IoT to transform many processes

“The IoT (Internet of Things) can help businesses be more productive and efficient” says Phil Goldstein, web editor for BizTech – “but they need a plan to integrate disparate technologies whilst addressing protection needs against malicious actors”

Steve Darrah, Director of National Solutions at Intel, says that “IoT can be used to improve efficiency and profitability, drive safety and increase worker productivity”

For example:.

  • Retailers can use radio frequency identification tags to track inventory
  • Healthcare providers can use wearables to track the vital signs of seniors in long-term care and predict if a person is going to suffer a heart attack

 

Link Simpson of CDW, an international IT company, notes that IoT technologies work in combination with other systems e.g. in the event of a fire, an office with IoT sensors can:

  • Call the fire service
  • Shut down elevators
  • Take control of digital signage in the office
  • Turn on video cameras to find workers and feed the images to the firemen on site
  • And lock or unlock doors to direct traffic out of the building

 

However, Simpson cautioned about one major hurdle to afflict the IT revolution ever since it began mid last century – different technologies running on different protocols and programming languages often cannot talk to each other

But the good news is that this can now be accomplished using ‘modern network gateway technologies’

He concluded: “IoT is really no longer just about the data and the information you can pick up from sensors – it’s about transforming your business processes”

 

Diageo appoints a CPO

Many companies employ inspectors and quality controllers in an effort to minimise waste and boost good output volumes

Very few indeed  have anyone specifically in charge of productivity or widespread employment of best practices, whether from internal or external sources

Now, at long last, a major company has appointed a Chief Productivity Officer (CPO) – at least it’s the first one we’ve read about

Diageo have clearly recognised the importance of productivity improvement to their long term success and elevated their previous CIO, Brian Franz, to this new position

IT is indeed important, but it’s only one of the tools/ skills needed for productivity improvement

In his new role as CPO Franz says he is: “Helping to lead a targeted drive across our entire cost base and plans to save £500m in the next three years, two-thirds of which will be reinvested in growth”

He adds: “Productivity savings are often wrongly associated with cutting costs – we want to put the consumer at the heart of what we’re doing and drive top-line growth through productivity-focused activities”

One can only hope all other FTSE 100 companies, indeed,all UK SMEs, follow suit

Then, at long last, we might see a breakout in the apparent sclerotic UK productivity growth rate

 

Pareto analyses

Pareto, a 19th century Italian economist, spotted that “80% of effects arise from only 20% of possible causes” – apply this rule to national productivity levels and just the top quintile of companies determine whether improvements are made – and it has been ever thus

In other words, the great majority of companies are doing little or nothing to improve their productivity – not only do they lag far behind the vanguard companies but the productivity gap between them could even be widening, especially when patenting and intellectual property rights restrict the spreading of new ideas and better ways of doing things

Andy Haldane, chief economist at the Bank of England, recently supported this view by arguing that, if UK firms in the three least productive quartiles were able to improve at the same rate as companies in the top quartile, overall UK productivity would rise by 13% – whilst we might question the veracity of the data he used, we fully agree with his view that most companies have enormous scope for improvement

So, given such a distribution of companies applies to most nations, not just the UK, a two-pronged national productivity improvement effort is needed by all viz:

  1. Incentivise the 80% of companies/ organisations that lag behind leaders in their sectors to improve productivity levels:
    1. First, offer them good measures that clearly establish their current productivity levels and scope to improve relative to others – otherwise most will assume they’re at least average, have little to worry about and so need do little to change
    2. Also, provide education/ help in how to cut waste and make best use of existing costly resources – most will have the opportunity for at least a 20% improvement from these actions alone
    3. Then, after successfully completing the above, have them consider using latest best practices and major investment in new resources and systems – and so will need advice/ support to do this
  2. At the same time, encourage the vanguard 20% of organisations in each sector to at least continue to improve as before, not least by offering more financial incentives for more ‘open research’ and ‘market creating innovations’

 

For too long, productivity improvement has been ignored by most organisations despite it being more important than just about any other business issue

And, if and when it does appear on the national radar, the focus is usually on progress made by vanguard organisations in the manufacturing sector i.e. the 20% of a sector that comprises only some 15% of any developed nation’s GDP i.e. a mere 3% of its economy!

Is it any wonder most managers and ministers don’t ‘get it’ and national productivity improvement staggers from year to year

They’re all focussed on other ‘key result areas’ i.e. areas of less importance

They need to understand Pareto’s Rule and its relevance to productivity

The capitalist’s dilemma

N.B. The following are extracts from an article published in the Harvard Business Review in June, 2014 – it remains highly relevant today

Professor Clayton Christensen and Derek van Bever of Harvard Business School  have embarked on a fascinating study into what may be holding back growth in the USA and elsewhere given ‘corporations are sitting on mountains of cash but failing to invest in innovations which might foster growth’

They identify three different types of investment in innovation which have quite different impacts on the growth of jobs and prosperity:

  • Performance improving innovations which upgrade old products or services with new and better – these create few extra jobs as customers simply buy the new versions instead of the old
  • Efficiency innovations which help companies make and sell existing offerings at lower prices – they can even reduce jobs – they can also release capital for other more-productive uses
  • Market creating innovations which create whole new classes of customers, even sectors e.g. computers – the moves from mainframes to minis to PCs to smartphones – at the start, only a rich few could afford a computer – 50 years on, just about everyone can – such innovations usually generate many new jobs, both internally to meet the increased demand and externally in supply chains

 

Key features of these market creating innovations are also:

  • They have an enabling technology that drives down costs as volume grows
  • They reach many new customers who were unable to afford the first offerings e.g. Ford’s Model T

 

The problem is that companies invest mostly in efficiency innovations which often eliminate jobs, some invest in performance improving innovations which tend to maintain the status quo, and few invest in market creating innovations which generate most new jobs and so growth

Why so?

Because the financial measures and norms used to determine the attractiveness of investments are seriously flawed – RoCE, RoNA, IRR, DCF etc. all make market creating innovations appear much less attractive because they bear fruit in five to ten years and are risky whereas efficiency and upgrade investments usually pay off in one or two years and shoulder much less risk – and most venture capitalists prefer safe bets, not adventurous punts

Indeed, the average shareholding period for external investors is only about 10 months, which pressurises executives to maximise short-term returns (or else!)

However, one might expect longer-term investors, like Pension Funds, to press for more market creating investments to secure their longer-term returns needed

Not so

Most now suffer from depressed returns, unfunded commitments and longer life expectancies – their funds are not growing fast enough to meet their obligations, so they also look for quick payoffs

Hence the capitalist’s dilemma:

‘Doing the right thing for long term prosperity is the wrong thing for most investors’

The authors put forward some worthy suggestions on changes needed:

  • Tax financial transactions to reduce high frequency trading
  • Introduce rewards for shareholder loyalty
  • Wake up business schools to teach finance and strategy together, not separately as now
  • Establish measures/ tools to analyse innovation pipelines and identify opportunities for long-term growth creating investments

 

They sign off by quoting Peter Drucker: “The point of a business is to create a customer” and ask for contributions to help devise solutions to this dilemma ‘for the long-term prosperity of us all’

Over to you

 

 

Wolf explains UK productivity gap

The great financial journalist Martin Wolf of the FT recently opined about the current state of UK productivity – disappointingly, his words offered no new insights and were simply a regurgitation of current groupthink.

He kicked off with the now well-worn cliche from Paul Krugman about productivity being ‘almost everything’ – and then trotted out a bunch of statistics about population and productivity growth, the two factors which indeed determine national prosperity levels:

  • The working-age population stats could well be reasonably accurate, and show the UK has little potential for significant growth from that quarter
  • But the national productivity stats (GDP/ labour inputs) about the UK’s relative position versus other nations are seriously flawed – nevertheless, like most important commentators, he ignores this widely accepted fact and proceeds to draw conclusions based on them

 

He rightly points out that there are big differences between the performance of ‘the best and the rest’ in all UK sectors, and that such differences appear to be growing – “a slowdown in the diffusion of knowhow and slower elimination of zombie competitors” being the received wisdom – however, this does not explain why the UK is so much worse than most others

So what’s his ‘big aha’?

By simply comparing the UK with its international competitors (using more spurious data) he spots two fundamental UK weaknesses which explain most of the prevailing productivity gaps:

  • Lack of investment in capex – “physical investment in machines, buildings, ICT and R &D, is very low” – but how much more would be needed to close any gaps (£10bn, 100bn, 1000bn?) – and what of Robert Gordon’s claims that the days of major new productivity-improvement inventions are over?
  • Lack of investment in human capital – “skills overall remain highly deficient” – there is indeed a serious mismatch between the skills organisations need and what kids now study but nobody knows the size of these gaps, nor the potential % GDP and productivity benefits if they were closed, nor the amounts to be invested by whom – all we do know is too many kids (50% was the target) sally off for a very-expensive three year stint at university to graduate in subjects many employers don’t want

 

The biggest problem facing all organisations, and nations, is not lack of investment but lack of good performance measures and the knowhow to find and implement solutions to productivity problems and opportunities highlighted

At present:

  • Most have only some 20% of the performance measures they need – and they’re mostly financial
  • Most could improve productivity by at least 20%, some over 50%, either by upping output/ sales and/ or reducing inputs/ costs
  • Most do not need any major investment to get these results – instead, they should first focus on cutting existing waste and then optimising use of their existing resources, both of which could involve only modest extra investment in human capital and new systems
  • Only then should they consider any major investment in best practices and/ or new technology

 

The fact is most UK organisations (80% = ‘the rest’) perform well below their potential – they could make giant productivity improvement strides if only they had the right measures and knowhow – but such a message is the biggest elephant in the productivity room