Category: future

Redefining affluence

Are we at the end of the Western world’s era of great prosperity

Finance writer Scott Pape always has an interesting perspective in his regular columns.

This week he talks about Melissa a mother of three who lives in the US state of Georgia who also happens to be Scott’s virtual PA.

Scott hires Melissa because she’s cheap; far cheaper than her competitors in Australia.

For the $8 an hour she earns, she gets no sick pay, no health insurance and no retirement benefits. Unless Melissa has a well paid partner and her work for Scott is just a sideline to help pay the bills, she will work until she drops.

This is the new reality for those in America, Spain, the UK and most of the West. It’s slowly becoming the reality in Australia as well despite the current hubris about the Down Under Economic Miracle.

Melissa’s job as a secretary or PA was safe and comfortable twenty years ago. Today – just like auto workers, shop assistants, accountants and even lawyers – secretaries are having to trade their secure jobs for precarious, and reduced, incomes in the globalised and casualised marketplace.

Scott makes perfectly valid points that individual drive and determination will be important in the globalised economy, but nothing changes the fact that Melissa and millions like her – including ourselves – will not have the living standards of her parents.

While we can talk about billions of Indians and Chinese improving their standard of living the new globalised world, we shouldn’t forget for a moment that living standards are declining for the most of developed world’s middle and working classes.

This decline isn’t totally due to globalisation and was probably going to happen regardless of the rise of China. The West’s prosperity was built upon the post World War II reconstruction and the credit booms of the 1980s and 2000s. Eventually the money – or the credit – had to run out.

How we as a society deal with this will define our nations and communities over the next fifty years. Our governments, business leaders and media commentators are ill prepared for the effects even if they recognise the problem.

Those most deeply affected are the businesses based on the twentieth century model of ever increasing prosperity. As our retailers are finding, this model is running out of steam.

While some expect the newly affluent Chinese and Indians to save their well padded hides, most will find Asian consumption patterns in the 21st Century will be different to US auto workers of the 1950s or English real estate agents of the 1980s.

Even financial planners like Scott are going to find things different – many financial planners thought they could get rich just skimming commissions off their clients’ portfolios which grew with the ever climbing stock and property markets. That model dropped dead in September 2008.

For those of us born and raised during the Western world’s era of great prosperity, we’re going to find we have to work a lot harder and not take affluence for granted.

Melissa and her eight dollar an hour secretarial service is the future and it’s probably Scott’s, yours and mine as well.

Some may say that’s a pessimistic view of the world, but a leaner, harder economy may be the best thing could happen for us as individuals and a society.

Giving a damn

Our works are what we are judged by – not the trinkets we gather.

Twenty years ago a lady unexpectedly passed away leaving her estate to her infant daughter. Included in the estate was a modest apartment in Sydney’s inner western suburbs.

For years, the unit sat on a local real estate manager’s books quietly gathering rental income and growing in value during Sydney’s great property boom.

Eventually the owner of the real estate agency tracked down the infant, now grown up and living in Boston. He’d hired lawyers and private detectives to track her down.

Most of us would have taken the easy course and flicked the property to the public trustee where the property would have quietly languished for years in the tender care of the dusty, but expensive, bureaucrats.

A few criminally minded ones would have sold the property and pocketed the cash, confident that no-one would ever know or care.

But Chris Wilkins decided to do the right thing and found the owner, doing anything else would have been a “heartless alternative.”

Having a heart and giving a damn is what matters.

Whether its in our work, how we deal with other people or the change we make to our society. This is what matters – big bonuses, a flash car, a ministerial position or invites to “insider” conferences are just trinkets for the egos of vain little people.

In an era where shareholder value, triple A credit ratings, executive remuneration and personal entitlements seem to stand above everything else, it’s good to be reminded that most people are doing the right thing by others.

At the end of our lives, we’re judged by our actions. What will you be proud to be judged by?

What do we call the long term?

Has the long term arrived yet?

Yesterday Optus launched their revamped business services under the banner of Optus Vision.

As part of the launch, the telecommunications company released their Future Of Business report complied by Deloitte Access Economics.

In discussing the details, economist Ric Simes of Deloitte Access made some observations on what drives businesses in adopting digital technologies. Ric broke it down into management time horizons.

Short term: Economic uncertainty is no excuse for ignoring digital strategies.

Medium term: Companies start using digital technologies for competitive advantages.

Long term: Structural change disrupts industries.

On asking Ric what his definitions of short, medium and long terms are, he said “1-2 years”, “3 to 5” and “beyond five years”.

The interesting thing with this is that for most industries the long term has arrived, in fact it’s been with us for a decade. It’s just many managers and investors haven’t noticed.

John Maynard Keynes once said, “in the long run we are all dead.”

For some industries that long term disruption has happened and their business models have died – it’s just that managers haven’t noticed they are dead.

Is small business too pessimistic?

The small business sector doesn’t seem to be too confident about the future.

The MYOB March 2012 Business Monitor report is a disturbing document; not only does it show how low confidence is among Australian business owners, it also portrays a group that are making sacrifices for an uncertain future. Is this what small business has come to?

One of the most disturbing aspects of the survey is how long company founders go without a break. With one third reporting they had not taken holidays since starting their business, this statistic is constant regardless of how long the operation has been going.

As somebody who went a decade without taking a holiday, I have a lot of sympathy for business owners in that situation.

What really jumps out is the pessimism of business owners – a quarter don’t expect the economy to improve for at least two years and only 39% expect their revenues to rise.

That business owners would be so negative about the future is disturbing; they should be the most optimistic.

It’s also interesting that more than half are disappointed with levels of support from the government, does anyone expect different?

Quite frankly, if you want money or support from the government then get a job with the public service. I tried that for a few months and there’s plenty of pessimistic people there.

That small business owners are becoming as disillusioned as public servants is a concern for our economy and society. Hopefully it’s not a permanent condition.

Hubris and risk

Technology brings benefits and risks, we need to understand both

Today is the centenary of the Titanic’s tragic sinking. In many ways, the RMS Titanic described the 20th Century conundrum; a blind faith in technology coupled with a struggle to deal with the consequences of those innovations.

It’s worthwhile reflecting on the hubris of those who believed their technology made a ship unsinkable, or those who believed their shipyards would never close and – probably most relevant today – those who believe the sun never sets on their empire.

Technology can liberate our lives which is shown by the fact the average American, European or Australian lives far longer and better than even kings did two centuries ago. But we should never assume these improvements don’t come at a real cost to ourselves, the environment or the ways of life we take for granted today.

Bubble economics

The fear of missing out drives most investment booms. Today’s Silicon Valley is no different.

You know you’re in an investment bubble when the pundits declare “we’re not in a bubble”.

A good example of this is Andy Baio’s defence of Facebook’s billion dollar purchase of Instagram.

Justifying the price, Andy compares the Facebook purchase with a number of notorious Silicon Valley buyouts using two metrics; cost per employee and cost per user.

Which proves the old saw of “lies, damn lies and statistics”.

The use of esoteric and barely relevant statistics is one of the characteristics of a bubble; all of a sudden the old metrics don’t apply and, because of the never ending blue sky ahead, valuations can only go up.

Andy’s statistics are good example of this and ignore the three things that really matter when a business is bought.

Current earnings

The simplest test of a business’ viability is how much money is it making? For the vast majority of businesses bought and sold in the world economy, this is the measure.

Whether you’re buying a local newsagency outright or shares in a multinational manufacturer, this is the simplest and most effective measure of a sensible investment.

Future earnings

More complex, but more important, are the prospects of future earnings. That local newsagency or multinational manufacturer might look like a good investment on today’s figures, but it may be in a declining market.

Similarly a business incurring losses at the moment may be profitable under better management. This was the basis of the buyout boom of the 1980s and much of the 1990s.

Most profitable of all is buying into a high growth business, if you can find the next Google or Apple you can retire to the coast. The hope of finding these is what drives much of the current venture capital gold rush.

Strategic reasons

For corporations, there may be good strategic reasons for buying out a business that on paper doesn’t appear to be a good investment.

There’s a whole host of reasons why an organisation would do that, one variation of the Silicon Valley business model is to buy in talented developers who are running their own startups. Google and Facebook have made many acquisitions of small software development companies for that reason.

Fear Of Missing Out

In the Silicon Valley model, the biggest strategic reason for paying over the odds for a business is FOMO – Fear Of Missing Out.

To be fair to the valley, this is true in any bubble – whether it’s for Dutch tulips in the 17th Century or Florida property in the 20th. If you don’t buy now, you’ll miss out on big profits.

When we look at Andy Baio’s charts in Wired, this is what leaps out. Most of the purchases were driven by managements’ fear they were going to miss The Next Big Thing.

The most notorious of all in Andy’s chart is News Corp’s 580 million dollar purchase of MySpace, although there were good strategic reasons for the transaction which Rupert Murdoch’s management team were unable to realise.

eBay’s $2.6 billion acquisition of Skype is probably the best example of Fear Of Missing Out, particularly given they sold it back to the original founders who promptly flicked it to Microsoft. eBay redeems itself though with the strategic purchase of PayPal.

Probably the worst track record goes to Yahoo! who have six of the thirty purchases listed on Andy’s list and not one of them has delivered for Yahoo!’s long suffering shareholders.

The term “greater fools” probably doesn’t come close to describe Yahoo!’s management over the last decade or so.

While Andy Baio’s article seeks to disprove the idea of a Silicon Valley bubble, what he shows is the bubble is alive, big and growing.

One of the exciting things about bubbles is they have a habit of growing bigger than most rational outsiders expect before they burst spectacularly.

We live in exciting times.

Risks and opportunities in crowdsourcing

There are real benefits and dangers for business in the globally connected marketplace

Crowdsourcing and offshoring are changing bringing to small business the same changes we’ve seen in manufacturing and low level office jobs over the last forty years.

Those trends are going to affect local businesses – particularly the home based service providers – in a serious way as the local web designer and bookkeeper find themselves undercut by freelancers in countries where an Australian day rate is a month’s pay.

With those thoughts in mind I went along to a round table discussion with crowdsourcing advocate Ross Dawson, Freelancer CEO Matt Barrie and Design Crowd founder Alec Lynch to hear them discuss some of the issues around the concept ahead of their half day workshops in Sydney later this months.

Having read Ross’ recent book, Getting Results From Crowds, many of the concepts and arguments are familiar but its worthwhile considering how the trend of a globalised workforce is changing.

The benefits of crowdsourcing services

Crowdsourcing services like Design Crowd and Freelancer have benefits traditional outsourcing services don’t have.

Alec Lynch describes these as reduced expense, speed and risk. A broad range of cheap, accessible suppliers mean businesses aren’t locked into costly contracts with the attendant risks while they can bring projects to fruition in days.

Until recently, globalisation only bought benefits for major corporations with manufacturers contracting work out to China, back office functions to India and software development to Eastern Europe.

The rise of web based services where smaller, one off projects could be paid for by credit card has bought global outsourcing into the small and medium sized business markets.

Now local businesses are affected by business practices that, until recently, were the concern of those working for large organisations.

This is bad news for local service businesses; the suburban web designer or bookkeeper is now finding themselves competing with individuals who, as Matt Barrie points out, have a very good weeks’ income for the equivalent of a day’s pay in Australia.

Basically the same forces that drove most low value manufacturing offshore are now driving services and white collar jobs the same way.

Responding to the threat

There are major downsides for clients using these project based outsourcing services; for instance designing a logo is only part of a much bigger branding exercise which in turn has to be considered against the orgainisation’s longer term objectives.

Often, most of us don’t know what we don’t know and that’s the real reason why we hire an expert to explain why a logo should look a certain way, an expense should be allocated to one specific cost centre and not another or why we should one software package over another.

When we outsource our services, particularly to a low cost provider, we lose that expert insight and end up with someone just carrying out a task; it is up to us to supervise something we probably don’t understand ourselves.

Part of that supervisory role is project management, in the design field managing creatives can be like herding cats. This is why experienced project managers are worth their weight in gold.

Like many essential skills, project management is one of those which most of us don’t have and is chronically undervalued but when a business is outsourcing to a freelancer in Estonia or Eritrea then this service is essential.

Providing those skilled supervisor and management roles is where the opportunities lie in a crowdsourced market place.

In many ways, we’re seeing the end result of the post-industrial society. Just as we offshored the manufacturing industries through the 1970s and 80s then the low skilled office work in the 1990s and 2000s, we’re now outsourcing local services to low cost countries.

Whether ultimately this is a good thing or not is a big question but for local businesses, the trend is clear and much of the basic work is going offshore. Those who choose to whinge rather than adapt will be left behind.

We come here to work

We shouldn’t under estimate the economic power of the Chinese factory worker

“We come here to work and not to play” is the quote from a Chinese production line worker in Reuter’s article on Foxconn factory workers.

That quote could have come from a hundred years ago in Western societies as young workers fled agricultural communities to make better money and find greater opportunities in the factories and cities of North America, Europe and Australia.

In their report on Chinese labour conditions commissioned by Apple and its supplier Foxconn, the US Fair Labor Association confirmed the quotes from the Reuters article.

48% thought that their working hours were reasonable, and another 33.8% stated that they would like to work more hours and make more money.

These workers have an average 56 hour working week and over a third are putting in 70 hours each week.

Like our great grandparents they are focused on bettering themselves and deeply conservative; they know their immediate livelihoods and future prospects depend upon the work they can get.

They also understand the government owes them nothing and their expectations on what the authorities will do for them are low.

It often said the Communist Party of China is the most effective capitalistic organisation on the planet today. In reality it’s the workers on the assembly lines who personify what we know as the free market.

As the leaders of Western nations continue to indulge in corporate and middle class welfare while believing in magic pudding economics where massive mis allocations of resources have no cost and tax cuts pay for themselves, it might be worthwhile thinking of the businesses those 23 year old factory workers in Shenzhen or Chengdu might be running in thirty years.

Just as our great-grandparents built modern economies and industrial empires out of their hard work, which most of us still reap the benefit from, those young Chinese workers are doing the same thing.

I don’t get it

“Getting it” doesn’t guarantee business success

“I don’t get Twitter or Facebook” says the talkback radio caller, “why would you want to tell the world what you’re having for dinner?”

Once upon a time people didn’t get the motor car. There were many good reasons not to – compared to a horse a steam or petrol driven vehicle was expensive, unreliable and restricted in where it could go.

The motor car ended up defining the 20th Century.

Those who didn’t get it – like the stage coach lines and later the railway companies – eventually faded into irrelevance.

Something we should remember though is that many of the entrepreneurs in the early days of the motor car who did “get it” went broke. As did those in earlier times building railways and canals.

“Getting it” is one thing, but it doesn’t guarantee it will make you rich or guarantee your business’ survival.

Super connecting cities

How can cities re-invent themselves in the connected economy.

I’m chairing a panel this week in Newcastle for the New Lunaticks on How Cities can Become Super Connected where we’ll look at how a city can develop its broadband infrastructure and how the local economy can grow in a global, connected marketplace.

The challenge for a city like Newcastle is great as in many ways the city’s economy is a microcosm of Australia’s – a massive restructure of the local economy over the last forty years has left the region with a consumer driven suburban society and the massive coal resources of the region have made the city the biggest coal exporting port on the planet.

Much of the wealth flowing out of the port to India and China isn’t being distributed into the city and the Newcastle central business district is suffering from years of underinvestment and neglect by the business community and governments of all levels.

So the rollout of the National Broadband Network offers an opportunity for the city and the local economy to reposition itself. The question on the panel is how?

Waiting for Godot

The first aspect is that waiting for a government agency or telephone company to come to town is risky; recent history shows Newcastle gets no favours from state or Federal governments so expecting the region to be a priority for the National Broadband Network is unrealistic.

Indeed this has proved the case so far with no planned rollout locations for the NBN announced in the Hunter region to date.

At present higher speed Internet access comes through ADSL over the telephone lines and Telstra’s 4G mobile network in the downtown part of the city.

So it’s up to the community to create the conditions and demand for faster broadband.

Building the infrastructure

One way to make Newcastle more attractive to the providers of high speed internet is to make the supporting infrastructure easy to access. The local council can work on this by making streets, building and underground services like conduits accessible and available.

Part of encouraging investment in the local telecoms infrastructure includes an attitude from council that doesn’t put unnecessary barriers in the way of developments.

This isn’t to say local residents’ views should be over-ridden; if a city is going to be successful then it need the support of the residents.

Who funds the network?

While the city waits for the NBN or expanded 4G services to arrive, what happens in the interim? Should local and state governments build a temporary Wi-Fi network to cover the Central Business District?

If so, why just the CBD? Why not key industrial, commercial and shopping centres in the suburbs? Over the last forty years, Newcastle residents have shown they prefer to work and shop outside the city centre.

Of course the biggest question is who is going to pay for such an interim network. Putting the load on already stretched local governments guarantees the project will be strapped for capital.

Open data, open processes

An area where local governments can encourage growth is by being open and innovative themselves.

By making data available they encourage local developer communities and attract entrepreneurs who see a welcoming environment.

More importantly, having open procurement and recruitment processes that encourage local business to apply for government work and suggest innovative ways to work is one way industries in the region can be encouraged.

Connecting communities

Even with the best infrastructure you’re not going to build a vibrant economy without the community working together.

If we look at successful industry clusters such as Silicon Valley or the Pearl River Delta today, or historical successes like Birmingham in the 18th Century, we see industries built around a small core of determined entrepreneurs utilising local resources.

For Birmingham this was access to coal, iron ore, skilled labour and waterways to ship the products out. Silicon Valley’s role developed because of its access to high technology defense spending, good quality education facilities, a highly educated workforce and a free wheeling capital market.

Cities like Newcastle have to identify what the local economy’s strengths are and how these can built upon. It needs government, business and educational groups to be co-operating.

A liveable city

The key to all successful cities is making them attractive to entrepreneurial, skilled and younger workers. In some respects Newcastle has aspects that can attract these groups.

For Newcastle, and other centres, the challenge is to use their advantages to attract the human talent that will build the networks that matter.

The evolving business

How a fading electronics chain illustrates an evoluting industry

This story originally appeared in Smart Company on February 2, 2012

Woolworths’ announcement earlier this week they are exiting the Dick Smith Electronics business ends an interesting study in how a business can evolve as their industry changes.

In the thirty years since Dick Smith sold a stake in his business to Woolworths – a few years later they bought out the rest of Dick’s equity – the electronics retail business has changed immensely.

At the beginning of the 1980s, the CB radio boom that had fuelled the growth of stores like Dick Smith Electronics was coming to an end, as was the hobbyist industry which supplied those building their own computers and other electronic devices.

In the US, the hobbyist industry included people like Paul Allen and Bill Gates – who founded Microsoft – along with Steve Wozniak and Steve Jobs, the founders of Apple Computers. Both of these companies had a lot to do with the growth of the DSE business later.

While those two industries were fading at the time Woolies bought the chain, the availability of consumer electronics was taking off as Video Cassette Recorders, car hi-fi and, later, CD players started entering the market.

At the time these were high margin items so the transition from a hobbyist store to consumer electronics chain was a lucrative move for Woolworths – something helped by Dick Smith’s penchant for publicity even though he was no longer with the store.

Eventually the steam ran out of the early wave of consumer electronics but in the mid 1990s the PC revolution took off which allowed Dick Smith Electronics to diversify again.

As personal computers were taking off, so too did the next wave of consumer technology, particularly in mobile phones, games and big screen TVs which initially had big, fat margins.

Over time, these margins began to fade as prices dropped but for Woolworths this wasn’t a problem as the beginning of the 2000s saw an explosion of easy consumer credit, allowing stores to move more products to willing consumers.

Very quickly, the consumer electronics industry became more like the low margin, high volume FMCG – Fast Moving Consumer Goods – sector that is Woolworths’ core business.

The global financial crisis heralded the end of the credit boom and now cautious, credit shy householders meant consumer electronics were no longer fast moving.

Dick Smith Electronics aren’t the only chain affected by this, Harvey Norman are suffering the same way and in the United States Best Buy and Radio Shack are in desperate straits for the same reasons.

Making things tougher for Australian retailers are store rents that are among the highest in the world. Woolworths’ decision to shut down a third of the Dick Smith outlets is a wise move as many of those stores probably have lease renewals pending.

Woolworths has done well from Dick Smith Electronics over a quarter century as the consumer electronics industry has evolved. Their story is a great example of how a business can adapt in a changing sector.

Hopefully Woolies will find a motivated buyer – one hopes not one of the clueless private equity asset strippers that have destroyed so many other retail icons in recent years.

Perhaps we’ll see a buyer who can steer the business well into the phase of consumer electronics retailing with some innovative and fresh thinking that the Australian retail sector needs right now.

The battle between the old and the new

What side of history do we want to be on?

“We will build an America where ‘hope’ is a new job with a paycheck, not a faded word on an old bumper sticker” – Mitt Romney, US Republican Presidential candidate

“What immediate measures can be taken to protect jobs?” – French President Nicolas Sarkozy

“We want to be countries that made cars” – Kim Carr, Australian Minister for Manufacturing

Around the world the forces of protectionism are stirring to shield fading industries, businesses and fortunes from economic reality.

The most immediate target in this battle are the new industries that threaten the old.

It’s no coincidence US lawmakers want to introduce laws that will cripple the Internet in order to favour music distributors, that the US and New Zealand governments work together to shut down a cloud sharing service or that failing Australian retailers call on their government to change tax rules in order to prop up their fading sales.

The old industries appear to have the advantage; they are rich, they have political power and – most importantly for politicians – they employ lots of voters.

We shouldn’t under estimate just how far the managers and owners of the challenged industries will go to protect their failing business models, unwanted product lines and outdated work methods, which isn’t surprising as their wealth and status is built upon them.

Eventually they will lose, just as the luddites fighting the loom mills and the lords fighting the railway lines did.

The question for society and individuals is do we want to be part of yesterday’s fading industries or part of tomorrow’s economy.

We need to let our political leaders know where we’d our societies to go before they make the wrong choices.