Naked Transparency Meets Freakonomics

January 15, 2010

This post has been a little while in the writing (been busy with job search activities, as well as behind the scenes work on PodCamp Toronto 2010, where I’m on the organizing committee, looking after the finances) – last week I followed a link that I saw tweeted by Chris Brogan to a blog post written by Jon Udell titled Contextual clothing for naked transparency.  The blog post was in turn inspired by an interview with Lawrence Lessig that Udell heard on the CBC Radio show Spark*.  The host of Spark, Nora Young, was interviewing Lessig about his essay Against Transparency: The perils of openness in government in The New Republic.

The essence of Udell’s post was that “naked transparency” did not necessarily result in positive results, and he argues that context around the information revealed about people in the name of transparency is essential for providing the proper perspective.  Udell quotes from Lessig’s essay, where he argued that the lack of critical thought about what makes transparency work in a positive way will lead to very negative outcomes – inspiring only disgust and not the change and reform that those championing transparency hope so fervently for.

And that got me thinking about the basic tenet behind the book Freakonomics by University of Chicago economist Steven Levitt and New York Times journalist Stephen J. Dubner, which is that the response to an incentive is not always the one desired by those putting the incentive into place to drive a certain behaviour.

Now Levitt and Dubner apply the methods and tools of economics – statistical analysis of the behaviour of a population in response to specific stimuli or incentives – to demonstrate their thesis, and like any “pop” version of a non-mainstream subject they have perhaps over-simplified and sensationalized some of their data and conclusions (for example, see the Wikipedia article on Freakonomics which has sections on “Reappraisals” and “Refutations”).

But even allowing for that, I think it’s evident that the results of incentives are often not those that were anticipated, and I think that “naked transparency” may well be one of those cases.

It will be interesting to follow the consequences to society as increasing requirements for transparency continue to be imposed, to track both the unanticipated ways in which people or organizations will find to circumvent those requirements as well as the unexpected negative impacts on those who faithfully comply but are caught out by lack of context.

If you know of any specific examples of where the “conventional wisdom” that maximum transparency is always a good thing has been turned on its head, I’d like to hear about it – leave me a comment with the details.  And I’d certainly also appreciate hearing about your thoughts on the hidden downside of naked transparency.

*I’ve mentioned Spark before and told you how awesome the show is (whether you listen to it on the radio, or the podcast as I do), but I have to apologize to Nora and the Spark crew for being a little behind in my listening – a computer meltdown last Fall threw my podcast listening completely out of whack, and I still haven’t got back on track even after nursing our PC back to health.


Just how untransparent can they be?

March 24, 2009

In the snailmail today was a notice from Bell Canada:

We’re going green.

Dear R LEE

We are writing to notify you about an important change to our eBill program.

You are currently receiving a paper invoice, along with a monthly email notification advising you that your online bill can be viewed by logging in at the Bell Web site.  Following your next bill, we will be discontinuing your paper invoice to help reduce paper waste and protect our forests.

If you would prefer to continue receiving a paper bill in the mail, you have the option of keeping this arrangement now and in the future.  Simply log in to bell.ca/staypaper and click on “I wish to keep receiving paper bills”.

Thank you for choosing Bell.

Sincerely,
Jim Myers
Senior Vice-President, Customer Experience

OK, let’s start with “We’re going green.” — this has become the “ISO 9000″ of the 21st century IMHO.

What I mean by that is back when the ISO 9000-series standards were first developed, they were initally the business equivalent of cod-liver oil — they were told it was good for them, but implementing the requirements for certification wasn’t always terribly palatable.

For companies that already had good quality and documentation practices in place, it wasn’t that difficult, but for many it was a real sea-change — and when they came out the other side, they probably really were better companies, with more consistent quality in their products and services (note: I didn’t say better quality, since implementing any of the ISO 9000-series requirements doesn’t guarantee that quality will improve, just that you will have documented the quality — good or poor — of what you do.)

But as more and more large companies insisted on their vendors being ISO certified, an industry of consultants sprang up around certification (and training to go with it) to make it cheaper, easier and more palatable, with the result being that getting ISO certification became a part of the price of entry into the game.  I won’t go so far as to say it became meaningless, but it certainly has lost some of its value as a differentiator between a supplier you want to deal with and one you don’t.

So, what I mean is that being green in the noughties is something companies have to do just to stay in the game, and which any good profit-seeking company will want to spend the least amount of money on to acheive the appearance of.

Which for me means that they may as well have said “We’re still here to make as much profit off you as we can.”  Fair enough, that’s what they’re in business for — I just object to the lack of transparency in cloaking it with green.

Next: I don’t particularly enjoy having them shout out my name in the salutation, I mean really, how hard is it to automate putting it into proper upper and lower case letters…

Then, the use of the Royal “We” — alright, so that’s a stylistic letter writing formula that I’m quibbling about, but the letter is written over the name of one individual, the Vice-President of Customer Experience.  Why not say “I am writing you…” — it’s certainly not as if the whole company was in on writing the letter…

OK, on to the part that really gets up my nose:

Following your next bill, we will be discontinuing your paper invoice to help reduce paper waste and protect our forests.

Now, as an individual concerned with the environment, I will certainly choose ways that I can “reduce paper waste and protect our forests”, but their statement says that they will be doing it for that reason.

Which is a load of crap: they’re doing it to reduce their costs and maximize profit.

As I’ve said before, I don’t have a problem with a company wanting to make a profit and reducing costs can certainly be a legitimate way to do that — I just take issue with it when there’s a attendant increase in the cost to society as a result (but that’s a rant for another day…)

So if they would not be so untransparent and just admit that they’re eliminating the paper bill using a “negative option” strategy (something which got the Rogers Cable company into hot water some time ago…) I would happily elect to not receive the bill in the mail.

Maybe if enough of Bell’s customers insisted the same thing, that they come clean and say the reason for eliminating the paper bill is to cut their costs and increase their profit, before allowing them to discontinue sending it, then maybe they’d do it.

Well, I don’t plan on holding my breath waiting for Mr. Myers to ‘fess up and admit that Bell is just trying to squeeze a few more pennies of profit out of each customer this way, but if you are a customer of Bell Canada and feel the way I do about this, then why not let them know how you feel and just perhaps we can get him to do it — particularly if we all threaten to click on “I wish to keep receiving paper bills” if they don’t.

And thank you for choosing Unconventional Wisdom.


Because a meme is a terrible thing to waste – Six Random Things About Me

August 24, 2008

Been tagged for the “Six Random Things About Me” meme by the lovely and talented Daryl Cognito of the curiously entertaining Atomic Suburbia podcast. See down below for The Rules Of The Meme.

  1. Many years ago, I was young and foolish. Now, I’m no longer young.
  2. Despite no longer being young, people often think I’m much younger than I actually am, although they seldom think I am less foolish.
  3. I believe that beer is nature’s most nearly perfect food, with pizza a very close second.
  4. Approximately 9% of my life to date was spent living and working in France.
  5. Sports that I have engaged in moderately seriously during my life include alpine skiing, bicycling, archery and windsurfing; of these I still bicycle occasionally and practice archery a bit.
  6. I saw “2001: A Space Odyssey” presented in 70 mm Cinerama on a curved screen at the Glendale Cinerama (reserved seating no less, like a stage show) when it was in first-run theatrical release.

And, as promised, The Rules Of The Meme:

1. Link to the person who tagged you. (Check)
2. Post the rules on the blog. (Check)
3. Write six random things about yourself. (Check)
4. Tag six people at the end of your post. (Check)
5. Let each person know they have been tagged by leaving a comment on their blog. (To be done when this is posted)
6. Let the tagger know when your entry is up.  (Idem)

I’ve linked to my tagger, Daryl Cognito, at the top of the post. My taggees are:

  1. Maureen Blaseckie, of the most excellent Baba’s Beach Podcast
  2. Cat, who puts out the wonderful CatFish Show podcast with her husband Bob Goyetche
  3. Bruce Murray (nicest guy in podcasting), of the Zedcast podcast
  4. The Scarborough Dude, of the one-and-only DiscksnJanes podcast
  5. John Meadows, of the quietly brilliant On The Log podcast
  6. Sage Tyrtle, of the awesome QN Podcast (formerly Quirky Nomads)

Phew!  Done…  now to post and notify the victims, er, 6 people I would like to know 6 random things about.


Are you going to the fair?

May 3, 2007

Job fair, that is.

That’s what I did last Saturday. The first one I’ve ever been to. More about how it turned out below, but first some general observations and thoughts about job fairs and how they fit into the job search landscape.

I think that there are probably three broad categories:

  1. Job fairs targeted at soon-to-be or recent post-secondary graduates;
  2. Industry specific job fairs; and
  3. Single-company job fairs.

The first type can be single-company or multi-company, and are often run on-campus in cooperation with the school’s administration. The second type is a strictly multi-company affair — since I’ve classed single-company job fairs as a separate case.

Now, since I haven’t attended any of the first two types, I can’t speak with authority about them — so take anything I may say about them with an appropriately sized grain of salt.

In any case, I’m far enough past graduation that the first type isn’t applicable to my current job search. I’m sure there were some on campus back when I graduated, but I didn’t attend any — my degree was in aerospace engineering, and I was fortunate in joining The deHavilland Aircraft of Canada Ltd (yes, I know it looks a bit odd, but I assure you that was the company’s name, including the initial “The”; originally a subsidiary of a British aircraft manufacturer, the company was eventually bought from the Canadian government by Boeing and then sold a couple of years later to Bombardier Aerospace) straight out of school as they were recruiting new engineers in the aerodynamics department for the development of the Dash 8 commuter airliner. I still have many good memories of my time there and feel a sense of pride at my contributions to the design every time I see one flying overhead.

As for the second type, my impression is that they are probably useful for bringing together employers seeking very specific skills — typically either in highly technical fields or in skilled trades — and those who have those skills to offer. I suspect that they are more likely to be organized when there is a shortage of the required skills; when there’s a glut, there would be little incentive for a bunch of competing companies to get together to woo prospective employees.

Which leads to the third type, and which was the kind I attended last Saturday. It would seem that a company conducting a job fair to fill a bunch of their job requirements flies in the face of the current conventional wisdom of recruiting, which seems to be: do as much as possible to take the “human” out of “human resources”.

It’s true that the organizing and execution of the job fair took a lot of effort — and cost, I expect — on the company’s part and particularly on the part of the employees who participated (more about which later). Using the internet to recruit candidates, then screening them with software designed to match keywords found in a candidate’s résumé with keywords provided by the hiring manager, would seem to require much less effort — I can’t comment on the cost aspect, since there is obviously some cost associated with the systems and software required to do this and I don’t know how it compares with the cost of running a job fair (although I’m sure the software vendor’s marketing team has a well-cooked set of figures to prove how much money it will save…)

But maybe the reason it requires more effort is that it actually produces better results. Now, I’ve had some feedback from a number of sources that suggest to me this is true. Specifically, I’ll use RIM (Research In Motion, maker of the now ubiquitous BlackBerry) as a sort of “case study” for this — I’ve applied to RIM for a number of positions through their internet recruiting system.

And apparently, I have impressive qualifications, at least according to the canned rejection e-mails I keep getting back. Now don’t take that as sour grapes on my part, there’s more to the story. I do have some inside contacts at RIM: my brother-in-law works there, and so does a friend from university — they have both told me that the recruiting system seems to work against the hiring managers seeing the best candidates.

I’ve had this corroborated by the outplacement consultant I was provided with, who has spoken to a number of RIM’s managers and has heard the same thing from them. There are also lots of stories about people who’ve submitted applications and heard nothing back at all from RIM… until they get a call months, even years, afterwards asking them to come for an interview.

Perhaps RIM is a bit of an anomaly — they’re considered such a desirable place to work that they get a huge volume of applications and perhaps this significantly exacerbates the inherent limitations in the system. And having been a software developer, I can assure you that even an expertly developed system will not be able to identify suitable candidates as well as an experienced human resources professional.

But even so, I think it still serves as a pretty good indicator of the downside of taking the human out of human resources. It’s hard enough getting a hiring manager’s requirements stated clearly enough for a skilled and experienced human being to put them into a coherent job description (having had to write requirements as a hiring manager myself, I can say this with some confidence), but identifying good candidates that fit the requirement is tougher still and requires a level of judgement that only comes with experience — something much better dealt with in wetware, not software.

So, on to the actual job fair. I spotted an ad in the local paper for the job fair, which was being held at the company’s site in Cambridge, not far from here. I knew of the company, but the positions I had seen advertised previously were for skills outside my area of competence — they build communications components and systems for satellites, and the jobs I had seen before were mainly for electronics, RF and microwave engineers or for production workers and skilled trades (e.g. machinists).

But for the job fair, they were recruiting for a variety of positions, including some that matched my profile — a job that requires project management experience coupled with strong inter-personal/relationship building skills, for example. I decided that it was worth investing the time to prepare for and attend their job fair.

As noted, it was run on Saturday — presumably to allow people who are employed to attend, in addition to those who are (like myself) between jobs. There were a lot of their employees involved: from directing people in the parking lot and the lineup (and it was quite a lineup), to registering candidates as they entered (due to security and confidentiality restrictions that the facility operates under, everyone had to be signed in and out, and all cell-phones and cameras had to be left at the registration table — neatly tucked into a zippy-bag and labelled with your name for retrieval on exit), then directing people inside to various interviewing areas; not to mention the considerable effort spent in actually interviewing candidates.

While I’m sure that the employees would be compensated in some fashion for working on Saturday, with time-off in lieu perhaps, it was still impressive to observe the dedication and energy being shown by everyone — my impression was that they were putting in a lot of effort not because they were forced to, but because it was the best way to make the organization be successful.

I gathered from one of the staff that the company had put on a job fair the year before (perhaps they do it annually; I’m not sure about that, but they definitely had one last year as she talked about how hot it had been and having to take water out to the people standing in line. Not a problem this year; it was cold and there was plenty of water available in the form of rain) — I take this as an encouraging sign that their business continues to grow.

Once through the registration process, where things like name and address were noted, and the position you were interested in was marked on the top of your résumé, people were seated in the lobby until being called into one of the interviewing areas — which one depended on the type of job and skills required. After a short wait, I was ushered into a conference room with probably close to a dozen people — all HR personnel, I believe — performing preliminary interviews; a sort of triage to determine whether or not to send a candidate on for more in-depth interviewing with a manager.

I had a nice conversation with a young woman from HR, and found out that she had only been with the company for 6 weeks — I commented that they had really thrown her into the deep end right away. She asked a few questions and concluded that I should see one of the managers — she consulted her list of people conducting interviews and put the names of three of them on the top of my résumé, indicating that any of those three would be in a position to evaluate my suitability for the position; I would see whichever of them was available first.

When she was done with the interview, she gave me her business card and asked me to follow up with her after my interview with one of the managers, to let her know how it went.  One of the benefits, I think, of putting the human back into human resources — with most companies, when you submit an application through their faceless internet portal, it’s generally just “radio-silence” (other than, perhaps, an automated e-mail cheerfully informing you that your application had been received) unless you get contacted for an interview.

After another brief wait while they assembled a group, we were taken in to the cafeteria where the secondary interviews were taking place.  I waited there a bit longer this time, sitting through a presentation about the company, its history, products, business philosophy, corporate culture, employee benefits and so on…  actually, I saw the presentation quite a few times while waiting, and noted a small grammatical error on slide 15 (in describing the function of the recreation club they used “who’s mandate is…” instead of “whose mandate is…” — I pointed this out to my interviewer so that it could be corrected, and he noted that I certainly demonstrated good attention to detail).

The interview took about 15-20 minutes, I think.  The interviewer was a manager from the production engineering department, and was not the hiring manager for the position I was interested in — nonetheless, he was familiar with the main requirements of the position, so I expect that as part of the preparation for the job fair the managers who participated were briefed on all the positions being recruited for so that they could at least decide if a candidate was suitable enough to be passed on to the hiring manager later for an in-depth interview.

The discussion was very thorough, and I think we quickly established a good rapport.  At the conclusion of the interview, he said he would forward my résumé to the director of the department that was recruiting the position, and he expected I would be contacted soon to set up a formal interview.

Based on the experience with the job fair and the people I met, my impression of the company was that it is a very strong, dynamic organization; that the people who work there are dedicated, committed and truly enjoy being part of a successful team.  I tend to be somewhat cynical about “mission statements” and “corporate values”, but the ones stated in the presentation were: a) very much in evidence; and b) actually very much in line with my own beliefs about what makes a business strong, sustainable and a good corporate citizen.

So, my first experience with a job fair was exceptionally positive; however, I don’t expect that this would be the case with all companies running a job fair, so take that into account as well.

Also, I’ve gone from knowing almost nothing about the company, other than its name and where its products are used, to knowing a fair bit about them and being very impressed with the organization:  according to the information presented, their market share for some of their products is greater than the combined total of all the other suppliers in the marketplace (granted, satellite communications components are not exactly a high-volume business…  but it’s still a worthy accomplishment).  Beyond the commercial success, I can see that it would be a very good environment to work in.

Oh, and did I mention the lineup?  The job fair was scheduled to run from 9:00 am to 3:00 pm; I wasn’t able to arrive until right at 9 am (K was going to Toronto that morning to help her friend Karen, who’s opened a knitting store in New Hamburg called Shall We Knit?, with a booth at the DKC Knitter’s Frolic knitting show and I had to get her to the meeting point for Karen to pick her up before I went to the job fair) and the lineup was already half the length of the building.

The lineup moved slowly, and the time that was marked on my résumé at the registration desk was 10:42 am.  Fortunately I was able to strike up a conversation with the woman behind me in the line, as it turned out she is also from the city where I live so we had something in common; the conversation helped pass the time and distract from the miserable weather that day.

By the time I left, it was about 12:20 pm, and I think that the lineup was even longer than when I had arrived at 9 am.  When I later spoke to the woman from HR who had asked me to follow up, she said that they had been a bit surprised at the number of people who had showed up for the job fair; there were a lot more than they had expected.  A sign of the economic times, I suspect.

She told me she was forwarding my résumé to the hiring manager for the position, but that they were travelling on business this week, so it would probably be the end of the week or more likely next week before I would hear from them.

Based on my very positive impressions of the company from the effort that they put into their job fair, and also the obvious quality and dedication of the people I met during my time there, I have to say I would be very pleased to become a part of their organization; one that has the Unconventional Wisdom to put the human back in human resources — they evidently see enough value in return for the significant effort it takes.


Paraphrasing William Shakespeare

April 20, 2007

To paraphrase Dick the Butcher in William Shakespeare’s Henry VI, Part 2 Act 4 Scene 2:

The first thing we do, let’s kill all the MBAs

OK that may be a bit harsh. What’s prompted it is a bit convoluted; bear with me.

The story starts in the Shetland Islands, north-east of Scotland. A particular style of knitting has evolved there, called Fair Isle, which involves creating intricate patterns of colourwork — here’s a few examples:

uw_henry_viii_body.jpg
That’s the body of a Fair Isle sweater in the process of being knit — the pattern is, I believe, called Henry VIII.

uw_henry_viii_detail.jpg
This is a detail of Henry.

uw_reef_vest.jpg
This one’s a Fair Isle vest; the pattern is called Reef, I think.

In case you’re wondering, these were knit by my wife, K, and she’s the one who passed on a bit of information that led to me writing this.

You see, in order to knit Fair Isle, you need a huge palette of colours, in subtle gradations. What’s more, you may only need a small amount of some of the accent colours — possibly less than a full skein or ball for one pattern. You might use the leftovers of the colour for another pattern, perhaps not.

The results, I think, speak for themselves… the garments can be simply stunning.

What, you ask, does that have to do with paraphrasing Old Will and wishing harm to MBAs?

Well, there are principally two manufacturers of real Shetland yarn for Fair Isle knitting: Jamiesons of Shetland and Jamieson and Smith Shetland Wool Brokers. And it seems that the latter, known as J & S in the knitting community, has announced that they will be discontinuing about half of the their colour palette.

Apparently, the company has been bought by an English firm from the mainland. And they’ve decided that because the minimum economic production run for a colour is something like 1780 skeins, that the business can’t be run profitably with such a large range of colours — particularly when some of the accent colours do not sell in high volume (for the reason noted above).

Now, I’m all for running a business at a profit; that’s not what’s got me going here. It’s the stunningly shortsighted inability of some off-shore management group (likely composed at least in good measure of young MBAs hungry to make a name for themselves) to understand the fundamental nature of the business.

Dropping half the colours from the palette is not going to achieve the desired result, which I expect they believe will be increased inventory turns on the remaining colours. But it doesn’t work that way — you can’t knit Fair Isle properly without the subtle gradations of colour; removing half the palette will just destroy the beauty of the pattern. In fact it will make it un-knittable, as you can’t just say “Right, can’t get that accent colour anymore, I’ll just use a bit more of this other colour they still make”.

An analogy would be if Crayola were to decide that it’s really not cost effective to put 64 different colours in a jumbo box of crayons, and then eliminate a whole whack of them — maybe you’d get 4 crayons of each of just 16 colours instead.  I mean, really, who needs that many colours — MBAs seem to get along fine with just black and red ink, and the less of the red the better.  Surely kids will be just as happy to draw a less colourful, more homogenized world — won’t they?

So it’s quite likely, at least in my opinion, that in the end they’ll sell less yarn overall. Not a good way to increase your inventory turns and profits.  And, more’s the pity, there will be fewer Fair Isle garments knit; perhaps eventually the style will die out — what a loss that would be.

But I suppose they’ve run a case study, built an economic model based on some assumptions learned at MBA school and ran the numbers to determine that this, the conventional (business) wisdom, is The Answer To The Problem.

I suppose the point of all this, the Unconventional Wisdom on the matter, is that a business is more than a case study: it’s knowing how the product is really used, the history, the culture and — most of all — knowing your customers.  From what K has said, from reading between the lines it appears that the people working at the J & S mill in the Shetlands have been quietly encouraging knitters to bring this small fact to the attention of the new owners, before it’s too late — because they, not the MBAs, know what Fair Isle knitters want.

Oh, and once we’re done with the MBAs, we can resume Dick the Butcher‘s original plan and go after the lawyers… ;)

PS feel free to submit all your favourite MBA or lawyer jokes in the comments; here’s one to start:

Q: What’s brown and black and looks good on a lawyer?

A: A pack of Dobermans.  :D


The Multiple Careers Paradigm

April 3, 2007

If I recall correctly, in the 1990s there was a so-called “paradigm shift” which produced a new bit of conventional wisdom that said people could no longer expect to have a slow, steady progression in one career with a single employer from graduation to retirement; that instead the norm would be for people to change employers and even careers every few years, with mobility, versatility and adaptability being key to long term success.

Except. What I’m seeing in my recent job search efforts is that a large number of companies seem to want to hire someone into a position who has been doing exactly that job. So if we’re supposed to be changing what we do every few years, how do you manage to break into another field when you don’t even get a look in because you don’t already have a long track record?

Now I already have had some success with career changes: I graduated with an engineering degree and had a successful career in the aerospace field, at least until economic conditions made the industry downsize (I was one of those downsized in the process).

Having developed my computer skills during that phase of my professional life, I was fortunately able to transition to the IT world and had another successful career, starting with Programmer/Analyst responsibilities and working up to Project Management. During that time, I was posted to France for 4 years to the company’s head office to work as the project manager on an implementation of a global system. After returning to Canada, there was some restructuring in the company’s North American IT operations, and my position was eliminated.

The next of my careers ended up being in management, in the field of Customer Care. Huh? From engineering to IT, that doesn’t seem such a leap perhaps. But customer service?

Well, it’s not such a leap really. Throughout my careers, I had excelled at serving internal customers; in particular I had a strong philosophy that ultimately what I did to help them was in support of what they did to serve the company’s external customers and they are the ones who buy the products that paid my salary.

I was fortunate; the company that hired me as a Manager of Customer Care saw that I possessed the characteristics they needed to supervise a customer service group and look after the needs of demanding customers. My technical background was also useful as they manufacture an engineered product that is sold primarily through industrial distribution channels and to OEMs. My computer background was another key for this position, as it involved managing and developing strategic enhancements to the company’s customer-only extranet.

This job ended when a re-organization of the management group occurred due to a change in the company’s strategic objectives.

So, with a track record of adapting successfully to new career challenges, you’d think I would be perfectly placed with regard to the “career mobility paradigm”. But it seems like this is not the case, and perhaps it’s because of another recent paradigm or two: “Shareholder Value” and “Sarbanes-Oxley/Good Corporate Governance”.

Companies are afraid, it would seem (at least from my perspective), that hiring someone into a position that isn’t an exact clone of the job description is too risky. And risk is, these days, unacceptable from a shareholder value point of view; I’m less certain of the corporate governance effects but I suspect that increased attention to “internal controls” makes everyone a little more nervous when it comes to making a decision that could end up being questioned.

So, there we are. Is the career mobility paradigm dead, killed off by the power of risk-averse investors? I’d be interested to find out what other people’s recent experience is telling them about this subject.


Thoughts about the “Low Cost Country” business model

March 31, 2007

I’ve been thinking recently about the trend for companies in “High Cost Countries” (notably North American and Central European countries — you know who you are…) or HCC (er, not to be confused with the “High Cadre Children” of post-Cultural Revolution Communist China, as described in Qui Xiaolong’s novel “Death of a Red Heroine“) to source raw-materials, components, sub-assemblies and complete finished goods from “Low Cost Countries” or LCC.

In addition to being a source of goods, some of the LCCs are also widely used for outsourcing of services (e.g. telemarketing, customer service, technical support, engineering, data processing, etc — even preparation of tax returns has been off-shored) that can readily be provided via various telecommunications paths — telephone, e-mail, internet chat/IM, WANs and VPNs, etc.

Now, the conventional wisdom (ooh, there’s that phrase…) on LCCs says that They Are A Good Thing For All The Parties Involved. The reasoning, at least as I understand it (see disclaimer below), goes something like this:

  • Raw material and labour costs in LCCs are low enough to more than offset the cost of transporting and importing the goods to the HCC, so that the net cost is less than the same goods sourced within the HCC.
  • The lower costs will result in lower prices to the consumer, giving companies using LCCs a competitive advantage in the marketplace.
  • The money flowing to the LCC is A Good Thing For The People There, who would otherwise be much poorer.
  • Jobs lost locally in the HCC to the LCC will be replaced by higher paying “value added” jobs.

The supposed advantages of LCCs over HCCs, from a cost perspective are:

  • Lower labour and social program costs in “undeveloped” countries; a result of the lower standard of living and people’s expectations there.
  • Less stringent safety and ecological impact regulations; no need to spend money on improving safety or reducing pollution, with few consequences for accidents or long-term health hazards.
  • Large pool of available labour compared to work; high levels of un- or under-employment keep labour rates depressed and allow workers to be exploited (and labour laws are generally lax in comparison with the HCC’s).

OK so far (although you’ll note perhaps just a hint of cynicism in my commentaries), but let’s think about this a moment. Time’s up. Here’s the Unconventional Wisdom on LCCs:

  • Transportation costs: have you looked at the price of Dead Dinosaur Juice (a.k.a. petroleum products) lately? And it’s not going to go down, either — demand is increasing (ahem… the fastest growing consumer of oil these days? One of those LCCs… a bit ironic, no?) and supply is not growing (it’s essentially finite, people… no matter how many holes we drill or tar sands we mine it will run out). Simple economics (even the kind doled out to the likes of me in Engineering School) tells you what happens in a case like this — the price continues to rise. So at some point, probably sooner rather than later, the cost of transporting goods from LCCs to HCCs is going to reduce and then eliminate any cost advantage.
  • Security of supply: this is partly related to transportation, partly to growing economies in LCCs (with two effects from each of these). If you have to transport goods a long distance by ship (because of the location of many of the LCCs relative to the HCCs, air transportation is too costly) you have issues due to: a) severe weather leading to loss of the goods at sea; and b) timing of arrival of the goods, which can be impacted by normal weather, and may adversely affect production and delivery scheduling. The growing economies in LCCs can cause issues because: a) in some LCCs private, for-profit businesses are A Very New Thing and they haven’t quite got the hang of things yet, so a supplier may just suddenly disappear due to bankruptcy (hmm… maybe they need to figure out that you have to sell at a higher price than your costs in order to make a profit. And they will, once they get over the heady exuberance of Just Selling A Lot Of Stuff.); and b) they compete with off-shore demand for the same things, raw materials and labour. Now, if you have two customers, one who’s two doors down and can easily come looking for you and the goods you agreed to deliver; the other who’s in another country somewhere across the ocean and several time-zones away — who do you think is going to get their goods first if there’s not enough to go around? My money’s on the neighbour…
  • Now this one’s not necessarily a LCC risk, and sort of falls under security of supply too — purchasing policies being driven by economy of scale, which lead to single-sourcing of critical goods. It does often go hand in hand with the LCC strategy, along with other Purchasing Department WMDs like reverse-auctions. Single-sourcing, in my experience, can be A Very Bad Thing, unless you have absolute security of supply. Now for commodities, it may not be critical, provided there is a ready over-supply in the marketplace or at least the capability of other suppliers to rapidly increase production in response to a loss of a supply source. But if not, then you become vulnerable to cost increases (if you have no alternatives for supply and you need the product to be able to continue to sell to your customers… well, think of what a junkie will do for a fix…) and in the worst case, you suffer a total loss (you single-sourced for that economy of scale, remember?) of supply and eventually run out of finished goods to sell. And your competitors? Perhaps they didn’t put all their eggs in one basket, paying a little more for the security of multiple suppliers (can you say “Insurance Policy Premiums”? I bet you can…) and they’re now taking your customers and eating your lunch.
  • The assumption, at least in most developed Western nations, is that the people of the LCCs will remain content with their standard of living and undeveloped status. Riiiight. Very short term viewpoint (and at its roots, harks back to the colonial impulses that the developed nations seem to have never quite gotten over). The two fastest growing economies in the world, if I’ve remembered recent news reports correctly, are both LCCs — the People’s Republic of China and India. And despite some government controls on access to information in China, in neither case are they living in a vacuum. They have internet and can see The Grass Is Greener On The Other Side Of The Fence. So why would Western countries expect that they wouldn’t want a piece of the pie too? And there are a lot of smart, hard working people in the LCCs (despite some Western stereotypes to the contrary) — there’s absolutely no reason why they can’t become as developed as any Western nation; perhaps even more advanced. With comparable standards of living and corresponding costs for labour and social programs. They’re going to want similar protections too: labour laws protecting them from abuses, better environmental conditions and so on. In addition, all this new prosperity brings with it increased internal demands for goods and services. Supply and demand — we all understand their effect on price, right?

So, the Unconventional Wisdom on Low Cost Countries is: look out the front window, that may be the next LCC you’re seeing.  Don’t they say “turnabout is fair play”?  And those higher paying, “value added” jobs?  Could they end up moving to the future crop of HCCs; you know who I mean, those current LCCs once they become developed?

Disclaimer time: Your Mileage May Vary. I’m not an economist, nor do I have an MBA (I occasionally regret not having found the time over the years to go back to school and get an MBA; not because I think it would have made me any smarter but principally for the career juju it seems to impart to people…) so the above is strictly based on years of observation of How Business Gets Done and much personal thought on the subject, rather than on any specialized education in the field.

So, if you have any well-reasoned thoughts or opinions — either for or against my propositions above — on the subject that you’d like to share, please leave them in the comments.


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