Month: February 2008

Don’t count on those service jobs

The Christian Science Monitor has an amusing story on Robots set to overhaul service industry, jobs:

As a growing number of robots become capable of working alongside humans, the service industry may face a pattern all too familiar in the manufacturing sector: robots replacing humans in jobs.
“The service sector, which is a gigantic part of the employment landscape in the United States, is inevitably going to be a place where you can replace millions of people with robots that work 24/7 for less money,” says futurist Marshall Brain.

The story is mostly about the emergence of “autonomous mobile robots”, such as those which deliver supplies and meals in hospitals. But as the story points out, service automation has been going on for many years:

Though they might not look like robots, automated checkout lines at grocery stores or touch-screen check-in kiosks at airports are the tip of the service industry’s robotic revolution.

Just another illustration of what Levy and others have pointed out: if your job can be routinized, it can either be automated or done by someone in a lower wage area following instructions.
(See also a posting from a couple of years ago on jobs in the intangible economy).

A different type of “gown”

In yesterday’s posting, I talked about the role that universities play in a local economy — and the trend to globalization. This week’s Economist had a similar story about another local institution: heath care. According to the piece (Cities and hospitals | Mayo with everything), large institutions such as the Mayo Clinic in Rochester Minnesota and the Cleveland Clinic are major players in economic development:

The size of the health giants ensures that their reach extends far beyond the examination room. Each, for example, has made its city something of a destination for “health tourists” (people who come for operations or check-ups) and conferees. Rochester received 2.5m visitors in 2007; about 70% of these came to visit Mayo. At the last count, Rochester had the same number of hotel rooms as nearby Minneapolis, which is about four times as large.
The Cleveland Clinic has taken on many of the traits of a hospitality group. Its main campus served almost 3m patients in 2006, bending over backwards for them. A posh international centre offers translators, coffee and foreign newspapers. The clinic owns three hotels and lets the InterContinental hotel group manage them. The most expensive hotel, built in 2003, has space for conferences and plush suites, popular among royal patients from the Middle East.
In addition to importing visitors, each hospital has turned its city into an exporter of sorts. Each is spinning off technologies and start-ups. Mayo has hospitals in Florida and Arizona. The Cleveland Clinic has begun to offer management expertise, for a fee, to a handful of hospitals around the country. It already has facilities in Florida, a “wellness centre” in Toronto and projects under way in Abu Dhabi and Vienna. Cleveland’s manufacturing base may have declined, but its main commodity in future may be cardiac expertise.

That can give rise to a different form of town/gown conflict:

For all this activity, community relations remain a work in progress. Mayo has dominated Rochester for so long, donating to a host of local programmes, that the mayor—himself a former Mayo employee—calls the clinic “a gorilla, but…a very nice gorilla”. The Cleveland Clinic’s relationship with its city is more complex. Cleveland is much larger than Rochester and much more racially diverse; the city has an industrial hangover and the attendant headaches of poverty and urban decay. The clinic itself sits in a poor neighbourhood where few employees live, preferring to drive in from the suburbs.
. . .
Much energy is directed towards education, through gifts to local schools and programmes to teach students about careers in health care. The premise is that the hospital cannot succeed without a successful city. “Our future”, Dr Cosgrove [head of Cleveland Clinic] has said, “is intimately tied with the future of Cleveland.” And, increasingly, vice versa.

Of course, this last quote brings immediate comparisons to the universities. This is especially true given the fact that these health institutions are also branching out into other geographical regions. Then add in the rising trend toward a reverse medical tourism. In the past, rich foreigners (and others) came to places like the Mayo Clinic for health care. Now, middle class American’s are going overseas (see earlier posting.)
There is yet another wrinkle in the “health institution as economic driver” story. A few years ago, I had a conversation with someone who was involved in city finances. He was very interested in what I thought about the trend to telemedicine. I told him I thought it was great. It could cut health care costs and provide care in underserved areas because people wouldn’t have to travel to a centralized health care facility. That was exactly what worried him. If telemedicine reduced the need for large centralized health care facilities, many urban areas might suffer — since these institutions are often the largest employer and the economic base for many cities now days.
So, as much as I agree with the description of the current situation in the Economist’s piece, I can’t help but think it may be a story about the past not the future. Mayo Clinic is to Rochester MN what US Steel was to my small home town in northern Michigan, or what the auto industry was to Detroit. As the I-Cubed Economy evolves, are these large institutions still as relevant as they once were? Granted, economies of scale and scope will still be important in some areas. But the nature of production is changing. We still don’t understand very well the role of agglomeration in this new system. Large institutions could decline, but geographical economic clustering could continue – ala Marshall’s “something in the air” comment. Or the “death of distance” decentralization could be the rule. More likely, both will happen as we mix and match the organizational structures to the specific economic production situation and business model.
That is one of the things that will keep the evolution of the I-Cubed Economy interesting.

Town and Gown

There have been tensions between town and gown since universities first came into existence. In more recent years, communities have come to appreciate universities as a major driver of economic development. Any basic primer on technology-led economic development stresses the role of local universities in both creating a skilled workforce and in spinning off new companies. (See the State Science and Technology Institute for resources on tech-led economic development.) So this story in today’s Wall Street Journal caught my eye — Colleges Teach ‘Urban Development 101’ – WSJ.com:

Universities, increasingly, are extending their reach to off-campus development in an effort to give their surrounding areas and town centers a vibrant and modern feel. In the process, they are becoming major drivers of economic development after concluding that their fortunes are directly tied to those of their cities.

The story describes a couple of major real estate developments by U Penn, U Maryland College Park and Case Western. Interesting, but not new. One of the major town/gown frictions has always been the universities’ real estate expansion. As the story notes:

Neighbors also eye some expansion projects warily, such as New York University’s proposal to add six million square feet to its campuses in the next 25 years, half of that in Greenwich Village. “There are more and more parts of the neighborhood where you feel like NYU is the sole defining entity, and that footprint is growing and growing,” says Andrew Burman, executive director of the Greenwich Village Society for Historic Preservation.

What really intrigued me, however, was the statement that universities have concluded that “their fortunes are directly tied to those of their cities.” That is debatable. More and more top universities are globalizing (for example, see U.S. Universities Rush to Set Up Outposts Abroad – New York Times and California universities take globalization of business education to new level – International Herald Tribune). As this trend continues, there is a real danger of localities becoming wary of general support for local institutions of higher education. After all, why support those institutions with tax dollars for activities that don’t directly benefit the local community. Universities are going to have to walk a careful line between turning themselves into a footloose global institution and cultivating their local roots. Not to say this can’t be done. But it does raise a new challenge – and set of issues — in the old town/gown saga.

Oil and the stock market

On Feb. 19, the Wall Street Journal ran this story — Today’s Markets – WSJ.com:

Crude’s surge to a record over $100 a barrel quashed a daylong stock rally, as investors unloaded consumer stocks that may suffer as everyday Americans spend more at the pump.

Today, the Journal is running this story — Today’s Markets – WSJ.com:

The market got a boost from a stock-buyback plan at International Business Machines and solid gains in the energy sector, which benefited from crude oil’s return above $100 a barrel.

So, on the 19th oil, at $100 a barrel is a market negative; on the 26th, oil at $100 a barrel is a market positive? Or, is there some intangible — like market confidence and herd behavior — at work here?

The traveling band

This from the Times of London earlier this month — Search goes on for cheapest labour – Times Online:

The deindustrialisation of Western countries has led to multinational companies trawling the world like a “travelling band” in search of cheaper labour, according to the chief executive of Alcoa.
Klaus Kleinfeld said that there had been “fundamental changes” in where and how firms sought blue-collar labour. He said: “Those types of changes were probably seen first when there was a big debate around the deindustrialisation of Western countries, and interestingly this seems to continue.
“You actually have labour-intense industries very often that moved away from the US to Mexico, and if you go today to Mexico you’ll see that there are industries that have moved away from Mexico to SouthEast Asia.
“So it looks like it’s a travelling band almost that goes around the world and always looks for ‘where can we get the additional cost benefit from lower labour costs?’ A very interesting and very critical development, but one that we have to accept and probably have to live with.”

Rare for the CEO of a major company to admit this.

Improvisation

In keeping with my earlier global history theme, one of the other books I’ve just finished is Timothy Brook’s Vermeer’s Hat: The Seventeenth Century and the Dawn of the Global World. I won’t go into a description of the book – you can read the reviews in the Washington Post. Suffice it to say that the author uses Vermeer’s paintings as device to discussion the newly emerged global interconnections, especially between Holland and China. There is one quote, however, that deserves special attention. Brook is seeking to place the 17th Century in context. He argues that it was one of “second contacts” — where both sides were negotiating the relationship. As he puts it,

The age of discovery was largely over, the age of imperialism yet to come. The seventeenth century was the age of improvisation.

That description — the age of improvisation — might well describe our current situation. The industrial age is gone, the information age has not yet fully arrived. Our economy is in flux; our economic policy deficient. We are searching for an effective macroeconomic policy: at a time of record government budget deficits and historically low interest rates, we are falling into recession. Our policies to cope with globalization are inadequate at best (a miserly level of funding for an overly narrow trade adjustment assistance program) and – more to the point – mostly completely missing. Our technology policy has sunk to a level where we promise to throw a few more dollars at the physical sciences, and can’t even deliver on that meager promise. Our education policy is teach-to-the-test, rather than promote creativity.
We are clearly in an age of improvisation. And that improv is not going all that well.

Competiting – Italian style

Here is a story from this morning’s Wall Street Journal — How Small Italian Firms Married Style to Globalism:

PUTIGNANO, Italy — For more than half a century, wedding-dress maker Giovanna Sbiroli SRL built its brand and customer base by serving the Italian market. But over the past decade, the company — one of around 40 small wedding-dress makers in and around this remote hill town — watched its share of the Italian market drop by 20% as Chinese imports and goods made in other low-cost countries flooded in.
“Fewer orders were coming in, and we began to realize that we were losing our customers,” says Gianpiero Lippolis, a principal in the firm. “If we didn’t react and attack these markets, then we risked having to shut our doors,” he says.
Today, Giovanna Sbrioli exports to 18 countries, and foreign sales account for 30% of its business. Though it employs only 50 seamstresses, down from 80 a decade ago, it has made up for its smaller workforce with new technology, and annual sales have remained steady at about $7.3 million.

And that includes booming sales to China.
All is not completely rosy, however:

Even as these companies are succeeding in selling their Italian style and know-how on the world stage, they are straining to maintain their own quality and traditions at home. Most of the seamstresses in the area have 20 years of experience and replacing them is difficult. Few young women are interested in becoming seamstresses, aspiring to become designers instead. To find local talent, the companies scout trade schools, advertise in newspapers and rely heavily on word-of-mouth.
Last year, Mr. Lippolis gave 15 young seamstresses a trial run at the company but hired only two of them. “There is on-the-job training, but we can’t invest time and money in people who don’t show a real interest in the craft,” he says. Soon he may have to start relying on immigrants from Hungary or Romania to make the dresses. But, he says, “It will still be made in Italy, always.”

Can the US economy succeed following this niche strategy? Unclear. It may work for a portion of the economy but may not generate enough exports to offset our imports. It does bring us back to what Michael Porter said decades ago: you either compete on price or on premium. Those in the middle of the road are roadkill. Thus, if you can’t match the “Chinese price”, your only alternative is the high end model – as these Italian dressmakers have found out.

Intangibles food fight

The new French President has stepped into the middle of a new fight over an intangible — in this case, food. As the Times of London reports Nicolas Sarkozy loses his cool over French food:

The right way to make mayonnaise, cheese soufflé and foie gras will be protected by the UN if President Sarkozy’s latest ploy wins approval (writes Charles Bremner in Paris).
The French leader wants la cuisine française to be listed by Unesco, the UN agency, as part of the world’s cultural heritage.
At the opening of the annual Paris Agriculture Show, Mr Sarkozy said: “We have the best gastronomy in the world — at least from our point of view. We want it to be recognised among world heritage.”
Mr Sarkozy’s gesture in response to a two-year campaign by a group of leading chefs — who fear French cuisine is under threat from modern life and the global food industry — raised eyebrows because it stretches the meaning of a UN project to protect traditions in the developing world.

But, according to the Financial Times, this has not gone down well with everyone – France stirs food fight with Italy:

France’s campaign to put its cuisine on the United Nations’ world heritage list has sparked a transalpine war of words with Italy.
Italian farmers spurned President Nicolas Sarkozy’s proposal over the weekend that France should become the first country to have its cuisine recognised as an “intangible” cultural treasure.
“With 166 food specialities recognised by the European Union, Italy clearly beats France, in second place with 156,” Coldiretti, the Italian farmers’ association, told Reuters.

I really think that says it all.

Investing in workers

Speaking of investing in intangibles, the Knowledge@Wharton newsletter is running an interesting story/podcast on Taking Work-based Learning to the Next Level:

In the mid-1990s, a new C-suite title was born when General Electric CEO Jack Welch dubbed Steve Kerr the company’s “chief learning officer.” Since then, CLOs have sprouted up at major firms in several industries. But what does this new breed of “learning leaders” bring to the table that traditional human resources departments and employee training programs do not?

The article interviews three “CLOs”: Ed Betof, former vice president of talent management and CLO at Becton, Dickinson and Company, who is a senior fellow and academic director of Wharton Executive Education’s Executive Program in Work-Based Learning Leadership; Mike Barger, vice president and CLO at JetBlue University; and Ann Schulte, vice president of global learning at MasterCard Worldwide.
The bottom line is that companies are taking their skills development activities much more seriously:

Knowledge@Wharton: Historically, Human Resources departments have been in charge of programs that enhance employees’ skills, such as on-the-job training and tuition reimbursement. Why is there a need for a separate role that’s wholly dedicated to learning?
Schulte: Well, I think that in the environment that we’re in today, identifying the skills and the competencies that are necessary for an organization to be successful is a critical first step. Once those competencies have been agreed upon at a strategic level by the organization, the learning department and the learning leaders can come in and provide a variety of different interventions.
In the old days, as you referenced, when training existed in the HR department, a lot of times those interventions were limited to a class of some sort. Today, we talk about all different sorts of ways to help employees build their skills and become continuous learners, so that they can continue to contribute to the strategic goals of the organization.
Barger: I think the evolution of the learning function has moved more from a training and skills delivery function to more of a performance engineering function. Our job now is directed much more at improving frontline performance — again, connecting that performance to business improvements, which is considerably different than I think what HR and training used to do. I think now our energies, as I mentioned before, are really directed at driving performance improvement through all levels of the organization.
Betof: One thing that I would add is, in addition to addressing the skills, knowledge and talent needs for today, the chief learning officer and the functions that they lead are responsible for anticipating and working with other leaders in their organizations to anticipate the skills, the knowledge, the talents necessary next year, three years and even five years, possibly even beyond, depending on the type of organization. So, it should be just about be impossible now, going forward in very contemporary organizations, to have a strategic business plan without a strong talent and talent learning element — not just hanging at the end of that plan, but integrated into the fiber of the strategic plan.

And so what is the pubic policy to encourage such activity? In some case, companies understand that enlightened self-interest dictates that they continually train their workforce. Much of this is in firm-specific knowledge. But some of it is in industry-specific or even general skills. Here we run into the free-rider problem. Why should I train workers who can just take that skill to some other company. In some cases, there is an IP solution — a non-compete agreement. But those have their own problems.
A free-rider problem has generally been accepted by economists as a market failure – where government intervention is acceptable and appropriate. In addition there is the spillover effect where general social welfare is increased by an increase in this private activity, thereby justifying public investment.
In this case, some have suggested a knowledge tax credit. Essentially this is an expansion of the research and experimentation tax credit — another activity with spillovers to both other companies and to society at large — to training activities.
There is another argument for the knowledge tax credit. We have long understood that increased private investment in plant and equipment is necessary for continued economic growth. As a result, there are various tax incentives for investment in equipment–including in the recent stimulus package. So why would we treat our people — which everyone says are companies’ most important asset — worse than equipment? If a tax incentive for investment in machinery is appropriate, so is a tax incentive for investment in workers. It is as simple as that.