Monthly Archives: February 2014

Setting aside the burdens of the past

The first report from the Australian Centre for the Edge on the Australian Shift Index, Setting aside the burdens of the past: The possibilities of technology-driven change in Australia, has just been published. (Press release here.)

We’ve worked hard on this over the last six months or so and I’m very happy with this report as an introduction to what we’ve done. If you’re interested in how technology is driving change both in business and in society in general, then I highly recommend that you head over and grab yourself a copy. (And if we’re in something like the same neighbourhood I’d love to catch up for a coffee to discuss. Or feel free to leave a comment below.)

The Shift Index was created as a tool to help us understand if the rapid pace and increasing uncertainty we feel in the business and social spheres is real, or if it is just an illusion created by the always-on environment we live. (This is a bit like how nationalised news brings us stories of shootings in other regions leading us to think that crime has increased, when in actual fact crime has been decreasing.)

As we say in the report:

The world is changing faster than ever. However, we can only respond to and manage a change if we can measure and understand it. If we want to respond as a community, then we need to find a way to quantify the change. We need to ask ourselves whether the perceived change is real, and if it is, how we can capitalise on it.

The short answer is that the world is definitely changing and that Australia, Australians and Australian businesses are successfully adapting to the changes. We can’t, however, rest on our laurels as the drivers of change are still present and it doesn’t look like they will dissipate for some time.

The concept behind the Shift Index is that developments in digital infrastructure (computing, storage and networks) is driving increases in information flows, and that these information flows are reconfiguring society by tipping the balance of power from the merchant to the consumer.

The framework we used as our starting point was developed by the US Center for the Edge, founded by John Hagel and John Seely Brown. The US Shift Index was developed in 2009 and has been updated each year since then.

Our goal with the Australian Shift Index was to take the US framework and build a comparable index for Australia, allowing us to take the lessons learned from the US index and translate them to our local context. At the same time, we tailored the index – tweaking or changing some of the metrics used – to create a version that is uniquely Australian and which can provide us with insight into the particular challenges we face here.

The methodology defines three groups of metrics:

  • The Foundation Index measures the price-performance of computing, storage and network technologies, the penetration of these technologies into society, and change in regulation to support the adoption of these technologies. This is the lead indicator in the Shift Index.
  • The Flow Index measures the resulting increase in information flows in terms of virtual flows (mobile phone and internet usage), physical follows (attendance at conferences, business travel, and money transfers) and flow amplifiers (social media and the like).
  • The Impact Index measures the impact of these changes across the Australian market (competitive intensity, labour productivity and stock price volatility), firms (asset profitability and the like) and people (consumer power, brand disloyally, returns to talent, and increased in executive turnover). This is the lag indicator for the Shift Index.

The result is three high-level metrics that quantify the the drivers for the change, the change itself, and it’s impact.

AU2012shiftindex

Image source: Centre for the Edge

There’s ten major findings in the report:

  • Fast adopters: Australians have a good track record for adopting new technology. Our challenge is to continue adapting, and to find opportunities to leverage these technologies within our institutions.
  • Tech-driven change: The permeation of cheap, powerful computing, communications and storage technologies is driving change and will continue to do so into the foreseeable future.
  • Knowledge flows: New technology has resulted in new flows of information at unprecedented volumes.
  • Higher competition: The Australian market has become more competitive as a result of new technology and knowledge flows.
  • Capital over labour: Australia’s focus has shifted away from labour and towards investment in new technologies for more efficient workflows.
  • Knowledge economy: Australia has shifted from an industrial and agricultural economy to a creative, service-based economy.
  • Unrealised potential: There is a big gap between our technological capabilities and the way we currently use technology to solve problems.
  • Economic strength: Australia’s economy is strong and demonstrates better asset profitability than the US.
  • Recession-proof: The global downturn in 2008 was only a pause in our progress and has not halted Australia’s transformation.
  • Future success: Our continued prosperity depends on how well our knowledge workers can find new ways of using technology to solve problems.

These ten findings are only the tip of the iceberg though. While the report answers some interesting questions, or raises even more questions, questions that we intend to delve into further.

Image source: macinate.

It’s time to make the hard decision

Toyota, as you’ve probably heard, is shutting down operations in Australia. This has triggered the expected wave of commentary claiming that this is the end of manufacturing in Australia and that unless the government does something about this industrial relations problem then the entire car manufacturing supply chain (i.e. everything from final assembly back) will collapse with disastrous consequences for the Australian economy.

This point of view is both disingenuous and unhelpful as it ignores the fact that the viability of car manufacturing in Australia is strongly influenced by both economic trends outside our borders and by systemic challenges within the car industry itself. Australia might be an island, but that does not mean that events outside our borders will not affect us. Industrial relations might be part of the challenge, but it’s not the whole story.

Pouring more money into the domestic car manufacturing supply chain may provide short term relief, but it does not address the root cause of the problem.

We need to make the hard decision.

If car manufacturing is to be part of our industrial mix in the longer term then we need to transform the domestic industry, creating a new operating model that enables a stable manufacturing industry in Australia within the global context.

If we cannot create a sustainable car manufacturing industry in Australia, then we should immediately start to transition the resources (people and assets) to new industries that do have a future here.

Simply propping up an industry who time has come will only ever be a short term solution, and one which is a disservice to the generation just entering the workforce.

Capital has won over labour

The global car industry is in trouble. There’s too many factories and not enough people buying cars.

Similar situations are not uncommon in other capital intensive industries. Decades spent automating and streamlining processes has transferred costs from labour to capital. This has been great for customers as it lowers the unit cost of the goods manufactured. The manufacturers, on the other hand, find that their business, or even their entire industry, can all too easily be pushed into a never ending cycle of boom-and-bust. We only need to look to containerisation and the development of the global container network to see these forces in action.

Containerisation transformed the old, manual, approach to shipping into a highly automated and efficient global logistics network. Goods were packed into large metal containers and craned onto and off ships, rather than relying on stevedores to manhandle individual barrels. This resulted in a dramatic reduction in shipping costs and time (somewhere between 60% and 80%), since the majority of the work was in the manual loading and unloading.

However, building a container network required a huge investment. New ships were commissioned, larger ships with complex racks to hold the containers. Fleets of containers were required to carry the goods. Docks also need to be changed from the fingers sticking out of a bank that was suitable for manual loading, to the large container terminals that host huge cranes.

These investments allow shipping companies to slash the cost of shipping. It also made these businesses very inflexible. Previously shipping companies could trim costs when demand dropped off, parking ships and laying off their crews. Now, with huge investments in container infrastructure, the shipping companies were forced to keep the boats moving during the down turn, as the revenue was needed to service loans or pay dividends to investors.

Times were good when demand was high, with the low shipping rates helping to drive volume up. When times were bad when demand was low, as the boats needed to keep moving even if it meant that they were losing money.

Car Manufacturing in Australia

Australia finds itself wanting to protect its traditional car manufacturing industry when the dynamics of the global car industry and economy conspire against us.

Car manufacturers need to improve factory utilisation if they are to remain profitable. Shutting factories down for a few weeks is not enough, nor is trimming labour rates, as the majority of their costs are in the plant and equipment contained within these factories, and not in the labour required to operate and management.

With too many (expensive) factories and not enough people buying cars, car companies are looking to consolidate their operations. Ideally the final resting place for these factories will be adjacent to major markets in a comparatively low cost geography. (Despite the balance of costs being in equipment, moving from a high to a low cost geography can still shave 10% off the total cost of manufacturing.)

Similarly, reducing the time from final assembly to delivery to the customer by placing the factory as close as practical to the customer, helps to reduce costs by reducing the time it takes for product to flow through the supply chain. This cuts the amount of working capital required as well as cutting the time required to push product updates through the supply chain.

Ideally, given current manufacturing technology, one of these manufacturing centres will be right in the middle of South-East Asia, enabling quick and convenient access to the the fastest growing car markets in the world. Thailand looks good. Another would be somewhere in the centre of the Americas, allowing it to service both North and South America. Perhaps Mexico or the southern states of the US? Eastern Europe might get a look in for a third manufacturing hub, but then it might just be easier to service Europe out of S.E. Asia or the Americas. (Note that niche plays such as BMW are the exception to this rule, as they are not selling into the mass market.)

So what does this mean for car manufacturing in Australia? Australia fairs rather badly on both the dimensions we just considered.

As a high cost country we can expect cars manufactured domestically to cost roughly 10% more than those manufactured in a low-cost hub. Unfortunately wage bargaining will be little help unless we’re willing to slash wages to the same levels as Mexico and Thailand, which is something that the Australian public is unlikely to find palatable.

Our position below S.E. Asia and a long way from the US and Europe also puts us at a disadvantage. While shipping a car from Australia to S.E. Asia, the Americas or Europe will not significantly affect the final price, the delay pushes up working capital requirements while the longer supply chain is more challenging to manage.

We can’t expect our domestic car industry to export its way out of this problem. Nor is the domestic market large enough to sustain it when cheaper imports are flowing in from overseas manufacturing hubs. The car industry is, after all, a global industry.

Pouring money into the industry might support it in the short term, but at what cost? If it cannot complete globally then it will eventually succumb to the pressure. And given the perilous state of the global and domestic car industries, that time will probably be sooner than later.

In the mean time we’re encouraging a generation of eager and talented young adults to build their lives around a career and an industry that we know will no be able to support them. They deserve better.

Can technology save us?

One solution to our dilemma is to find a model for the industry that can work for Australia.

Consider, for a moment, the replicator from Star Trek. Or, if you’re less inclined to science fiction, the recent explosion of 3D printing and the maker movement.

If we can slash the investment required to manufacture cars by slashing the investment required to build a factory, then the decision on where to locate that factory might tip in our favour. If a rather large 3D printer costing AU$10,000 could print a car, then every dealer would have one. Why ship a finished car from one of the manufacturing hubs when you can pick the model and options you want, have it printed, and pick it up in a day or two.

3D printing might be some way off, but there are people out there looking at this problem. iStream, for example, is the result of looking at the manufacturing process to see if there is a better, faster and cheaper way to manufacture cars. The result is a manufacturing plant that is 20% the size of a conventional factory, and which reduces the typical capital investment by up to 80%.

If we can use technology such as iStream, or one of its descendants, to reduce the factory footprint then we might be able to arrive a solution that can be sustained by our domestic market.

Taking this path would require an investment at the national level. The major car manufacturers are struggling with their older, more capital intensive, operating model and have no interest in a new approach. If we are to take this route then we cannot rely on the existing brands.

Should we cut out losses?

If technology cannot save us, if the consensus is that it is not possible to build a sustainable, mass market, car industry in Australia, then we need to consider our options.

Should we copy a page from Germany’s playbook, and invest in building a high-value, niche industry? An Australian equivalent to BMW or Mercedes?

Or are there other manufacturing industries that can absorb the work force? Should we, for example, invest in becoming the leading manufacture of pre-build housing? (We already have some form in this area.) What industries can we excel in? As others have pointed out, ending car production is not the end of the world.

It’s time to make the hard decision

Pointing out the key role the car industry has historically played in our economy, and focusing on how we might keep the industry alive, is ignoring that fact that the domestic troubles are part of a larger global trend, a trend that we can do little about.

Regardless of the path we each, as individuals, prefer, the debate we need to having is on how will we choose between the the options available too us.

New Business Models Need New Approaches to IT

Dominos

I have a new post up at CIO of the FutureNew Business Models Need New Approaches to IT. This post brings together a couple of things that I’ve been thinking about recently.

The first is the debate around who will ‘own’ IT in business. Will it be the CIO, the traditional ower of IT? Will it be a different department, such at marketing which has become the big spender on IT in the last few years? Or will be be some new department with a new leader, one that subsumes the current IT department just as the IT department and CIO took over from the Data Centre Manager? All of these options seem short sighted to as they appear to be only addressing the symptoms and not the cause of the problem.

The second thing I’ve been thinking about is anti money-laundering (AML) and counter terrorism-financing (CTF) regulation, since I’ve just done an update to the Technological Considerations of AML/CTF Programs piece published by LexisNexis as part of their Anti-Money Laundering and Financial Crime publication. A side effect of some of the new regulation in this space is that many more companies might be pulled into the regulatory framework – both public and private companies – due to their use of or integration with complimentary currencies. This has interesting implications for enterprise-wide governance models.

My ah-ha moment was when I realised that the debate we’re seeing around the role of the IT department and CIO would be better framed as a question on how IT should be governed in the new digital businesses that are emerging at the moment. Or, as I said in New Business Models Need New Approaches to IT:

Instead of focusing on who the new owner of IT might be, the question we should be asking ourselves is “How does a digital business consume (govern) information technology?” This is an important question, and one that we need to delve into more deeply. (Indeed, I like to keep posts fairly compact but this one post was roughly 2,000 words by the time I was happy that I’ve had covered the issue.)

It’s a long post, but the question is a nuanced one that needs that many words to work through the issues. I recommend that you head over to CIO of the Future and read it, and leave your thoughts in the comments.

Image source: mckinney75402

Bitcoin might make AML/CTF regulation a problem for everyone

I spent a little time over the break thinking about what’s happening with anti money-laundering (AML) and counter terrorism-financing (CTF) regulation, since it had come time to update the Technological Considerations of AML/CTF Programs published by LexisNexis as part of their Anti-Money Laundering and Financial Crime publication. (There’s a blurb for my part embedded below.)

The interesting shift in this version is that growth of AML/CTF regulation for complementary currencies (ie. currencies that are not backed by a government). Organised crime groups are finding all sorts of creative ways to use complementary currencies to launder money, including the creation of bitcoin ‘mixers’ that are intended to improve anonymity for bitcoin transactions.

A side effect of this regulation – which is largely targeted at bitcoin but which is been written in a way to bring all complimentary currencies under regulation – is that the points-based loyalty programme that you were thinking about introducing might actually bring you under the AML/CTF regulator’s watchful eye. Something as ambitious as Facebook Credits definitely would.

This has all sorts of interesting implications for enterprise-wide governance, but that’s a different discussion since it’s well beyond the scope of the Technological Considerations of AML/CTF Programs piece.

If you’re interested then head over to LexisNexis (or we can catch up for a coffee if you like).

Image sourceMike Cauldwell