John Hagel, perhaps best known for his book The Only Sustainable Edge, has been one of the leading strategic thinkers for decades. Recently, as Co-Chair of the Deloitte Center for the Edge, he unveiled the Shift Index. This is a fascinating way to look at the economy and goes well beyond the traditional GDP and employment measures. Have a strong cup of coffee before reading or listening to this interview. This is important for enterprises as they think about the big picture related to social media, changing demographics, and increased global competition. It is also valuable for enterprise software vendors as they seek to articulate the value of their products to these clients.
The Interview and PDF
The interview is about 20 minutes, a good listen. If you want to do justice to this subject, read the PDF first as background, and then listen to the MP3. For the super-busy skimmer, we attempt to distill the essence below.
Download the MP3.
The Return on Asset Bombshell
This is what caught our attention in the email — and is the reason we wanted to do this interview:
“U.S. companies’ return-on-assets (ROA) have progressively dropped 75 percent from their 1965 levels despite rising labor productivity.”
That is dramatic. If you had to select a single measure by which to judge the value delivered by a CEO, board, or management team, it would be return on assets. To quote from the Wikipedia entry:
“The return on assets (ROA) percentage shows how profitable a company’s assets are in generating revenue. This number tells you what the company can do with what it has, i.e. how many dollars of earnings they derive from each dollar of assets they control.”
And here is the bit that matters:
“Return on assets is an indicator of how profitable a company is before leverage.”
If you want to understand the financial meltdown that happened at the end of 2008, just think leverage, i.e. debt. Companies juiced up their earnings using leverage. They have been doing this more and more in the last 30 years.
What happens when you take that away? You get the return on asset bombshell that the Shift Index reveals. It is like taking steroids away from an athlete and then saying, “Now, how fast can you run 100 meters?”
Only a US and BigCo Problem?
The massive ROA drop was measured across all public companies in the US since 1965.
It would be very interesting to see the results for Europe and Asia. Would they be different? Has anyone run those numbers?
Public companies tend to be large. We were interested in knowing whether this was simply a BigCo problem. Here at ReadWriteWeb, we report on startups and small companies. Our assumption for some time has been that an historic shift in power is taking place from BigCo to SmallCo, which can be explained by Coase’s Theorem.
Now that we’ve seen huge companies, household names such as Lehman and GM, crumble before our eyes, thinking that BigCos are in serious trouble is no longer a radical idea. And as nature and economies abhor a vacuum, this must create opportunities for others. The question is whether this shift will be simply from some BigCos to others, as they out-compete each other, or a more fundamental shift from BigCos to SmallCos.
We asked John Hagel about this, and he told us his view that the shift in power to smaller companies, even to free-agent individuals, is a short-term trend and that bigger companies will return to dominance once they figure out how to operate in this new environment. He told us that BigCos face a great challenge in part because:
“They grew up and became successful in a different environment, where scalable efficiency was the way to generate and sustain economic value.”
He goes on to explain that money follows talent and that large companies are having a hard time articulating to the most talented and creative individuals why they would be able to grow and prosper more within large institutions than as free agents or in small ventures. He believes that large companies will be able to make that transition. Clearly, given his role with Deloitte, which provides management consulting to large companies, he has to take that view. But he has also voted with his feet on this issue, by even joining a large company like Deloitte in the first place, when he was already a successful free-agent author and consultant.
His fundamental message is that BigCos need to offer a rationale other than just scalable efficiency. This is consistent with Coase’s Theorem. His view is that this rationale will be “scalable learning.” Scalable learning sounds like it could become an over-used buzzword, but when you listen to him describe how companies build networks of partnerships that learn from each other, it comes alive.
It certainly will resonate with anyone who has worked at a startup.
The question is whether BigCos can learn to work like agile startups again. In other words, is it possible to teach elephants to dance?
How Can Enterprise 2.0 Vendors Articulate Their Value in This Context?
I asked John if he saw a day when more CTOs and CIOs would become CEOs, because really understanding systems and technology has become so essential for leaders. He was skeptical. In fact, John views the risk-averse nature of most CIOs as a big stumbling block.
John pointed out that most companies have “only skimmed the surface” of opportunities to use social media to build richer knowledge networks that cross the firewall and connect with partners and customers. Indeed, he talked about the problem of how “most CIOs are tending to become extremely risk-averse.” He pointed out that CIO turn-over is increasing, and that the reason CIOs get fired is often because of some big operational blow-up. So, they avoid anything that puts current operations at risk. In doing so, they may be creating even bigger issues, as large companies miss opportunities to leverage social media to create new value.
John’s advice to Enterprise 2.0 vendors is to become a lot better at articulating how their technology can build value and competitive advantage at scale. That is obviously easier said than done. But doing it is essential. The CIO will be motivated to look at operational risks only if the CEO tells him or her that the risks of ignoring them are greater.