results. That is not apt for most companies today. There must be a paradigm shift in the way we think of innovation. In the traditional model the innovation gets killed when it reaches the execution phase. In the new one, it gets killed if it does not fly; instead of death by management, projects can be death by natural selection. Managing innovation is supposed to be finding new ways to do something. Here we're talking about finding new things to do. And that's a different story.

Your investment to improve tacit interactions

http://www.mckinseyquarterly.com/article_page.aspx?ar=1767&L2=18&L3=30

If 70% of your workers interactions are what McKinsey calls Tacit, did you ask yourself what percentage of your IT investment goes to support those interactions?

Reengineering and automating processes has taken companies to achieve great productivity improvements. But if we are to live in an era where interactions are more tacit than, transformational or transactional, what is going to be the contribution of IT to improve productivity in this environement?

There are two key areas in IT that companies look at in order to support the new nature of their work:
- Make information accesible. Despite the organizational structure, try to avoid silos in information. Allow the information flow in all directions and break down barriers, hierarchies to become porous.
- Make people accesible. Adopt mechanisms to increase the means you can access people, inside or outside the boundaries of the organization in real time. Provide as many channels as possible in order to maximize the bandwidth of communciation.

As you can read in one of the McKinsey articles mentioned in previous posts, "Tacit interactions reduce the importance of structure and elevate the importance of people and collaboration"

In further posts I explore the details on how to do this and how SOA and Web 2.0 converge.