Month: February 2016

I’ve always had an interest in technology, more from the perspective of what it can do for us and what it will mean for us rather than how it works. Back in 1994 I started to get interested in the potential of the Internet and maintained a Compuserve account for a couple of years. The problem was that few other people had even heard of email, never mind actually having an email address. I also started undertaking a bit of personal research and still treasure the October 1994 edition of the ‘Internet’ magazine, the first ever edition and also possibly the first UK magazine devoted to World Wide Web matters. I worked in the cable industry at the time just as it was about to evolve into the cable telecommunications industry. It seemed right to investigate the potential of a technology that could well help change the industry. The potential was always there but few would have predicted just how much of an impact it would eventually have.

So to today, or yesterday, February 23rd 2016. Boston Dynamics, a DARPA funded, Google owned company heavily engaged in developing robot technology released a video on Youtube which depicts how fast the technology is changing.

You really have to see this:

These ‘Atlas’ robots are still slightly awkward in their movements but it is pretty obvious that the wrinkles are slowly but surely being ironed out. Now the military applications are pretty obvious but it also looks like they are also working on commercial applications. Those heavy lifting jobs requiring limited dexterity look like they are now on countdown to being eliminated. I am no expert in the detail but it looks to me like a lot less than ten years before these ‘lifting robots’ are available as ‘off the shelf’ items. Perhaps not as domestic cleaners just yet but even here, once accepted in a commercial environment, we will soon start to see them enter the home.

I continue to read about how fast robots are developing and what they are likely to be doing. It is always good space filling material for news programmes, the middle pages of newspapers and specialist interest groups in the Blogosphere. What there is much less of, is an impact analysis of what happens when it does gain critical mass. How are we going to pay for these robots if the people who might actually buy them have had their jobs displaced by them?

Over time new technologies tend to become an accepted part of our social and economic infrastructure. Despite what could be a fundamentally different change about to be unleashed I am sure that eventually we will be interacting with robots on a daily basis and no doubt consider it an entirely normal and acceptable part of our lives. Though the transition could be painful, more so in that the widespread introduction of robots could take place not over decades but over years.

A general introduction of robots in Western nations will force developing nations to either cut labour costs or adopt the same technology. If we look at the costs of operating in Asia today, China is no longer the low cost manufacturer it once was; look to Vietnam for the lowest labour costs. But even Vietnam will be challenged in competing with a labour force that doesn’t demand higher pay, has low maintenance costs and can work 24/7. We often see the threat of robots as a developed economy issue but in a globalised economic environment it may be that the real impacts will be seen in those nations relying on low labour costs for export muscle.

As nationals of developed nations our concern will be for our own situation. If I’m a shelf stacker and become displaced by a robot what exactly will my future be? Do I retrain, if so to become what? If I can’t find any paid work in my chosen fields, then what? It is quite likely that these are the questions that politicians will be challenged with. How will they react? Will there be robot income tax? Will corporation taxes have to rise to pay for the costs of displaced humans unable to find paid labour? How will pensions be paid for?

Income is obviously high on the list of concerns for any society but it is not the only concern. What exactly are people to do with their time? Is this perhaps the destiny of huge swathes of society? Should we be promoting the education and entertainment sectors far more than today? Perhaps not necessarily as preparation for productive labour but to keep people who would otherwise be employed, occupied. If we adopt this course of action how exactly do we incentivise the people we want to keep on working, the scientists, engineers and medical staff and others who help maintain the fabric of society?

What are the responsibilities of companies and other organisations who plan to introduce robot technologies that displace hundreds of thousands of people? In the past it has been acceptable to simply ‘restructure’ with a redundancy payment and perhaps a bit of outplacement support. This may be far less acceptable in a future where there are simply no human jobs left. A restructuring in this instance really would be the end of the employment road for many people. How should companies adapt their release policies to cater for this new situation? Should expectations be set at the onset of employment? In other words no ‘evergreen’ employment contracts. Should employees be advised far further in advance of their impending release than in the past so that they can prepare? In other words should we be changing our whole attitude to employer – employee relations in a world where ‘robots are our greatest asset’?

When you do start to think about the implications of this technology the questions start to pile-up by the dozen. The worrying part is that there are not many people even thinking about these challenges and even fewer committing pen to paper and suggesting answers. In 1994 the Internet was a single magazine a few thousand basic web pages and a few million email accounts. By 2004 it had taken hold across the developed world and by 2014 virtually all major software applications had been web-enabled and Web had caught the imagination of some of the least developed nations. It’s now everywhere.

Judging by the Boston Dynamics video and some recent statistics I have seen in the growing acceptance of robots I don’t think we will have to wait until 2036 before we see robots everywhere. My guess is that the world of transformation programmes in the 2020s will look somewhat different than those of the last few years. Those skills in project and programme management, Lean Six Sigma, ITIL and other performance improvement initiatives could well become software algorithm re-writes capabilities rather useful certifications for humans. Restructures may well become human organisation elimination rather than a new Visio organogram.

At the moment the government response is to promote software development skills in youngsters going through school. This may work for now but will not be much help when software writing software really takes hold. As libraries of pre-written code are generated and artificial intelligence (AI) start to create algorithms capable of following basic functional requirements the landscape will change again. It’s not HAL that I fear in the world of AI but the more subversive threat of computers removing our ‘thinking’ roles. How then to we prepare our children for work, or non-work as the case may be?

My view is that we need some far bigger thinking than has taken place so far. Robots ad AI will not go away. We need to think through the implications of these technologies before they permeate through our whole social and economic infrastructure. The Internet has created more jobs than it destroyed and perhaps there is an argument that robots and AI will do likewise. However, until we truly analyse and gain a better understanding of their impact we will remain reactive and subject to unpleasant consequences.

After the 2008 banking crisis I often saw comments to the effect that ‘nobody could have seen it coming’. It was totally untrue of course. Similarly, the potential impacts of robot technology and AI are (sporadically) starting to be talked about. Look closely and you can see these robots on the horizon marching towards us.

We have some time to prepare for their arrival but not a lot.

There are a couple of widgets I have loaded onto a page on my website. One tracks official UK public debt and the other official US public debt. I’m sure there are others I could load, Japan, China and the Eurozone for example, but these are the ones I like to keep an eye on. A few points before getting to the nub of this post. The debt trackers only measure public sector debt, not total debt; the latter including corporate debt and household debt. They also only track what I would term ‘realised’ balance sheet debt. In other words they are not tracking the aggregate future liabilities of social, health and pension commitments i.e. the net present value (NPV) of those liabilities. Add those and we are in 2008 Zimbabwe dollars numbers. I’ll stick to the hard numbers for this blog.

Debt as an absolute number does not really mean much to most people, me included. Economist therefore like to express it as a percentage of gross domestic product (GDP). That helps but is also not particularly useful. GDP doesn’t pay the interest, a country’s tax take does that. The debt to GDP ratio is the most favoured ratio but pretty useless when the exam question is about affordability.

So, to the numbers. The official UK debt now stands at £1.53 trillion and the US $19.06 trillion. Both are increasing at an eye-watering rate per minute. By the time the next US president is elected US debt will have hit $20 trillion with few signs of it getting under control. The US and the UK are in similar situations. Neither country has the means to repay the debt and only manages it on a day by day, week by week basis by revolving loans: new treasuries, gilts and bonds are used to repay older commitments now maturing. Over the past seven or eight years as interest rates have hit near or at zero and it has worked fairly well. The average interest rates on both US and UK has dropped somewhat as new securities have been issued at lower rates.

Alas in the UK’s case interest payments alone are now in the region of £50 billion a year. To put in into context total UK tax take is about £650 billion which means that 7.5% – 8% of our taxes are wiped out by interest payments (about 6% of the US budget is absorbed by interest). The fact that in both the UK and the US total interest payments have been flat over the past few years is the perverse result of interest levels being at the lowest levels since the Black Death. Interest rates rising from their current suppressed levels of 0 – 0.5% to more ‘normal’ levels of 3.5% – 5% will raise interest payments in the tens of billions in the UK and hundreds of billions dollars in the US – analysts estimate that each 1% upward movement in US interest rates translates into an additional $200bn in payments to external creditors.

In a growing economy, taxes will increase to service payments of existing debt. Growing economies also usually deliver price inflation which erodes the ‘value’ of the nominal aggregate debt accumulated over time. Debt commitments are therefore usually affordable.

However, the problem we currently have is that economic growth is not really reaching levels that is making much of an impact. The existing paradigm of over -supply of commodities, goods and services across the globe has created a price deflationary environment, discouraging new business start-ups. The money created by central banks found its way into the equity markets, recapitalised some of the banking system or has simply sat on central banks’ balance sheets. In the US FED’s case something in the order of $2.3 trillion still sits on its balance sheet as the ‘excess reserves’ of the commercial banking system. Commercial banks have been less willing to take risks and lend and entrepreneurs have been unwilling to borrow. What is the point when there is already over supply everywhere?

Having burrowed about as far as I want to into the background of public sector debt I think it’s time to surface and get to the purpose of the post. Despite the ominously financial/economic sense these initial paragraphs have conveyed, this is really a blog about change.

Our public sector debts matter. The cumulative effect of all the debt across the western world in my view has been impacting the micro-change management world for the past few years. Debts have to be serviced. Public sector debts are serviced by raising taxes or cutting public expenditure. Both approaches have economic and financial consequences. Organisations and businesses have to react to these changes.

If public sector expenditure falls, the companies relying on the revenues from public organisations need to adjust their behaviours and costs if profitability is to be protected. Falls in public sector expenditure represent a change in market conditions and it is not hard to make the case that recent changes are more structural rather than cyclical in nature.
Increases in taxation take income out of corporate and consumer pockets, income that might otherwise be applied to commercial and domestic expenditure. The theory is that taxes are just a reallocation of expenditure rather than a loss to the economy: the government can spend your money better than you can. Well, there may be some substance to this if taxes are reallocated to public infrastructure spending but the argument fails miserably when your taxes are taken just to service existing debt. This latter argument also compounds if and when interest rates go up (2020 now!) and we have a £2 trillion debt and interest rates at 3.5%. If that unpleasant prospect coalesces in our none-too-distant future it has the potential to deliver massive change management challenges for both the public and private sector. Gross UK taxes are already around 38%, the point at which economists and Treasury officials start to think about what a UK ‘Laffer Curve’ might look like. Laffer is all about the point at which increasing taxes impacts behaviours, and there is a point at which people lose interest in working. Thus, somewhere in the 40% range it is postulated that increasing taxes actually reduces total tax take.

So the real point about the blog is that debt really does matter. My own contention is that the relationship between debt levels and change management is far more tangible than it ever has been, primarily due to the enormous size of those public sector debts. Low interest rates have bought us some time but companies and public sector organisations really ought to be preparing now for the effects of these debts rather than wait for governments to effect tax increasing and spending reduction panic measures a few years from today. After eight years of emergency central bank measures we are no further forward. Even the hardened ‘cycle’ economists are starting to doubt. Equity markets have been buoyed by central bank largesse but the underlying economic conditions across both sides of the pond look more and more like structural changes are underway.

As I look at the world the big economic issues transmit into change management challenges almost immediately. In response to the banking crisis, the US FED created free money via quantitative easing (QE). Free money was thrown by the hundreds of $billions at US shale which promoted rapid technology development and in turn turbo-charged on-shore non-conventional oil production. In only a handful of years the US emerged to challenge Saudi Arabia as the biggest producer, taking tangible market share from OPEC countries. OPEC reacted by artificially increasing production to maximum output, which has hit Crude and Brent spot prices. Spot prices rapidly fell which created massive problems for the oil sector across the world. Companies have had to react quickly to an industry in financial distress. Dozens of organisations have created change programmes to address the revenue and cost problem – change management specialists with deep energy sector experience are at a premium at the moment.

Again, the point here is that big economic issues translate into organisation level change management challenges very quickly. And the ‘big daddy’ of these issues is almost certainly the level of public sector debt in western countries. When the cracks do finally appear in the current Ponzi like approach to servicing debt, it will likely affect every sector, not just one or two. All organisations and companies will be confronted by the challenge of how governments will react. Some strategic thinking and scenario planning may well be called for.

It would be nice to think that a crisis will never happen but hope has never really been much of a strategy in the past. Central banks have managed to suppress interest rates and put government debt on their own balance sheets for some years now (both the US FED and BoE own 35% – 40% of their respective governments’ debt) but at some point the jig will be up. We don’t know what the catalyst for a crisis will be but tangible signs of recession will be a promising candidate – recessions increase deficits and push public debt up at an even faster rate. Reactions to a crisis could involve printing yet more money or negative interest rates but these policies have not worked very well in the past and future effects could be even more muted.

So I’m going to continue to keep an eye on those debt trackers, despite the sceptics who see everything still working and have concluded that the financial and economic system must therefore be just fine.

For my part, debt matters.

I tripped into the world of shared service centres (SSCs) by accident.

The revolution in telecommunications, media and technology (TMT) during the 1990s did not appear without cost. Valuations for TMT companies accelerated at warp speed from the early part of the decade right into a brick wall during the year 2000, but that’s really for another blog. The reason for the reference is really a contextual point for the sort of environment it fostered. Mergers and acquisitions (M&A) during the ‘90s took place at ever increasing valuations, and apparently at escalating costs. Companies started and continued to borrow for this activity, not at IG (Investment Grade) rates but HY (High Yield), or ‘junk’ rates. Interest rates on amounts borrowed for infrastructure investment and M&A exceeded double digits well before the end of the decade.

So what has this got to do with shared service centres?
Well the link may appear tenuous but it was far more direct than most would realise. M&A activity created opportunities for eliminating cost through removing duplication and those enormous interest payments had to be serviced. The industry needed some new ideas for saving operational costs, and quickly.

Centralisation as a concept had been around for many years before the appearance of shared service centres but the traditional approach was rather one-dimensional. In most instances it was simply a case of consolidating lots of people previously working on a dispersed basis into a single physical site. It was far less about efficiency and effectiveness than about visible control, and they were certainly not in the business of customer service. Likewise the concept of identifying critically important performance indicators had yet to evolve into an operating process standard.

With a clear need to save costs it was down to the ingenuity and creativity of the industry to develop practical ways of making it happen. Centralisation was agreed as the obvious place to start but the traditional model would not be enough. We were fortunate in that the tectonic shifts in the telecommunications industry were being matched by similar changes in information technology (IT). Developments in IT started to open doors to improving how transactions could be effected. Thus the concept of ‘Automation’ emerged as something very relevant to providing service vs. its usual application in the manufacture of goods. For my part I usually associate automation with ‘Standardisation’, the challenge of ensuring that tasks are undertaken on a consistent basis. Centralisation, automation and standardisation initially looked like the way forward and for a short time all the emphasis was placed in this direction.

But the really big change wasn’t technical or structural, it was cultural. Instead of just ‘doing stuff’ the concept of service, of ‘customer service’, was introduced. I worked in a sales environment at the time and the sales guys were measured daily on their performance. Our relationship was direct. The output of our sales operations had an immediate impact on the performance of the sales teams. The company expected Sales to deliver so why shouldn’t we be expected to deliver on a similar basis? Reports on our own performance as well as that of our ‘internal customers’ were developed, Key Performance Indicators (KPIs), not just on cost but on the services we provided. A standard operating environment (SOE) was developed with the sales line management which outlined how sales advisors would work, what reports they would receive, when, and generally what was expected of them. For the sales people to succeed we had also to deliver. A service level agreement (SLA) emerged. We agreed the types of reports that would be produced, at what time of day they would be produced by, and to whom they would be distributed. Commitments were made on how quickly the daily sales orders would be distributed and the time it would take to process orders through the ‘stages’ in the customer relationship management (CRM) system. End to end (E2E) process thinking became the norm with initial targets soon becoming performance standards.

Thus the shared service centre emerged. It wasn’t a tried and tested, well-trodden route to an optimised cost structure providing high quality services, but a pragmatic reaction to a requirement to reduce costs very quickly. It worked through the innovative efforts of our people in developing pioneering solutions, a commitment to teamwork, sound leadership and a recognition that fundamentally we all wanted to grow the business.

So what of the 21st Century shared service centre?
The concepts are basically the same as are the critical success factors. There is perhaps a slightly greater emphasis on the people aspect but the core elements developed in the 90s are pretty much the same. My own criteria for assessing a shared service centre involves taking a look at a number of aspects of its operation:

Cost effectiveness

Has it been structured in the most cost effective manner? This could take us into the realms of physical locations and virtually centralised operations as well as organisational structure.

Are processes optimised? Are they written down? Is there a process owner? Is there a continuous improvement culture? Shared service centres are established to process transactions and the processes used should be constantly reviewed for environmental changes and other improvement opportunities. Inferior processes equate to higher transaction unit costs and ultimately to competitive disadvantage.

Are processes optimised the extent where only increased automation can deliver additional benefit? Automation is a cost as well as a benefit so its contribution should be assessed in the context of its cost.

Effective planning, both for resources and tasks for the day, week, month and year is another essential ingredient in running a cost effective SSC. Poor planning will mean more cost. The SSC needs to have the right resources available at the right time to deliver to the committed SLAs. Costs are not just financial when things go wrong.

Customer service culture

Has the concept of delivering a service been embedded into the operation? Do the people within the service centre think in terms of delivering services to their internal customers, or is it just an administration job?

My firm belief is that you will never deliver excellence in a shared service centre unless the people operating it believe in service, and their part in contributing towards excellent external customer service. This means measuring your own performance, accurately and with integrity, and managing to the internal SLAs you have committed to.

It should also be remembered that it is a ‘shared’ service centre. There should not be preferential treatment to some functions at the expense of others. Agreements may be made within the context of a broader SLA from time to time, but they should be transparent and fair.

Most SSCs use individual financial incentives as a method of supporting the service goals of the organisation. These certainly underpin the importance of providing service but they ought to be carefully designed so that the cost aspects are not undermined and that there are no other ‘hidden’ costs relating to staff.

Customer service feedback is also important. KPIs may provide one communication route but opportunities to use response surveys and user groups should also be sought.

People

A third theme is around the people operating the shared service centre. Today’s centres can be substantial in size and the work repetitive. Consideration needs to be made of the training and career development needs of staff and work ought to be rotated. Teamwork is essential, not just within the SSC but with the functions and people supported. Teamwork will help foster ownership which itself helps promote customer service.

As with other functions the roles and responsibilities of people working within the SSC should be constantly evaluated and adjusted if necessary. The demands on an SSC will evolve over time and with those demands so will the processes and the roles played by individual line managers and staff.

Shared service centres evolved through internally centralising transactional environments. They have now moved externally and in some cases offshore. The emergence of external solutions has introduced a whole host of other sourcing related issues encompassing pricing, contracts, cultures, languages and time zones. The challenges of control, intellectual property and core strategy and also not too far away. Shared service centres are now not just about how they are run but who should run them, where and for what cost.

Looking beyond the present there is a significant chance that the functional tasks of the SSC will become further automated. There are already signs that Robotic Process Automation (RPA) will make significant steps over the next decade into replacing people processing tasks with automated hand-offs. It is not beyond possibility that the SSC of 2030 will look more like a server in an air conditioned IT room than an office in India processing transactions for a European bank. As past experience has often informed: if it can be automated then it most likely will be automated.

It has taken fifteen to twenty years for the modern SSC to evolve to where it is today. The next ten to fifteen could well introduce changes that are even more dramatic and possibly even lead to its elimination as a management concept.