I have known John Seely Brown for many years and have served with him on several committees and boards. John was Chief Scientist at Xerox and Director of its Palo Alto Research Center for almost twenty years. Since retiring from Xerox, he has continued to be very busy as a speaker, writer, member of the boards of several public and private companies and lots of other activities. In his website, he writes “Today, I’m Chief of Confusion, helping people ask the right questions, trying to make a difference through my work - speaking, writing, teaching.”
I have indeed learned that John is always asking just the right questions, be they about technology, business, learning or society in general. So, when he recently sent me an e-mail, recommending that I look into his latest project and recent papers, I proceeded to do so.
The project John referred me to is called The Big Shift. It is being conducted at the Center for the Edge, which is part of Deloitte Consulting. The Center is co-chaired by John Hagel, whom I have also worked with and greatly respect, and John Seely Brown. They just published an article on their research in the July-August issue of the Harvard Business Review, co-written with Lang Davison, Executive Director of the Center for the Edge, as well as a more extensive report explaining their ideas and methodologies in detail - Measuring the forces of long-term change: The 2009 Shift Index.
As we all know, digital technologies are causing long-term transformations in the global business environment. The team at the Center for the Edge has been studying these long-term business transformation, which they named the Big Shift . They have been trying to render explicit some of the major drivers behind this historical transformation, as well as providing an overall framework for research on the subject.
The Center team has come up with a number of major findings. In particular, they have uncovered a seemingly baffling paradox. The Return on Assets (ROA) of US companies has been steadily dropping over the past decades, and is now 75 percent lower than their 1965 levels. ROA is a general indicator of the profitability of a company, so this means that something profound has happened in business to cause the ROA of US companies to drop to a quarter of their 1965 levels.
But, at the same time, labor productivity - the goods and services that a worker produces in a given amount of time, - has continued to rise and is now double what it was in 1965. Where are the benefits of these productivity gains going if not to the bottom line of companies, which have seen their overall profitability drop so much during the same period?
The Center research has begun to answer these questions by looking at who might be benefitting from the increases in productivity, if not the companies themselves. Two strong candidates stand out, both indicating a shift of power from institutions to individuals. Customers are now getting a lot more for their money, not surprisingly given the increased competition; and the compensation of creative talent has increased substantially faster than overall compensation.
In addition, leading indicators point to a highly volatile market environment. The performance gap between companies which do well, - winners, - and those which do not has been increasing over time, but winners don’t remain winners for long. The topple rate and competitive intensity has more than doubled since 1965. And, all these changes are being ultimately driven by the fast adoption rate of digital infrastructures, which is two to five times faster than previous infrastructures like the electric grids and telephone networks.
To help them better make sense of all these findings, the research team investigated how to best quantify this Big Shift, so they could measure the rate and magnitude of the long-term changes they were uncovering. The result is The Shift Index, which consists of 25 metrics grouped into three major indices designed to quantify the waves of long term change: Foundations, Flows and Impacts. Let me briefly describe these key components of the Shift Index.
The Foundation index measures the fast moving evolution of the digital infrastructure, as well as the shifts of global public policy that are reducing the barriers to entry and movement. This is the easiest part of the Big Shift to comprehend, quantify and measure. It tracks the rate of change in the components of the digital infrastructure - computing, storage and bandwidth, the usage of the infrastructure as measured by number of Internet users and wireless subscriptions, as well as the Index of Economic Freedom, an integrated measure of the extent to which individuals can control their own labor and property.
Driven by the rapid advances in digital technologies and Internet usage in the last fifteen years, the Foundation index has been increasing at a ten percent CGR since 1993. It is, without doubt the primary driver of all the other changes.
The Flow index is designed to measure the flows of capital talent and knowledge across institutional and geographic boundaries, especially as enabled by the advances in the digital infrastructure. In the past, our stocks of knowledge, - what we know, - was a great source of economic value. That is no longer the case, because the increasing rate of change all around us is rapidly obsolescing knowledge. Therefore, the real economic value has now moved from the stocks of knowledge to the flows of new knowledge that we are now able to quickly acquire, and thus refresh and expand our rapidly depleting stocks of knowledge.
The Flow index is an intriguing and elegant concept that nicely captures the essence of the knowledge economy. Some of its metrics measure Physical Flows, - the flows enabled by the movement of people so they are in close proximity to each other, including the migration of talent to creative cities, travel volume, and movement of capital. Virtual Flows measure the flow of knowledge enabled by advances in the digital infrastructure, including inter-firm collaborations, as well as wireless and Internet usage. Finally, the Flow index includes a set of Flow Amplifiers, which measure how engaged or passionate workers are in what they are doing, as well as the impact of social media activity in helping people connect and enhance their knowledge.
The Flow index has been growing at seven percent CGR since 1993, and thus lags the faster advances of the Foundation index. This is to be expected, as it takes a while for individuals, institutions and communities to embrace the new ways of working and communicating enabled by advances in technology.
While the Foundation and Flow indices quantify the major changes we see happening all around us, the Impact index aims to explain how and why it all matters. It attempts to quantify the ways the market environment is changing, as well as how those changes impact the way companies and consumers operate. The Impact index is a measure of the transformations underway in Markets, Firms and People. Let's look at each of these three constituents.
Stock price volatility, labor productivity and competitive intensity are used as measure of markets and market dynamics. Since there is no consensus on how to measure competitive intensity, a proxy is used, the Herfindahl-Hirschman Index of industry concentration, which measures the size of firms in relation to the industry and is a widely agreed indicator of the degree of competition among them.
To measure the impact of the intensifying competition and volatility on firms, the Impact index uses four metrics: asset profitability; topple rate, - which tracks the rate at which big companies change ranks as defined by ROA performance; and two measures of the growing gap between winners and those not doing so well: ROA performance gap, and shareholder value gap.
The last category in the Impact index is people. It uses four metrics to characterize the impact of all these changes on consumers and talent.
Consumer power is increasing, because consumers now have access to vastly more product information and product choice. This increase was quantified based on 4300 responses to a survey the Center conducted consisting of six questions designed to test various indicators of consumer power. The same survey included questions which were used to measure brand disloyalty, a byproduct of the increased consumer power and market competition.
The last two people metrics concern talent. Returns to talent is a measure of the increased value associated with so-called creative classes of workers, as evidenced by compensation data from the Bureau of Labor Statistics. Executive turnover is a measure of how performance pressures have raised the degree of difficulty of senior management jobs, resulting in both raising their remuneration but causing them to lose their jobs more frequently.
While the Foundation and Flow indices have both increased rapidly over the last fifteen years, the Impact index has changed much more slowly and paints a very different story. High market volatility is taking a heavy toll on corporate performance. It is causing a major transfer of power from companies to individuals, especially to talented workers and managers, as well as to well informed consumers.
What does this all mean? We are indeed in the middle of a historical transformation as we transition from the industrial to the knowledge economy, a transformation driven by huge changes in technology, markets and society in general. The traditional, industrial-age way of doing business is under siege and must evolve.
The hierarchically organized firms of the industrial age were optimized to achieve economies of scale. Firms must now embrace knowledge-age organizational structures designed to help them reach out, absorb and integrate all the expertise and talent out there, including employees, partners and clients. As the report repeatedly points out, “companies must move from scalable efficiency to scalable learning and performance. Only then will they make the most of our new era's fast-moving digital infrastructure.”
The Big Shift is a very innovative, difficult and important project. I strongly urge you to look at the full report to learn more about their objectives, methodologies and conclusions. You may not agree with all the measures chosen by the Center for the Edge team, but that is to be expected. Like any complex initiative, getting going is what counts. The Big Shift project will undoubtedely keep getting better and sharpening its results over time, especially, as it practices the spirit of learning and collaboration that it so strongly advocates.