The Golden Age Of Outsourcing


Golden AgeAt the turn of the 21st century, outsourcing was going full blast, moving from obscurity to mainstream. It quickly improved corporate profits and promised long-term benefits through continuous improvement…at least that’s what was supposed to happen. Now, robots are arriving in the workplace. Is it a threat? Or is the “Robot Revolution” our second chance for a golden age of outsourcing?

The last wave of outsourcing was an eye opener for corporations. Everyone had heard about outsourcing and offshoring in auto factories. Yet, it seemed impossible that the same techniques could work for banks and non-manufacturing corporations.

Early on, outsourcing suppliers talked about more than just lower wages. Survey after survey told us that corporations wanted innovation, improved quality, and freed-up time for managers, not just lower wages. But after receiving a huge financial benefit by the first or second year, other benefits were de-emphasized or forgotten by corporations. A few programs did prioritize Six Sigma, LEAN, and other efficiency methodologies, but they were exceptions. Long-term planning and management is stressful and can be risky, but when it is successful program costs are kept under control and the program can deliver exceptional benefits. Yet, few programs were “ambitious” enough to demand, and pursue, all of the benefits they originally agreed to.

It was easier for companies to get their big financial benefit with the first contract and then try to negotiate a lower price for the renewal. However, when productivity and quality were not addressed, costs rose. Offshore inflation in Asian countries was usually higher than in Europe or the US. Companies that used offshore locations might luck out on foreign exchange rates on their second contract, but by the third contract, companies surely had to deal with rising prices.

Addressing internal inefficiencies might have worked just as well, but most companies began to look for lower cost locations. China (manufacturing) and India for knowledge services (legal, banking, insurance, research, IT) were the lowest prices on earth…for awhile.

By 2015 Chinese wages were two to four times higher than neighboring Vietnam and Cambodia. Brazil, Eastern Europe, and other locations tried to duplicate India’s success, with mixed results. By 2017, outsourcing work was tried everywhere—it had literally gone to the ends of the earth! The days of wandering around the world in search of a significantly lower wage are over. But if you stay where you are? Then costs will inexorably rise. It’s time to think about the most efficient place on earth, which may be closer than you think!

Producing a physical product offshore costs time and transportation. Real estate in China and India is surprisingly expensive, at least in any place that it makes sense for you to operate. Many domestic locations cost far less and do not require extensive power backup, dedicated employee transportation, and other infrastructure.

IF wages can be neutralized, the best place to manufacture might be in your home market. More specifically, if a machine can build a product in one location, it can build it in another. The “labor” then becomes the same anywhere in the world. Transportation, real estate, and other costs become more significant, as does opportunity cost. Restocking offshore products can take a month or more. Onshore, customers can go to another store or buy a similar product from another manufacturer. Factories built near the markets they serve can restock quickly.

As manufacturing returns to the US, will these corporations build and manage their own factories? Or will they outsource factory management? New factories MUST be highly automated with few employees. It may make more sense to build super factory complexes that can be efficiently supplied and perhaps powered by factory controlled power plants. Factory complexes that support multiple companies and brands will have greater leverage when negotiating with states over tax breaks and work conditions. It may also be easier for customers to outsource rather than renegotiate an existing union contract.

Automated factories require lifecycle management. In the past, factories were built and run until they had no value left. Machinery might have been upgraded occasionally, but most equipment lasted for 20-50 years. Some industrial machines were so large that the building had to be built around it. Automated factories will require much more frequent changes.

If a complex of factories contains multiple corporations, some will grow, some will shrink and some will go out of business. Early adopters will start off with far fewer workers than comparable factories of the past. Over time they will evolve into “lights out” facilities, requiring no staff at all.  Former employee parking lots will be redeveloped into other types of space. Automated equipment will undoubtedly require more frequent upgrades. There is a strong argument to be made for outsourcers to take on this role. If major US and European outsourcing companies are not quick to tackle this challenge, a new competitor may be very eager to develop an onshore presence. China. Think about it!

China dominates offshore manufacturing, but recent increases in compensation have hurt its competitiveness. China’s wages are four times higher than Cambodia’s! The writing has been on the wall for years, which is why, in 2015 the, the government allocated $250 billion for projects to replace manufacturing workers by 2021.

Even before this mammoth infusion of money, China was the world’s largest buyer of industrial robots. Now they will also be the world’s largest buyer of industrial robot manufacturers. In 2016, they bought $10 billion worth of European robotic firms, and they have plenty of money to buy more.

The official global production of industrial robots is 250,000, growing at 35% annually. A little-known fact is that China produces at least 100,000 additional industrial robots that are not counted in global production Why are they left out? Because they are often used by the companies that build them, and because they are outdated by international standards. But, in China, they do the job. And as China buys more and more Western robotics and artificial intelligence (AI) firms, we can expect China to DOMINATE global robotics.

Today China builds 100,000 and they buy 70,000 robots annually. They’ve barely begun to spend their $250 billion nest egg. If robot sales grow at their current rate, between 1 and 1.5 million robots will be sold by 2021, and half a million will be built in China. By 2025 China will produce half of the world’s robots.

In a handful of years, no matter where you build your factory, your (robotic) workforce will be “made in China.” Not interested in lower cost Chinese robots? What if the construction was financed by a Chinese bank and a special discount was offered if a Chinese construction company did the work? Similar interlocking deals have powered China’s expansion in Africa and Asia. I’m betting that a Chinese end-to-end factory could be far better priced than more domestic funding.

Knowledge work has different needs but will create similar new opportunities. Because physical products don’t need to be moved around the world, transportation is not an issue. Productivity is.

India has been successful in all sorts of knowledge work. However, it often hits a glass ceiling. Many junior knowledge workers are created, but the big prize—senior knowledge workers—has been elusive. The old promise was to have junior work performed by more skilled staff, resulting in a more educated knowledge worker, but that never materialized. Is it because of prejudice against foreign workers, lack of “real” work environment exposure, or the resistance of skilled workers to performing less skilled work? Whatever the reason, outsourced workers often fail to become the MOST educated knowledge workers, instead falling into support roles. These roles are likely to be automated. Soon.

India’s legendary IIT and IIM Universities have highly respected graduates. Yet, basic education has not risen above sub-standard. Some experts say that the secret to surviving in a robotic world is education. Should the offshoring platform of the future be Canada, Singapore, Israel, Australia and other countries with the best-educated citizens?

While India is the world’s back office support for IT, they produce few notable software products. India should produce more than 3,000 patents every year. Without more software, AI or robotic leadership, India is in for a rough time in the next decade.

Outsourcing once promised more than lower wages. Work was going to be revolutionized. For the last 20 years, outsourcers have talked about continuous improvement and long term benefits. The Robot Revolution could be Outsourcing 2.0. But if your focus is still on lower wages, you probably won’t survive the coming big squeeze. If, instead, corporations focused on quality management, continuous improvement, and the strategic use of automation, long overdue benefits will help your program thrive!

 

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A.I. Saves The World!


 

Robot Hand

Photo: All Rights – Richard Greenhill and Hugo Elias, The Shadow Robot Company

Robots, Artificial Intelligence, automation. Machines are taking over the world… and it’s about time! Our environment today has far more technology in it than it did a generation or two ago. And tomorrow? You can bet on even more technology. Now we constantly hear that Artificial Intelligence (A.I.) is taking over the world, or at least taking over your job. Is technology still a good thing? It sure is! In fact, new technology is about to do some ridiculously great things for us!

It’s the 21st century. I get it! We’re supposed to be surrounded by technology. Computers are everywhere. Of course… I still don’t have a jetpack. Or a flying car. But my smart phone is a computer in my pocket, and that’s something. What are the other big benefits of A.I. and new technology? Let’s take a look at just a few big changes that we’re all going to benefit from…

MEDICINE – Everybody hates going to the doctor. Soon, we will be able to hate going to the Robodoc. Yet, millions of patients have been treated with Robo-surgery. Consider Lasik. Originally, it was a fairly manual procedure. But technology advanced, and machines did more while doctors did less. Today, one computer examines your eye with a laser, mapping any imperfections. Then, a different type of laser reshapes the lens, eliminating flaws. It takes 15 minutes for a Robodoc to complete a very complex surgical procedure. The doctor? If he agrees with the computer’s plan, he gets to press the “go” button.

In most professions, A.I. tends to start with the simplest work. The opposite is true with surgery. “Computer assisted” surgery has been around for years, helping doctors with work that is so complex (or so small and intricate) that they must use a computer in order to perform them at all. Also, any semi-autonomous robot or A.I. may be just an upgrade or two away from working solo.  

LOGISTICS – “Logistics” is a term used by big corporations, but it affects just about everyone. Logistics is about managing the flow of people, goods, and services. Getting to work in 30 minutes, rather than a traffic jammed hour, is a great example of logistics. A broken traffic light, flooded street, or just an accident can complicate your trip. In New York City, millions of people every day rely on the subway to get to work. In order for the trains to run, they rely on a signal system that is similar to traffic lights for cars. NYC’s signal system is a hodgepodge of aging technology that goes back nearly a century. And it’s breaking all the time.

It will cost $3 billion to update NYC’s subways to a computer controlled signal system. That not only reduces train accidents, it will solve many other problems. Today’s slow response time requires that trains must be at least 2000 feet apart. A new computer controlled system can react much faster, allowing more trains on the tracks at the same time. More trains, faster rides, and less crowded subways. Not a bad deal!

Consider your last plane flight. It takes too long, and there are always problems. Have you noticed that planes change direction several times during your flight? It’s not because of turbulence or weather.  Your plane needs to be tracked at all times, and it turns to stay within the range of the next radar tower. Soon a satellite and A.I. controlled radar system will be in place. The results? Fewer lost planes, and less flight time. A straighter route is a faster route, and satellite radar means flight will take a third less time. That cuts 2 hours off of the typical coast to coast trip.

TRAFFIC ACCIDENTS – Everyone knows about self-driving cars. Different versions are being tested around the world. They seem to perform as well or better than the average driver. What? You disagree? You think you drive better than an A.I. can? You might be right. After all, car accidents are caused by other people, right? Especially people that drive when they are tired, or distracted, or texting or even when they’ve had a bit too much to drink? There are 35,000 traffic related deaths and millions of injuries every year. Self-driving cars would dramatically reduce the toll on human lives.

A.I. guided vehicles would eliminate almost all driving accidents and property damage. By communicating between vehicles, cars would know about closed streets and other obstacles well in advance. When rare accidents did occur, A.I.’s would not rubberneck as your car passed the scene. A sudden winter “white out”, in a snow storm would not blind the radar and infra-red sensors on your car, and every car would stop at the same time. Even annoying drivers that want to be the last one to cross the intersection, and get stuck, wouldn’t sit in the crosswalk, obstructing traffic.

EDUCATION – Every parent has heard their child tell them that a teacher doesn’t like them. They may be right! We know from independent testing that a test scored by two (or 3, or 4, or 10) different human teachers have more variations in scoring than if two A.I.’s scored the same work. We also know that scoring tests and homework requires 40 to 60 percent of a teacher time and few teachers like doing this task.

That means that the best teachers… the VERY best teachers… can focus on teaching, not administrative tasks. Will this eliminate teaching jobs? Yes, it will. But for the children and the parents who pay for school, it means receiving a higher levels of service and greater objectivity. It also means that the cost of education goes down, and schools that have consistently resisted reform and improvement, can focus financial rewards on teachers that truly improve education.    

The march of the Robot Revolution may be inevitable, but that does not mean it’s a defeat for humanity. We will be healthier, have fewer crippling injuries, better education and we can expect to live longer lives. Not exactly a bad revolution. There will be change. No doubt about it. The few items listed here are just the start. If we embrace change rather than resist it, the 21st century could be the golden age of humanity… but I still want my flying car!

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Zero Work Is Not Zero Happiness


Work-Pays-POsterThe world is faced with the greatest economic crisis or the greatest opportunity since man was let into Eden. Even before the earliest civilizations, Man has labored. At first, Man fought against nature for food and shelter. Later, people became workers, serfs, and even slaves. We created tools, to be more productive. The Industrial Revolution further increased productivity, elevating pay and creating “leisure time”. The computer revolution turned factory jobs into desk jobs, with air-conditioning, better pay, and benefits… like health care. Now automation, Artificial Intelligence, and Robots threaten to steal the world’s jobs in just a few years. What if… not having a job was a good thing?

Technology pundits, economists, and futurists are well-aware of new technologies. But traditional economics say that society will continue to adjust, regardless of the technology. Just as factories replaced farms, a “new economy” will arise to solve all problems.

The experts, however, have started to change this message. Factory jobs may be the first to go away, but they won’t be the last. Artificial Intelligence (A.I.) and robots will be equally good at replacing high paying jobs. Outsourced work and even whole factories may return onshore, but new factories will be highly automated factories and create few workers. Experts no longer see a “next economy” on the horizon. Any “new jobs” can be performed just as well as “old jobs”… by robots.

In the 19th and 20th centuries, American’s were primarily farm workers. By the mid-20th century, we were factory workers. Now we have a service economy. The next economy, the jobless future, will be our fourth (and last?) economy. After 150 years of transition, just 2% of workers are farmers. After just 50 years of transition, just 8% of jobs are in factories.  Robots and automation have already taken over some service jobs. These transitions have become shorter. Will the transition to the Zero Work economy take just 10 or 20 years?

Back in 1980, a labor organizer in India, Valerian Texeria, looked at Communist and Capitalist theory. He thought that both theories shared a flaw. Machines were becoming more intelligent and new energy sources could be nearly free to produce. If machines replaced human workers, and energy was free, machines could directly replace human workers. While this seems obvious, political and economic experts of the day largely ignored Texeria’s “Zero Work Theory” (ZWT). Today, however, experts are beginning to discuss jobless future that looks a lot like Zero Work.

A jobless future shouldn’t cause panic. That is if the loss of jobs is… a good thing.  The history of labor has been a continuous march from long hours and bad work conditions to shorter hours and better work conditions. This is what workers want, and what labor organizers demanded for generations. But it does raise a question, “If less work is better, then is no work best?”

Remember Communism? Communism and Capitalism battled for dominance for most of the 20th Century.  SPOILER ALERT. Capitalism won. Big Time! 50 Communist nations faded away, leaving just China as a significant Communist nation. Communism said that a new society without the need for money would arise. Maybe not!

Capitalist said that automation drives down the cost of labor, freeing up money for workers and new jobs. Automation has indeed improved profitability, but profits mostly went to the “1%”, and buying power for the 99% has been frozen for decades. Now automation is replacing jobs faster than new jobs can be created and even more wealth is moving from the middle class to the “1%”.

Texeria proposes that this process of “Technological Unemployment” will increase. Instead of trying to chase lost jobs, Mr. Texeria believes that we should focus on how people will pay for food and shelter without jobs. The idea of UBI goes as far back and Sir Thomas Moore’s 16th-century novel, “Utopia”. There,  governments provided a stipend “sufficient for necessaries”. Modern Universal Basic Income (UBI) works by converting government entitlement programs into UBI. The cost for UBI can vary but for the U.S. is around $3 trillion. That’s what the government currently pays for education, socials security, healthcare, and housing. Having citizens choose and buy their own services will eliminate multiple bureaucracies, reducing the cost of government.

Modern Universal Basic Income (UBI) works by converting government entitlement programs into UBI payments. UBI for the U.S. has been estimated at $3 trillion, the current cost of education, socials security, healthcare, and housing programs. Under UBI, citizens will choose and buy their own services. This eliminates multiple bureaucracies, reducing the cost of government.

The Robot Revolution won’t just eliminate jobs. It will reduce the cost of EVERYTHING. Corporations are installing robots because they are cheaper than human workers.  That means that when the UBI arrives, it will cost less than today. Because everything will cost less.

The Robot Revolution also means that the “1%” that own the factories and the corporations that are automated will be more profitable. That means provides a new stream of profits that can be taxed. Some experts prefer the idea of a “Robot Tax”, on every robot that displaces a human being. Whatever method is chosen, the economy will be as strong as it is now and will continue growing. UBI represents a restricting of taxes and payments. By removing the most inefficient government programs, rather than increasing the government budget, it may be possible to pay down the national debt.

Robots will continue to take over factory jobs, but they will also drive cars, replace cashiers, and out-perform “knowledge workers” (doctors, lawyers, financial specialists, etc.). That us back to Mr. Texeria and Zero Work. In 1981, he wrote a book, “Zero Work Theory”, predicting an optimistic future that economic experts rejected. His view was simple. Economics laws, including Moore’s Law (computer costs drop by 50% every 2 years) are inescapable and has been eliminating jobs for decades. Technology now eliminates jobs faster than they can be replaced. If not his ZWT and UBI, is there a lower cost and more effective alternative? If so, it’s being kept a secret.

Technology has simply reached a point where jobs are being eliminated faster than they are created, and the speed of elimination is accelerating. ZWT points to massive societal changes, but advocates adjusting to a jobless future rather than trying to prevent it. Of course, experts that are still tied to Communist or Capitalist alternatives haven’t come forward with an alternative to ZWT and UBI that will cost less, or that will be more effective.

Some experts warn that without the “sense of worth” you derive from your job, you can’t have positive self-esteem. How does Mr. Texeria address this? “That’s just leftover thinking from religion and 20th Century economics.”

He may have a point. Soldiers, engineers, and firefighters can “become” their job, and their fellowship with their workmates may be closer than with their family. But these are exceptions. 70% of American’s are unhappy with their jobs. Cashiers, fry cooks, and the guy who cleans the men’s room urinals are much less likely to confuse themselves with their jobs. But they might be… parents of their children, fans of their local sports teams and experts in their favorite hobbies. This is what drives them and this is where they want to spend time.

What will people do with their spare time in the jobless world? The same things that they do today… participate in their community, become involved in politics, play games (in 3-D), participate in increasingly dangerous sports (base jumping, free climbing, parkour…), and experiment with drugs.

Is it desirable for citizens to experiment with drugs?  At the moment, no. America is gripped by an opiate epidemic causing 40,000 fatal overdoses annually. One in 10 Americans (1 in 4 over 40) take anti-depressants, which are often contributing factors in 50,000 annual suicides, and workplace killings. Alcohol kills nearly 90,000 American’s every year. Yet, Starbuck’s and Red Bull have built respected caffeine empires. Marijuana legalization is likely to happen in the next few years. in part a movement to discover less destructive drugs for depression and pain relief. And drugs will be used for

Perhaps, given the dramatic rise in leisure time that we will soon face, this might be just the right time for America’s vast pharmaceutical industry to look for less destructive drugs for depression, ADHD, and pain relief. That just might eliminate thousands of mass killings. Of course, without the stress of the modern workplace, many of these drugs may not be needed.

Today’s economic experts have largely failed to adapt old economic theories to the Zero Work future, after “workers” largely disappear. Technology has been moving towards a jobless economy for centuries. Nations are at different levels of development. The U.S. and Europe (and Japan, Canada, etc.) could adopt UBI in just a few years, but it could take a century or more for today’s poorest countries to have large enough economies to pay for UBI.

The Robot Revolution will cause enormous changes, just as the agricultural and industrial ages caused great disruptions in the past. Are we headed towards the destruction of the world or into a new golden age? That largely up to us, and how we hold our governments accountable managing a Zero Work world!

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National Insecurity On Your Desktop


InsecureCorporate IT has an old saying, “Computer users backup their data twice. Once after they buy a computer, and once after their computer crashes.” Let’s face it unless it’s automatic, we don’t do a lot to protect our data. After a crash, we remember to do backups… for a while. But the massive breakout of “ransomware” in May has reminded us all of how vulnerable our computers can be. Now, we’re all checking that our anti-virus subscription hasn’t run out! But a few of us have started to think, “WAIT A MINUTE… where was my antivirus made?”

Not too many years ago, anti-virus software was pretty much “Made-In-America”. Microsoft offered some software with your operating system, while McAfee and Symantec battled it out for the title of #1 anti-virus software. Today, however, anti-virus software has become diversified and global.

Depending on how you count, Microsoft or Avast is the top Antivirus in the US.  Microsoft is an American product, but Avast comes from Czechoslovakia. The next tier of software comes from America (Malwarebytes), Germany (Avera), and Slovakia (ESET). Russian has a respectable 4% of the US market with Kaspersky’s Anti-Virus. Although Kaspersky insists that it is completely independent of the government.

If Russia was confident enough to tamper with our Presidential elections, why wouldn’t they try to get spyware into Kaspersky? China once made counterfeits of CISCO routers with built-in spyware. A few years ago, a Chinese-made mobile phone had built-in spyware, with traces of tools made by the Chinese People’s Liberation Army.  

Of course, America has its own intelligence operations. We invented the Stuxnet virus, infected HP centrifuges and then delivered them to Iran in 2010. This destroyed several of their labs and set back their nuclear weapons programs by a decade. All intelligence groups seek out a technological advantage.

Today, our documents are electronic, most work involves a computer, and business (banks, hospitals, power plants and critical infrastructure) are all computer based. It’s only natural that intelligence agencies seek out methods to control the digital infrastructure of other nations.

This week, a massive wave of “ransomware” hit Europe. The virus encrypts your hard drive, locking you out of your own files. To add insult to injury, the tools to create the virus were stolen from the NSA (National Security Agency)… an Intelligence group set up to protect us against threats from other countries… by what appears to be foreign hackers.

Why did the NSA create these tools? The NSA and other government “security” agencies look for vulnerabilities in popular software that might be exploited by foreign governments, criminals, and terrorists. Unfortunately, rather than inform the developers of these vulnerabilities they “stockpile” this information in hopes of one day exploiting it against an enemy.  It has been argued that stockpiling creates greater risks, especially if the stockpile is successfully hacked.

Washington on fire with accusations of Russian interference (electronic and traditional) with the elections, stolen email, and hacking of government agencies. There appears to be little that government spies won’t do to achieve their goals. We suspect other governments of pulling dirty tricks and other governments suspect America of the same tricks. After all, Donald Trump, the President of America, has claimed that he is the victim of spying and dirty tricks from the US government. While Trump has not presented a shred of evidence to support his claims, I’m sure that the heads of Russia, North Korea, Terrorist groups and others will remind us of Trump’s accusations, and will ask the world to ignore warnings from US Intelligence the next time we see something threatening in the world.

After all, Donald Trump, the President of America, has claimed that he is the victim of spying and dirty tricks from the US government. While Trump has not presented a shred of evidence to support his claims, the leaders of China, Russia, North Korea, and various Terrorist groups will remind us of Trump’s accusations and tell the world to ignore warnings they hear from US Intelligence.

Government spies be are eager to influence the media. Wouldn’t they be just as eager to influence antivirus manufacturers? Does that mean that a Russian-made product like Kaspersky should be approached with caution?  Maybe. And perhaps we should also be concerned about products from Germany and Slovenia? Maybe.

Is your government spying on you? OF COURSE NOT! That would be wrong, unethical and probably illegal. Instead, your government spends it’s time productively spying on everyone else in the world!  What’s the point of paying billions of dollars for spy agencies if they don’t… SPY!  

The latest ransomware attack may have involved US tools, but the attacks seem to be directed from North Korea. The US, China, and Russia have all complained about the damage to their economies. Not quite the international cooperation between the US and North Korea the world was waiting for!

After this week’s ransomware attack, security software companies and national governments are going to be working more closely than ever before. Whatever their intent, anti-virus makers and the government will need to get much cozier with your data. Good thing we’re all working on the same side. At least, you’d better hope we are!

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Fake News Is Not New News


SupermanPresident trump seems preoccupied with saving America from, stuff. Before the 2016 election, we were told that the greatest threat to America was Hillary Clinton. Having slain the dragon in November, what new villains face America in 2017? The answer, obviously, is the media! President Trump is hell-bent on protecting America from the slavering jaws of a rapacious press!

That’s right, the media is now our enemy, spreading fake news and lies. Thank you, Mr. President, for letting us know that the media can be biased or untruthful. If not for you, the average American would not know…. Wait!… Hold on… BREAKING NEWS… “Inside sources tell us that Americans already know that the news is BIASED!” Well, what do you know! A biased Media is not new NEWS!

In America, we have always had a split image of the “press”, to use that antiquated term for the news, from back when news was primarily on paper. In that age of paper, we came up with the idea of a “crusading reporter”. The reporter who cleaned up bad politics, petty crime, embezzlement and misuse of public funds, and generally worked for the public good. Is this a cartoon image of the press? You bet it was! And at the height of the cartoon good guy newsman, a character called Superman was created.

Why was Superman a news reporter? Mostly because there are problems in the world that can’t be solved by punching it in the face. The nod to the value of the press was when a problem was too big for superman, but it was a job for Clark Kent, Ace reporter. Cartoonish? Absolutely, but it did highlight that by the middle of the 20th century, the world had grown larger than your hometown and too complex to understand without someone who can explain it to you.

Still, when America wasn’t reading cartoon, it was watching movies. Like Citizen Kane (1941), universally regarded as one of the greatest movies of all time. What is it about? It’s a thinly veiled docudrama about William Randolph Hearst, the newspaper baron of the middle 20th century. It shows the King of Newspapers as arbitrary and vindictive, using his power to punish his enemies and bend the world to his will. For students of film and those who want to dig a little deeper, reality does copy art! Hearst did not like his depiction in the movie, and he used the power of his newspaper to stop the release of the film (not a single Hearst paper carried an ad or a review for Citizen Kane).

The unforgettable “NETWORK” (1976) was about media’s fall from grace, as it moved from News to Infotainment. How the Walter Cronkite and Edward E. Morrow type journalists with integrity degenerated into shock jocks and ambush journalists. While the term “alt facts” wasn’t used, NETWORK certainly showed how facts could be twisted. Why? To get more ratings.  

In 1951 there was a brilliant film, “Ace in the Hole”, about the coverage of a man who was stuck underground in a mine cave in. Here, the reporter, played by Burt Lancaster, is the villain. Rather than a heartless news corporation, we see an individual reporter whose career is in freefall and needs “one big story” to get him back to the top. In a foretaste of the Internet, he is exploiting print and broadcast (radio) and has co-opted the public into becoming part of his media circus. In this movie, there is a literal circus… selling popcorn, soda, souvenirs, and tickets on rides… growing on top of the where the miner is buried. A subtle, but powerful image to remind us about how the public works with the media to create the worst of these sideshows.  

By the way, if you can still remember what you just read in the last sentence, the miner dies. Of pneumonia, while waiting for the rescue crew to reach him. Which is a total bummer. For everyone. If they rescued the miner, there would be celebration and more customers at the circus. But with just a dead miner, it was time to pack up and go home.

A lesser known movie is, “Wrong is Right” (1982). Here, the media is a problem, but it is not the main villain. The media is shown as being the equivalent of the ambulance chasing lawyer. Not a lot of ethics, but not overtly evil. Here the ultimate villain ends up being, the White House! In the end, a war is started in the Middle East to prevent a terrorist attack. But the war is started based on intentionally planted “alternative facts” from White House insiders.

Manipulation from the White House? How about that! America not only knows about manipulation from the media, it knows about manipulation from the White House. If we went back to the cartoonish adventures of Superman, for the past couple of decades there has been a running theme of Superman’s arch nemesis, Lex Luthor, becoming president of the United States. Here, Superman can crush Lex’s robots or withstand his death rays, but only Clark Kent (and his girlfriend Lois Lane) have the power of the media to stop President Lex Luthor’s nefarious schemes to take over America!  

America taken over by a hair challenged billionaire who thinks he is smarter than anyone else? (OK, Lex Luthor IS smarter than anyone else.) Who will rescue America if a real villain tries to take over? We might not have Superman, but we do have thousands of Clark Kents and Lois Lanes. Clark and Lois just need guidelines to make sure that they do not stoop to fake news, alternative facts, and manipulation that Lex Luthor’s team is so fond of. Hey! How about this for a new 21st Century code of ethics for all of our Internet bloggers… Truth, Justice and the American way! Nearly a century later, the news might benefit from those six little words!

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The Future of Retail Outsourcing: Amazon vs. Walmart


Walmart

WoW! Isn’t it amazing how quickly things change? In the early 2000’s, the very pinnacle of outsourcing was Walmart. Walmart didn’t outsource its own operations. Instead, it made history by working with offshore suppliers, introducing American consumers to low-cost Chinese goods. Consumers fell in love with the low prices, and Walmart grew to 14,000 stores, becoming the biggest corporation in America. Only later, Americans asked, “Why can’t I buy an American made hammer?” Walmart benefited individual consumers but wiped out family owned stores, family owned factories, and American jobs.  

Recently, Walmart’s brightly burning star has begun to dim as the Internet replaces brick and mortar shopping. But as Walmart declines, Amazon rises. While Walmart revolutionized the supply chain, Amazon has changed the shopping experience. Amazon has more or less inherited Walmart’s supply chain, which is filled with Chinese products. As a virtual store Amazon can carry an infinite number of products, more than even the largest Walmart. That allows Amazon to sell both Chinese manufactured goods under American brands as well as brands directly from China.

These two different models are headed on a collision course. Already Warren Buffett, considered one of the biggest and best investors in the world, has started to sell off Walmart shares. Other financial analysts are laying their bets that Amazon will win the battle between these retail giants. What will that mean for the future of retail, outsourcing, and employment? Let’s take a look.  

The Walmart megastore is huge… and cheap. Just their food section is easily the match of many local supermarkets and grocery stores. Walmart has taken over in these areas, and if they were to collapse, much of small town America would have few if any remaining stores. In America, and elsewhere in the world, people are moving into cities, where Walmart does not have a strong hold but where Amazon is rapidly expanding. Busy urban shoppers find that a trip to the store is too much effort. On-line orders with home delivery are becoming the preferred method of shopping.

Amazon has mastered how to ship products around the world and is piloting even faster drone-based delivery. Meanwhile, Walmart still struggles with their basic “free” delivery model. If Amazon’s drone service works, it could be the biggest “insourcing” project in history. Just a few years ago, no one would have bet that delivery services in America would be brought back into any major American corporation. If Amazon combines drone delivery with their increasingly robotic warehouses, they can crush Walmart (and similar competitors) while attracting more allies and partners to their merchant services.  

Amazon is also looking into brick and mortar stores, if only on a limited basis. Amazon’s model for a physical store, naturally, has a very different model for staffing these stores. There is no checkout counter and almost no staff. You find what you want, take it, and leave. A combination of artificial intelligence and image recognition tracks you and figures out what you took, and sends the bill to a payment system on your phone. Contrast this to the vast number of workers at Walmart’s 12,000 stores.

Walmart has revenues of $483 billion and employs 2.3 million workers, which yields 4.8 jobs for every million dollars in revenue. That’s our baseline. How does Amazon compare? Amazon’s revenues are just $136 billion, which means that it still has quite a way to go to dethrone Walmart. They have 341 thousand workers or 2.5 workers per million in revenue. That’s nearly half the workers per million in revenue.

As Amazon absorbs Walmart’s customers and their $483 billion in sales, 1.1 MILLION workers will lose their jobs. However, that doesn’t mean that an Amazon job will be the same, or pay the same, as a Walmart job. Walmart has “greeters”, cashiers and people who go out into the parking lot to bring back shopping carts. Amazon has a lot of programmers and marketing people. Very different jobs, but a lot fewer jobs. Consider the following:

Amazon Merchant: Amazon is more than an online department store. As Amazon builds its own services, it repackages those services and sells them to other businesses. Amazon will absorb some customers from competitors, and at the same time, they will make small and medium sized businesses part of Amazon through their Merchant services. Amazon acts as the anchor store in a mall, allowing other businesses to be part of a larger “Marketplace”, under the Amazon identity. A small business no longer needs to set up servers, develop a marketing strategy, etc. Amazon handles all of that. Score another outsourcing service for Amazon!

Amazon Delivery: As customers continue their move their shopping experience from physical stores to virtual shopping, there will be a greater need for delivery services. Between Amazon drones and autonomous cars, the entire package delivery industry will be completely disrupted in the next few years. The post office has already committed to closing nearly half of their post offices and their staff. The Amazon model, and similar models, depend on exceptional delivery services. Hopefully… for Amazon and other new services… the disrupters will build the future faster than they tear apart the past.

Amazon Web Services: AWS is a huge cloud service provider. Move your data, move your servers, move everything to AWS. Merchant services are good for a small business that wants a ready made web presence. AWS is for any company, including some very big companies. A firm of significant size could be run by just a handful of people. AWS outsourcing can make a company a lot more profitable, but it will eliminate jobs…. not because of offshoring or even automation. As technology scales up it becomes a lot more efficient. And AWS has a massive market to scale to.

AliBaba: While Amazon is America’s biggest online merchant, China’s Alibaba had sales of $485 billion in 2016. That’s on par with Walmart and three times the size of Amazon. While Alibaba is focused on China, it will soon compete with US and European merchants, creating stiff competition and driving more efficiencies.

Consolidation: The small store is disappearing, especially in small towns. In big cities, we have the “corner store”, a convenience store just a block or so away. That’s where you go stop on your way home to pick up a magazine, a candy bar, maybe a Red Bull or a packet of tissues.

Time pressured urbanites often just run from their apartment to a taxi or UBER car, go to work and then do a reverse version on the way home. Even going to the corner to pick up a few nicknacks has become too much trouble. Services like FreshDirect are replacing supermarkets and delivering food to your home. Can Amazon replace the corner store? If they can, perhaps with an advanced drone service, will we need all of the remaining drugstores, convenience stores, and Bodegas? Or will they consolidate into a few super corner stores?

Shopping IS moving from the real world to the virtual world. That move means that consumers will have more convenience, more options, more products, 24×7 shopping and lower cost. But it also means that there will be a downside, fewer physical stores, fewer merchants and fewer jobs. Nor does it matter if your virtual store is owned by Walmart, or Amazon or anyone else.

The real conflict is between the consumer and the worker, who is often the same person. As consumers, we want our shopping experiences to be better AND cheaper. Over the last century that shopping experience moved from a small local store with a limited set of products, to the department store, to Walmart’s super-store, to Amazon’s virtual shopping. Each step has improved efficiency, improved the variety of options, lowered cost, but also reduced the amount of labor needed to serve consumers. Whether this is called automation, outsourcing or just plain efficiency, the direction towards less labor is consistent and irreversible.

Will the retail world eventually be workerless? Maybe. The choice is ultimately up to the consumer. Do human workers make your shopping experience better? Do you enjoy having workers help you get what you want, or do you feel that workers are in the way and make shopping more difficult? Consumers need to decide which world they want because the next model for shopping is about to arrive!

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Outsourcing’s Mickey Mouse Future!


disney

Ever since the 2016 elections, America’s outsourced manufacturing has consistently been front-page news. Most of that news has been about manufacturing. Now news stories are shifting towards the larger world of foreign imports, rather than just outsourcing. That means new policies and taxes that will impact, well, just about everything!  That means all consumer goods, cars, electronics and a lot more. But what about… cartoons? Yeah… what about the Saturday morning ghetto, Hanna Barbaric, The Simpsons, and the Cartoon Network?

There was a time where American Cartoons were one of our recognizable products. CocaCola may be America’s most iconic export, but Mickey Mouse is a close second. When not inflicting bodily damage on themselves, Bugs Bunny spoke in official Brooklynese, while Daffy Duck and the rest of the gang at Warner Brothers spread American culture around the world. Even Elmer Fudd, Warner’s double-barreled representative for the 2nd Amendment, is known around the world!

In 1941, just before the start of WW II, Walt Disney landed in South America with a whole animation team, ready to tour South America. Walt’s cover story was that he was collecting material for a new cartoon. While he eventually did release a very successful cartoon about Brazil and South America, President Franklin Roosevelt gave Walt a secret mission. By building cultural bridges with South American, he could foil a plan by the Nazis to build harbors for submarines. Needless to say, Walt (with a little help from Donald Duck and Goofy) foiled the Nazi plans. After all, Adolf Hitler never had a chance in being more popular than Mickey Mouse!

Throughout the 1950s, cartoons continued, but their golden age was behind them. In the early 1960s, something new happened. Television! As television went mainstream, networks struggled to find ways to their empty programming hours… cheaply! Cartoons used to be a part of going to the movies and were funded by your movie ticket. TV had different economics, and couldn’t afford expensive theatrical animation. 

Luckily for Television, a less costly alternative… limited animation… was created. Limited animation is just that. Instead of animating the entire body of a character, just the arms, or legs or head moved. This style, developed by Hanna-Barbera (often nicknamed Hanna Barbaric, for its low-quality work) dominated television in the 1960’s. Soon other studios copied the style. The best of these (Rocky and Bullwinkle, Fractured Fairytales, Yogi Bear), focused on clever banter, rather than animation. Television animation and movie animation became two distinctly different products.

Animation prices continued to rise, leading to a new idea… outsourcing. The original outsourcing location for animation was Japan. Due to the devastation of the Japanese economy after WWII, Television developed a bit later in Japan than it did in the U.S., and it had to fill programming hours with even less funding. Japan also chose cartoons as a solution. However, while the U.S. primarily targeted cartoons for children, Japanese animation was also broadcast in prime-time. Soap operas, historical dramas, adventure, situation comedies, etc. … were all popular themes for animation, and received high ratings.   

In the 1960’s English dubbed Japanese animation (Gigantor, Speed Racer, Kimba The Lion Emperor) was broadcast in the U.S. By the 1970s, American cartoons were less technically sophisticated than Japanese “Anime”. A new generation of American animation studios wrote scripts, hired voice talents, and performed editing, but sent the animation work to Japan. Saturday mornings moved away from “funny animals” to adventure and science fiction themes. Hybrid American/Japanese shows were new, exciting and different!

A lot of that difference was… violence! Gone were the days of dogs and cats hitting each other with frying pans. Animation was now all about giant robots, high-tech weapons, fighter jets, and exploding missiles. Although there was the occasional My Little Pony or Care Bears, it was the Transformers that stole the headlines. Through the 1980s and 1990s Japanese Anime, and Japanese animated cartoons dominated broadcast TV and new cable-based programming, such as the Cartoon Network.

By the 2000’s, the Simpsons became a staple of American TV. Animation’s new home became South Korea. For the next two decades, animation followed two huge trends. First, animation would spread to other lower-cost Asian nations, such as China and Vietnam. Even Japan would send most of their animation to neighboring nations. The second trend was the move from manual to computer animation. The first trend moved work to ever lower-cost locations, while the second trend was neutralizing labor costs.

Not surprisingly, advances in technology eventually overtook labor advantages. Now the hot new country for animation is France. By leveraging strict cost management and the most advanced technology, they have been able to consistently beat the cost of animation from Asia.

Illumination Entertainment is one of the best examples of the new animation. The studio founder, Chris Meledandri is the founder but grew up at 20th Century Fox Animation. Japanese, and later Asian, animation is often recognizable by its depiction of women with impossibly small ankles and wrists, and characters with gigantic star-filled eyes. The look of French animation is… Minions! “Despicable Me” was one a breakthrough  French/America successes. You will see the same style in The Secret Lives of Pets, Hop!, The Lorax, and Sing.

How do these French animations compare to films? Let’s compare two 2013 movies. “Turbo” (from Dreamworks) using “traditional” Asian animation, versus “Despicable Me 2” from Illumination with French animators. Turbo made $283 million and was considered a flop. Despicable Me 2 made $970 million and was the biggest animated movie of the year. This difference may not be due to just animation. Plot, dialogue, music, etc. also matter. Still, it showed that French animation has been accepted by America. Even more importantly, though, Turbo cost $127 million vs. just $76 million for DM2.

That’s not just a fluke. Kung Fu Panda, a competing franchise, generated between $500 and $600 million for each of three movies and cost $150 million each. The original Despicable Me cost $69 million and generated over $500 million in revenue. The French animated “Secret Life Of Pets” cost $75 million and generated $875 million. The rest of the animations created by Illumination Entertainment all came in below $75 million.

There are exceptions, but French animation is consistently turning out blockbuster films at half the price. Any method that cuts the cost of production from $150 million to $75 million is getting a lot of attention. And it raises two questions.

First, is Despicable Me an outsourced American movie or an imported French film? Whichever one it is, does it mean that Trump wants to tax it? In New York, you often have a choice of a standard movie, the movie in 3D, or a 3D plus special audio. This kitchen sink version can cost $25 per ticket. Plus popcorn. With an outsourcing tax, an evening at the movies could cost well over $150 for a family of 4. 

Second, “Does animation inform us about the future of Outsourcing?” I think it does! Animation has gone through repeated moves from higher-cost to lower-cost locations, primarily based on wages. But the use of computers to draw animations may be even more important. Over the past decade or two, the big animated movies are now almost always computer animated. As automation increases, the wage element of a movie becomes less important. The cost of oversight, differences in work hours, cultural barriers, and simplifying the supply chain become more important, and work might be performed more efficiently in higher-cost geographies.

In one or two more outsourcing cycles, perhaps by 2025, we might see animation returning to America in a big way. Once you neutralize the differences in wages, talent, capabilities and other factors become much more powerful elements of a corporation’s location strategy. This same thinking led Adidas to build new athletic shoe factories in Germany and in the US, rather than in low-cost offshore nations.   

Animation is leading a parade of outsourcing away from Asia. Soon we’ll see if the parade keeps marching all the way back to America. Moving high-end trade work back to America could be an important milestone in renewing a segment of our workforce that has been in decline for decades. In the next few years, there may be bigger changes in America’s workforce, but higher wages and reshoring American animation jobs is anything but “Mickey Mouse”!

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