Disruptive Technologies, Part II - Healthcare

A small detour before kicking off the commentary on the disruptive technologies paper.

While some disruptive technologies have healthcare benefits, many wonder why there isn't more commentary on the coming healthcare-specific revolutionary and disruptive technologies. From what I've gathered from those who study breakthroughs in healthcare, there are two primary reasons: rarity and predictability.

Although there are always ubiquitous predictions of dramatic potential benefits of healthcare advancements, rarely do medical breakthroughs actually have far-reaching significant effects in the short-to-medium term. Medical breakthroughs rarely occur and are difficult to foresee. While there have been a few breakthroughs in medicine that dramatically improved human health, the majority of the benefits from these discoveries occurred slowly. For example, benefits from vaccines took over 100 years to make a significant global impact. Many only consider one health advancement to fall into the "high broad based impact in the near-term" category: penicillin.

Penicillin's direct impact was miraculous and significant. It had an immediate impact on infection mortality rates, and was one of the three critical elements (together with water and vaccines) that took down the three leading causes of death and led to falling infant and childbirth mortality rates. Surgery in the modern sense suddenly became possible. This opened a new world of transplants, cancer treatments, and heart disease mitigation. Antibiotics truly were one of those advances that "changed everything."

I prefer to look at the future on a marginal basis. What is the current path of events, and how can one push that path in a different direction? In the current path, antibiotic resistance appears likely and with grave consequences. (See this excellent post which links to another excellent post which links to other posts which link to an excellent book which...) A disruption to our current path would be finding a way to contain antibiotic resistance or discovering an antibiotic in which few resistances would develop. However, the probability of this at the moment is, sadly, remote. That leaves us to hoping that antibiotic resistance either a) develops very slowly, or b) the resistant genes are more aggressively selected against in the bacteria universe when not in full-blown infection mode. Nonetheless, even though I have my critical hat on right now, I'd never be so much a fool as to completely short humanity. As the severity of the problem increases, more human ingenuity will be dedicated to fight against it with a race to the finish. In the long game, the smart money is on mankind.

Disruptive Technologies, Part I - The Technology that Truly Matters

Upon reviewing McKinsey Quarterly's top ten articles of 2013, I was not surprised that what topped the list was the 130-page comprehensive study on the disruptive technologies that will change the world between 2014 and 2025. For those not willing to invest the time, the executive summary is very well done. In the next few posts we will walk through some key sections of the report, discuss impacts and likelihood, and reassess some areas left out by the authors. Although I believe existing data and probabilities of breakthroughs point us in another direction than the authors suggest, the framework used to identify these disruptive technologies is very solid. The authors define a technology that truly matters is one that has:
- a high rate of technological change
- broad scope of impact
- large economic value
- and substantial disruption potential

The framework is simple and complete. However, I often see those in technology circles short-change the second item listed. A broad scope of impact technological change has the potential to impact changes of an order of magnitude in the lives of those impacted and the overall economy. For example, take the printing press. Gutenberg did not "invent" the printing press or even movable type, but what he did do was invent the mass production of interchangeable movable type. Suddenly, anyone could learn to print, and they could do so at a relatively low cost. This breakthrough, coupled with other advancements in raw paper materials, resulted in the cost of a book dropping by an order of magnitude. Inexpensive books meant cheaper distribution of knowledge, mass distribution of religious texts, and the ability for individuals to publish facts and opinions. Drastically decreasing the per unit cost of this one form of communication had an order of magnitude impact across the economies and societies of Europe and eventually the rest of the world. Forecasting economic value and disruption can be difficult when assessing a technology. Many at the time underestimated the disruption and value of mass production of movable type because the printing element of the economy was relatively small. However, it was arguably one of the greatest small steps of mankind. The same can be argued regarding the initial developments in steam power, the agronomy revolution, semiconductors, and the internet. I will argue, at the end of this series of posts, that the same can be said for autonomous vehicles, inexpensive water desalinization, energy storage, bio/chemical terrorism, and customized education. Most of these areas overlap in some aspects of the McKinsey Global Initiative (MGI) report, but I'll add a few more details as to why they could be emphasized differently or viewed in a different light than that presented.

Historic disruptive technologies have impacted most if not all of the following areas: transportation, communication, water and sewage, agriculture, energy, and manufacturing productivity. Inexpensive movable type, steam power, the agronomy revolution, semiconductors, and the internet can put a check next to most if not all those categories. Many of the technologies listed in the MGI report meet this criteria, but the potential scope of the different technologies presented vary significantly.

We are, however, talking about the future, and it does tend to have its own agenda. Although we might not have fusion to power our flying cars, we can still assess these likely impacts, and the MGI report is a perfect starting point kicking off an analysis.

Operating in a Country with an Adverse Business Climate? Remember that Nimble is Relative!

Non-value added activities are a part of every company, especially large ones. As lean six-sigma has become a part of nearly every major company, “master black belts” have begun a seek-and-destroy mission against non-value added activities. Unfortunately, many non-value added activities are still required to continue operations. However, what many do not realize is that non-value added activities can differ significantly depending on the region, country, culture, industry, etc.

 Tax code complexity and legal compliance vary greatly by nation. Security concerns make non-value added activities in one country a significant value-added activity in another. Selective government enforcement of contracts and laws rewards otherwise overly cautious behaviors. Facilitation payments may be tempting to keep processes from getting bogged down. Labor laws or work rules can restrict what employees would otherwise be willing and capable of doing, coerce a company into using unskilled labor, and consume management’s time with proper forms and filings. Once these different areas start stacking on top of the other, the non-value added elements of “normal” processes can reach staggering proportions.

There are three “successful” outcomes for a firm in this extra burdensome situation described above. 1) Remain small enough that non-compliance is not an issue. 2) Perform the best you can given the constraints in place. 3) Regulatory capture of those responsible for compliance. Assuming that you want to keep growing, option 1 is not viable. Also, either for moral or Foreign Corrupt Practices Act reasons, let’s assume option 3 is not viable. However, knowing of these two different options is important because it gives you an idea of the competition you will be up against.

“Doing the best you can” does not sound appealing. However, the one-eyed man, the tallest pygmy, and the sprinting sloth can all be champions given the right environment. “Nimble and dexterous” is a relative description, not an absolute one. Additionally, doing the best you can is the best strategy of the three options above because small players can never reach economies of scale and large players engaging in unethical practices encourage a stagnant and corrupt culture.

From my experience, I have learned three key lessons on how to succeed in this situation: Start Now, Recognize Reality, and Be Positive.

1) Recognize Reality – Before you build, sit down to count the cost. Recognizing “critical paths” of implementation is an essential consideration in the creation of a successful strategy. Beginning with the end in mind is essential, but the complex process of tracing it to action today means your dreams must be based in reality. Do not assume that the pieces will automatically fall into place, even if you have an excellent team put together. Is doubling your footprint in the country in 18 months a key part of your strategy? Know exactly what resources will be required, such as government applications, the average speed of negotiations, inspections, public infrastructure evaluation, etc. Once the critical paths are identified, then the route can be traced between the vision and the present.

2) Start Now – The easiest way to turn a boat is to start early and make adjustments along the way. Although counterintuitive, being nimble in a difficult environment requires far more advanced planning and accountability than many would initially believe or are accustomed to. Strategy cannot be made up on the fly or simply copied and pasted from a different environment. Once a successful strategy is identified and committed to, successfully implementing this strategy will have many more moving parts than you may think. A combination of execution and control by a very limited number of people, with buy-in and input from a much larger range of individuals is usually the best combination.

3) Be Positive – Yes, I know that sounds like utter feel goodery, but it works. Let yourself laugh at the insanity, then take a breath and get to work. Many managers are unable to get past this and remain eternal pessimists. Unless these people are your lawyers, drop them. Do not fall in the trap. Watch yourself and watch your team. Proactivity can heal a thousand cuts, but reactivity and negativity will put your company into a coma. The rule with my team is, “Always have at least one potential solution when presenting .” This one rule has preserved all of our sanity, as we never go to someone else exasperated. The bleeding stops, and we can move forward.

Yes, there will be deadweight you may not be accustomed to and every day may seem like a slow motion 100 meter dash, but everyone else is racing with moon shoes too and victory tastes just as sweet.

The Consequences of Failing to Understand Basic Exchange Risk

I once participated in the negotiation of a decently large franchisee renewal. The franchisee was solid enough and was renewing its contract with corporate to continue operate in a few smaller countries. However, the negotiations got hung up on one crucial point. The franchisee was not willing to assume unlimited currency risk. Or, let me put it another way, the corporation was insisting on having a minimum annual guarantee in a currency foreign to the region where the franchisee operated. By the time I got involved both sides were issuing ultimatums and unwilling to back down. I was embarassed of my employer and the vice-president refusing to budge on an issue in which he was clearly out of his element (his primary experience was US only operations). After failing to convince this executive how... imprudent... the position was, I decided to subtlety cut down his position by explaining to and convincing some of the executive's colleagues that this decision was "unwise to pursue at this juncture." At the end of this process, there were two key lessons for me: 1) be willing to be wrong and solicit the feedback of those more knowledgeable than myself, and 2) a lack of understanding of a simple concept (an unforced error, as I like to call them) can consume significant amount of time at all levels of the organization.

Show Me the Money II - Statistics

I wrote a couple weeks ago on short-sighted corporate cultures. However, 20/400 near-sightedness is not just a "some corporate cultures" type of problem. It's a human problem. We see it when those who eat the marshmallow now seem so cool, exciting, and hip as they munch that delicious morsel and get invited to all the parties. I would take a swipe at politicians, but that's too easy, so I'll go one step above and go for myself -- those of us who rely on aggregated statistics and believe that they are comparable and assume everything else we haven't included in our models isn't very significant anyway. I'll use GDP as an example.

Besides GDP being an estimate of economic well-being, it's also an accounting identity. GDP = C + I + G + (X-M). Just add up consumption, gross investment, government spending, and net exports. There are many criticisms (most of them are marginalized) of GDP. I'll focus on just one: G, or the government spending component.

GDP is supposed to accurately depict the economic well-being of a society. Voluntary transactions, consumption, even the (quite subjective in my opinion) human development index can be a gauge of well-being. Government spending, however, is not. Here are a few examples:

1) A government spends $10M developing a new bomb. That money is now added into GDP. The economy is supposed to be better off by $10M.

Some people erroneously believe that war helps the economy (e.g., "World War II got us out of the Great Depression!"). Large amounts of spending on war simply manipulates GDP to no longer represent the economic well-being of a society. People producing large amounts of tanks, bombers, and guns don't make a society "richer" than when those same people produce butter, hair cuts, and buildings. Now, of course survival makes one better off than death and defense is a crucial part of this. However, GDP equates bombs with corn flakes. I'd prefer to not need the bomb and eat my corn flakes, but GDP states that I'm just as well off if I have no corn flakes and the bomb is made. Of course I prefer survival, but survival and corn flakes is even better than survival and no corn flakes. GDP doesn't make this distinction.

2) A farmer receives a $5M subsidy to plant nothing. The economy is supposed to be better off by $5M. The result is higher agriculture prices and a deadweight social loss that comes from the transfer of money through government There also might be secondary effects as savings drop as more income is spent on food. The economy is better off according to GDP.

3) A state spends $15B on the biggest public works project in the state's history. It's the biggest public works project in history because it went triple over budget and time. Let's call it a Dig that is Big. The fact that it went over budget is a plus for GDP, not a minus. Cases like this beg the question, "How much quality am I receiving per dollar spent?" Tyler Cowen makes the convincing case in The Great Stagnation that the marginal dollar of government spending is very important. The first 10% of GDP in government spending of GDP is generally spent on courts, police, and preventing starvation. The final 50-60th % of GDP in government spending is spent on subsidies, four year unemployment benefits, bike paths, and free stuff. When GDP is calculated, involuntary transactions are weighted equally with voluntary transactions. We then take these GDP numbers and compare them across countries with very different levels of government spending and assume that they are equivalent.

And, yet, I turn around and use the metric because... what else do I use? What else is available? I use the tools that I have even though my results are likely systematically biased. This is the principal reason why I love to dive, without the narrative of others, into the random minutiae in a process or among operational or "line" teams. I have the chance to see some of the ways it can all go wrong when we aggregate it up and take decisions. It forces cluelessness, and, hopefully, humility.

Show Me the Money - Corporate Cultures

As a friend was engrossed in reviewing the execution of a failed initiative, an executive walked over to his desk, mentioned a few things, then stated "It's the 25th and we need to find more money for the month. I'm heading to Accounting." ... Let that soak in. The first time you hear it, the alarm bells should start going off. The twentieth time, you think it's funny and laugh about it with some colleagues. The hundredth time? You might be responding, "How can I help?"

“Vice is a monster of so frightful mien, As to be hated needs but to be seen; Yet seen too oft, familiar with her face, we first endure, then pity, then embrace”
-Alexander Pope

Short-sighted corporate cultures don't focus on value creation. Managing by the quarter (or month) is like driving a car with the top two-thirds of your windshield blacked out in a snowstorm. Once you get to the point that executives have no fear of reprisal and say it out loud, you realize that everyone else on the freeway had their windshield blacked out as well. Some of your top-performers end up heading for the exit lane. Some potential top-performers never become such because they're stunted or take the exit as well. Others find a niche of the company where hopefully they can hide out until after the massive pileup. It's a culture where, like political dictatorships, the worst tend to make it to the top. Is the ensuing crash inevitable? Will it be public? Who will make it out? If you're asking the question, your answer will probably be, "I'm not going to wait around to find out."

Labor Union Strategies for the 21st Century

Organized labor’s continued pursuit of a strategy created in the early-mid 20^th century has decimated—and will eventually finish off—organized labor’s remaining influence in the 21^st century. Labor’s influence increased dramatically starting the 1920’s, peaked in the 1950’s, and is now at its weakest level in more than a century.

Source: http://unionstats.gsu.edu/

The private sector labor movement is dying. The 20^th century model of labor unions destroys the employees in the 21^st century. The 20^th century model writes work rules that prevent the worker from performing multiple tasks. The 20^th century model creates very high overtime costs or forbids working more than a set number of hours. The 20^th century model couples high pensions with extracting as much immediate monetary compensation for the worker as possible, creating a burden that puts a company at a disadvantage compared to its non-union rivals. This model dooms the 21^st century employee because it prevents employees from being flexible, autonomous, and skilled in a variety of tasks. Instead of negotiating for training that would enhance a worker’s productivity and marketability, unions negotiated for a compensation and work rules package that emphasizes the wrong set of benefits.

Devoid of revenue, unions turned to the growing government sector to maintain at least some level of support. At face value, this strategy would seem to make sense. A union shop can go bankrupt when faced with non-union competition, but a city/state/country has plenty of revenue streams and almost no competition. However, this strategic shift was a mistake. A unionized government sector combined with shrinking private sector influence places the unions on the opposing side of the general public.
2009 was the first time government sector employees exceeded the number of private sector employees.¹ This is a psychological tipping point for the general population. For example, when the Department of Labor or the AFL-CIO tries to sell the labor movement to the general public, they use graphs such as this one:

Source: http://www.aflcio.org/Learn-About-Unions/What-Unions-Do
This graph appears to be a selling point. The hope is that the public might think, “If only I were in a union, then I would be making more money.”

However, once the tipping point between government and private sector employees has been reached, the labor movement is painted in a completely different light. The public begins to think, “Look at all the government employees taking money from my paycheck, working fewer hours, taking more vacation days, and making more than me.” Equating unions with public employees will continue to push public opinion against the labor movement.

Turning to the public sector allows the dinosaur labor model to survive, with no innovation necessary. However, the labor unions are now on the other side of the negotiating table from taxpayers. Every dollar is extracted from taxpayers’ pockets. Additionally, unions want trade barriers, which also harm the public. This creates a tight spot for the unions. An entirely different marketing strategy must be adopted. How do you not get everyone to hate you?

At this point the labor movement is left to appealing to emotion. In the last decade this message has distilled into two forms, a positive and negative message. The positive message focuses on a positive emotional tie to the public. For example, “[Insert public occupation with positive image] are priceless!” Regardless of performance or current rate of pay, vacation, hours, etc., more funds are needed. The other message is to marginalize or demonize opponents. For example, “[Insert political target or wealthy] hate [public occupation from first message].” Maintaining these two types of messages is costly and can still lose in the long run as the public realizes that a zero-sum game is essentially in effect.

What Other Option is Available?
First, a successful labor movement strategy must include the private sector in order to avoid the trap outlined above. Second, a successful strategy must prepare its members for employment in the 21^st century. This means that its members must learn to be flexible, autonomous, and skilled in a variety of tasks. In the long run, the labor movement will die out in the private sector if this is not the case. Non-union corporations will drive out the union corporations with greater productivity and better talent. Third, the labor movement must identify areas where it can utilize its core competencies of leverage and employee goodwill.

It is not in the best interest of a company to provide skills and training to employees that are not directly applicable to their current position and that would make the employees more marketable to outside firms. However, a worker needs to continually expand her skill set to succeed in the 21^st century. The labor movement would be in an ideal position to bridge this gap.

Instead of the anti-productivity slogan “People over profits!” the labor movement can adopt the pro-productivity slogan “Promoting people promotes profits!” This can be accomplished by the union voluntarily tying one of its hands behind its back. The union can reserve the right to represent, intercede on behalf of, and provide a channel of grievance from the employee, but the union can also include in its charter that it does not reserve the right to negotiate compensation or work rules. The union does not even need to refer to itself as union, but rather as a learning and training federation. The union can negotiate training funding and hours during the work day for training from the corporation, while at the same time requiring nominal union dues from members who wish attend the training. Employees will enjoy the break from work and appreciate the training and skills. The outcome for the corporation may be neutral or positive, as training and employee morale increase productivity. The labor movement can continue to live up to its mission as the supporter of “the working man/woman.” The public enjoys a positive economic benefit from a workforce that enjoys lifelong training and improvement. The transformation of the union into an educational enterprise will produce the positive message and impact that the public needs and wants.

“Promoting people promotes profits” is a radically different approach from the current strategy. However, the current trajectory of the labor movement will leave a handful of legacy industries and public servants demanding the general public to pay up and implement net negative economic policies. A positive transformation and strategic shift will create a lasting labor movement for the 21^st century.
¹http://www.bls.gov/news.release/archives/union2_01222010.pdf.