High Tech Cars Fascinate Buyers and Save the World


Photo, all rights, TechCrunch

Photo, all rights, TechCrunch

You’ve heard that robots are taking over? It’s true! A lot of people are frightened about a “workless” future, but parts of the Robot Revolution will be useful. Like cars that can drive themselves. Just a couple of years ago, car experts said that they wouldn’t heavily impact the market until 2050. It made sense. Car companies take decades to introduce new features. Yet, just last year, A.I. experts said that 2030 would be the key transition year. Now, Unicorn firms plan to have production vehicles on the road by 2020. It looks like self-driving cars will hit the road, at least in several major cities, by 2018. 

In past articles, we’ve discussed how cars that can drive themselves will impact employment. Vehicles with paid drivers will go autonomous far more quickly than consumer cars. The financial incentives are huge for taxis, trucks, the UPS and FedEx. And government vehicles! Critical public and government organizations want to go autonomous, but they have special constraints that make their implementation date a toss up.

The United States Post Office (USPS) has been looking for autonomous vehicles for years. They NEED autonomous vehicles to stem their financial bleeding. They haven’t had a break-even year in the last two decades. Since 2001 they have lost over $50 billion, $6 billion just last year. Half of all post offices will close. Perhaps very soon.

The USPS needs a game changer, and autonomous vehicles may be their only hope. Small towns have a similar problem. The ups and downs of the economy have left many with big financial problems. Towns operate a lot of vehicles… school buses, garbage trucks, repair vehicles. They can barely afford to operate this fleet.

These days town vehicles are usually operated by union drivers or managed by 3rd parties under inflexible contracts. It can take years, even decades, to work out new agreements. The US military purchases a huge number of vehicles and has begun asking suppliers about electric and autonomous vehicles. Robot war machines? Seems a bit too sci-fi? Really? Remember, not too long ago, when you first heard about military drones?

When will consumers buy cars that drive themselves? Not in 2018, but not too far in the future either. Right now quite a few models can drive themselves… in some places, at least some of the time. Cars that park themselves or that can apply the brakes in an emergency have been around for years. Your next car will probably be able to drive under “safe” conditions… slow driving stuck in a traffic jam, certain roads with little traffic. 

VW BuzzBy 2022 we can expect to see fully autonomous vehicles from the big manufacturers, starting with Volkswagen. Remember the “Hippy Bus” from the 1960’s? VW has committed to delivering a slick looking, all-electric, self-driving version by 2022. Of course, the production vehicles can look very different from the concept vehicle, but it it is a VERY good looking concept vehicle. It can be a 6 seater van, a camper, or even an “office on wheels”. It has the potential of being a huge success.

Which brings us to an amazing detail that few experts have mentioned. The autonomous car revolution IS the electric car revolution. A gas-powered car can be self-driving, but it is much more efficient to make it an electric vehicle. Here’s why…

  1. Simplicity: In order to turn the steering wheel or press the brake pedal, you need actuators or electric motors, plus circuitry for the computer that runs the car’s Artificial Intelligence. If the car is all electric, you can skip a variety of mechanical “in-between” parts. That lowers the cost of manufacturing.
  2. Weight: Fewer parts means lower weight and higher reliability. The engine is removed from under the hood and replaced by 4 smaller electric motors inside of the wheel hubs. This eliminates most of the gear system and the entire powertrain (heavy parts that distribute power to the wheels). Electric motors also provide braking power, eliminating today’s separate braking system. Finally, the 12-volt electrical system is replaced with more lightweight cables. All told, nearly 1,000 lbs can be cut from the car’s weight.   
  3. Reliability: Internal combustion engines (ICE) have a few hundred to a few thousand moving parts. Electrics have just a handful of moving parts. That means less effort to design and build electric vehicles and lower maintenance costs. Imagine… no more oil changes!
  4. Efficiency: A lot of power in an Internal Combustion Engine (ICE) is turned into waste heat. Gas powered cars waste 75% to 85% of the energy from their fuel. Electric vehicles waste a more moderate 40% of their power. There’s still a tweak or two for the ICE, but after a century of evolution, it’s just about as efficient as it can get. Alternatively, electric motors have more room for improvement.

The same experts that missed the autonomous/electric connection have missed an even bigger point. They usually tell us that if America moves from petroleum to electricity, it could spell the end of the oil industry. That could be good. That could be bad. It depends on what you think about the oil industry. And if you own any oil funds. But what about electricity? When we plug in our cars, what happens? Won’t we need more power plants? What kind of power plants will we build?

Plug And Pray?: First, we have the simple matter of recharging our vehicles. Our 263 million vehicles! America’s 150,000 gas stations can easily add recharge stations as we transition from petroleum to electric. In fact, they need the business. In the 1990’s America had 200,000 gas stations. Consolidation in the oil industry eliminated 25% of all gas stations. The higher efficiency of electric vehicles will probably mean that a recharge will be less profitable than a fill-up. 

As our vehicles transition between power sources, gas stations will have competition. The perfect time for a recharge is when you park. Parking lots and municipal parking meters could easily add rechargers, providing a big boost to municipal revenues and private parking lot profits. Consider the sales of air filters, spark plugs, fan belts and oil changes. Electric cars don’t use these products.

But the big, BIG, change is that you can recharge your car at home. Plug it into the wall and recharge your car overnight. That could be 50% or more of all car recharges. Put all of this together and in 20 years when almost all American cars are electric, there may be as few as 50,000 traditional gas stations.

Astronomical Numbers!: Problem one solved. In fact, more than solved! Replacing petroleum-based vehicles with non-polluting electric cars will take a huge bite out of global warming! Think about it, millions of carbon spewing vehicles retired and replaced by zero pollution cars. Finally, freedom from foreign oil! Well, freedom in around 20 years.

The average new car is sold after 6 years. It then passes down through other hands for another 10 or more years. But 20 years, just about every car is ready to be scrapped. Most cars will be self-driving and electric. Isn’t it great that we can have a win/win with no environmental cost whatsoever? Yep. No cost! None!

Uhhh. Unless. Hmmm. If every gas-powered vehicle in America, all 263 million, become electric… won’t we need to produce more power than we do today? On a typical hot summer day when air conditions are cranked all the way up, cities across America have blackouts, which means that more power is used than is available. If millions of electric vehicles plug in somewhere to recharge, we’re going to need more power. Or we’re going to have blackouts all year round.

Miami trafficHow much power will we need? Every year America consumes 170 billion gallons of petroleum (gasoline and diesel). If we convert this into electricity, we get 5.4 million Gigawatt hours (GWh). To meet this demand, we would need to more than DOUBLE the That’s more than all of the electricity… that’s coal, nuclear, hydroelectric, natural gas, geothermal, wind, solar, everything!… consumed by Americans every year!   

Luckily, we won’t need to add quite that many new electric power plants. We already know that electric vehicles are more efficient than petroleum vehicles. At least twice as efficient. Also, our power grid still has some excess capacity. Not on those hot summer days, but just about every night, especially very late at night. Just when we will program our cars to recharge themselves. So, lets cut our needs in half again. Now, we need just 1.3 million GWh. Spread that over the next 20 years, we only need to build 67,000 GWh of new power every year.  That’s still a lot, but it is far less astronomical than the total power gap.

Power Is  A Breeze: Of course, this leads to another question, “What type of power plants will we build?” Let’s start with wind turbines. Wind turbines are rapidly evolving. Every year they are bigger and more efficient. New turbines are averaging 2-3 MegaWatts (1/1000 of a gigawatt). The largest wind turbine (so far) can generate 7 MWh and is a massive 650 feet tall. For now, let’s stick to more modest models. Something in the 2.5 MWh range, and just 300 to 400 feet tall. How many will we need?

The first rule of power generation is, “No power system produces at full capacity all year round.” Even a nuclear power plant needs downtime for maintenance. And then there are low demand times when the plant runs at less than 100% capacity. Since the wind isn’t always blowing and some days are cloudy, wind, tide, and solar power generation all have low utilization.  

Wind TurbineRule number two, “Location, location, location!” Some locations are windier (or sunnier) than others. The same turbine in two different locations will generate different amounts of power. Wind and solar are more land intensive than nuclear or petroleum based power. Identical wind turbines, in different locations, could have dramatically different costs per MWh.  For example, if the turbine is placed on the coast, just offshore where the wind blows continuously, utilization is high and the land may be given to you by the government. Onshore, most locations will have a much higher cost.

Most turbines are likely to average 30% utilization. That means that America needs 1.8 million wind turbines to power our 263 million cars, or 90,000 installed every year (1,900 every week) for 20 years. That would create quite a very large wind power industry. But, it wouldn’t work quite this way. 

That’s our next rule, “Costs are rarely linear.” The first new turbine we added would be in a great spot, where the wind blows often, the land is cheap and we’re near the users (farther away and you lose too much in transmission). The next turbine will be put in a slightly less ideal location. You go from great to good, to barely break-even locations. After 100,000 turbines… maybe 200,000 possibly 500,000… either the wind isn’t reliable or the land costs too much, or something else is wrong. Wind and solar power can be a big part of the solution, but other power sources will also be needed.

Carbon Is Back: Other options? Hydro-electric is out. Rather than building new dams, dams are being torn down across America because of environmental concerns. There’s always nuclear, but its reputation is so far from spotless that it’s a non-starter. Which is a pity. That bad image comes from reactors built to 1950s design specifications. The latest designs, using Thorium instead of Uranium or Plutonium, are simpler, cheaper and far more reliable. Still, it takes such a long time to approve and build a reactor, even without public opposition, that if we planned a new reactor today the first watt of nuclear power won’t appear until well after our 20-year time frame. Let’s move on.

So. Ahhh. Ahem. Coal.  A third of our electricity comes from coal. Even if we don’t build a single new coal-fired power plant, we are likely to ramp up the utilization of existing coal plants, especially overnight. We could also close the oldest and dirtiest coal power plants and replace them with newer, cleaner facilities. However, the newer the plant, the more it will be automated. Which is another rule… Newer = Cleaner = Less jobs. Clean coal is technically possible, it’s just not likely to be economically feasible. Of all of the forms of energy we can expand, coal offers the fewest jobs.

Nonetheless, ever since the 2016 Elections, Washington has talked about putting coal miners back to work. But more coal, clean or dirty, isn’t going to create a lot of new jobs. The problem isn’t the power plant, it’s the mine itself. Political ads show coal country miners from Virginia, Kentucky, and Tennessee taking crowded elevators deep underground into claustrophobic tunnels. That’s an accurate picture of the coal industry… a century ago. But not today.   

Today, two-thirds of America’s coal comes from open pit mines and draglines. It works like this. Find a mountain with a seam of coal running under it. Now, carefully lift the top off of the mountain and gently put it down in the valley. Sorry… got that wrong. I meant to say, use tons of high explosives and turn the mountain into gravel.

Now put a gigantic crane, weighing as much as 1,000 school buses, on the highest spot overlooking the coal seam. This crane is the dragline. It throws out a massive bucket that is dragged across the floor of the mine, scooping up hundreds of tons of rock and coal. The largest dragline ever built is operated by a crew of five.  That’s why the Department of Labor lists a mere 3,150 jobs in “Excavating,  Loading Machine, and Dragline Operators”.  From cramped mines filled with miners to one machine digging up more coal with a crew of 5, it seems obvious that the next step is fewer, if any, workers. 


Big Muskie Bucket

Dragline bucket

Likewise, the giant trucks and other vehicles to move coal from the mine to the nearest train are the heavy duty trucks we’ve already said will be the first vehicles to be converted to self-driving. If we use more coal to meet the demand for electricity, it will unquestionably accelerate automation throughout the coal industry.

Natural Gas?: Of all the petroleum products we can use, natural gas seems to be the best option. It’s abundant, inexpensive, and the cleanest petroleum fuel. For all of these reasons, it has been natural gas… more than pollution regulations… that killed coal.  

Then, fracking came along. Well, that’s not quite true. Fracking…  using hot pressurized water to crush shale deposits deep in the earth… was invented in the 1950’s. This process produces oil and natural gas. Fracking picked up speed when horizontal drilling was developed, allowing the profitable extraction of small pockets of petroleum.

However, the new technology made so much new drilling possible that new problems were created. Oil spills. Petroleum showing up in drinking water. Even earthquakes! We’re not talking about a tiny but statistical number of quakes. Ohio used to have 2 quakes a year. Now it is well over 1,000 every year, with each quake under an active fracking site.

Clearly, fracking has been misused. And environmentalists can point to some pretty bizarre side effects, like drinking water that catches fire. Or pipelines that are being forced onto Native American tribal lands, completely ignoring tribal rights. The 200 trillion cubic feet of natural gas in US shale deposits could recharge our cars for the next 300 years. If we were just a bit more selective in where we drill, we could greatly reduce these effects. Or we could ignore fracking and just use non-fracked natural gas, which is enough to keep things running for the next 50-100 years.   

Getting There:  There are tremendous benefits to self-driving cars. It seems inevitable that all developed nations will quickly adopt vehicles that are intelligent enough navigate our streets and highways. However, the transition to intelligent vehicles entails another transition, from petroleum to electricity.  THAT transition requires a massive expansion of our national power grid… the biggest expansion ever!

Most of the power grid is nearly a century old. It’s not just the powerplants, it’s the distribution infrastructure. Cables that carry current from the power plant to our homes and offices are still made of copper. Using copper cables means that we lose between 8% and 15% of all the power we generate in the transmission and distribution process. Newer alloys and even some early superconductors can reduce power losses, saving billions of dollars every year.

And then… Change is on the way! Self-driving electric cars are all but inevitable. But the changes that these cars will bring are based on decisions we have as yet to make. We can build new industries, change how we work, and perhaps… just perhaps… save our environment.

But before we reap all these benefits, we have to make those decisions. How will we grow our power grid? Should we utilize the unused capacity of our coal power plants or should we focus on building a next-generation power plant that we can roll out in force? Should we even consider what happens after our 20-year timetable? We will have consumed much of our remaining global petroleum reserves. Is it time to start talking about fusion power? What do you think? Comment and share your opinions!

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The Other Shoe Just Dropped


(Previously published in Outsourcing Magazine)

For years, the outsourcing world has been buzzing about reshoring (or “backshoring” in Europe), taking the jobs we sent offshore years ago and bringing them back to the US and Europe. Low wages, cheap property, and favorable taxes made offshore manufacturing very attractive. But in recent years property values rose, staff turnover increased, and wages just keep heading up. Despite weakening economics, offshore still made sense. Until today!

By far, the greatest financial advantage to offshore manufacturing was derived from labor arbitrage – lower wages from “replacement” workers. Low wages plus workers who can do the work are a winning combination. To access low-cost labor, manufacturers will happily build the factories, roads, and infrastructure needed for manufacturing. China has been the gold standard for outsourcing, but western manufacturers are being lured by still lower wages in Vietnam or Thailand. Now, technology has taken a big leap forward, and suddenly… wages don’t matter!

Today’s robots are intelligent machines that can perform almost every function a human being can. The latest intelligent machines don’t just help workers to be more productive, they completely replace workers. Robots eliminate the need to build factories where low-cost workers live. You can just build the factory where you want and install robots instead of workers. When wages no longer matter, onshore factories make a lot of sense.

Onshore factories certainly make sense to Adidas. Last year Adidas built their first SpeedFactory in Germany. A SpeedFactory is their name for a new generation of onshore factories that provide three benefits. First, it is highly automated, delivering a lower cost of operation than an offshore factory. Second, by building the factory in major consumer markets, transportation costs are greatly reduced. Lastly, because SpeedFactories are built near consumers, Adidas can quickly restock sold-out products and reduce customer frustration.

Not surprisingly, Adidas is building a second SpeedFactory in Atlanta, scheduled to open in 2017. Reebok, a subsidiary of Adidas, has announced the construction of a similar factory in Rhode Island. Nike has been talking about building a new factory in Oregon for the last year. (Come on Nike… Just do it!) What looks like a pretty good idea today, will be an irresistible financial proposal in a year or two.

One of the biggest difference between a human worker and a robot is the way costs change over time. Workers want raises and promotions. Over time, the same factory producing the same number of goods has higher labor costs. When the factory is offshore, this happens even faster due to higher offshore inflation and increasing competition for workers. Robots, however, cost less every year. Next year’s model will work faster, have more capabilities, and still cost less. As time goes on automation looks better and better.

If this is the beginning of a new era, where onshore can be more efficient than offshore, what will happen to all of the work that is already offshore? If a location only offers lower wages, we can expect that work to be reshored in a few years. Offshore factories need more compelling advantages to resist reshoring? Since China has the most to lose from reshoring, let’s see if their plans tell us anything about the future of offshoring.

  • Domestic Market. When offshoring took off at the turn of the century, products were manufactured almost exclusively for the West. Today, China is the largest consumer of Chinese manufactured products. For example, while America has peaked at 100 million iPhone users, China has 135 million users and plenty of room for expansion. China is able to be a “local” supplier for East Asia and India… if they maintain their manufacturing edge.
  • Energy. Manufacturing requires electricity, and next to labor, energy is often the highest cost for manufacturing. America has a significant cost advantage for electricity compared to most of Europe. Underdeveloped countries have high-cost power and unreliable power grids. In many offshore locations, manufacturers must invest in generators and other infrastructure. The cost of electricity in China is comparable to America. However, in the past decade, China built hundreds of new coal plants, is building 20 nuclear plants and has more solar and wind power in production than any other nation on earth. Old and inefficient plants are being closed. By the 2020’s, China may set a record for low-cost power generation.
  • Technology. China’s population has almost plateaued, and by 2100 will decline by 500 million. China already has problems hiring for manufacturing jobs, which has led to runaway wage increases. China has very ambitious plans to add between 1 and 4 million robots by 2020. If China succeeds, China will need to build and install enough robots to become the world’s undisputed #1 manufacturer and consumer of industrial robots. Furthermore, because of this robotic work, by 2020 China must develop the ability to build the most efficient factories in the world.
  • Financing. If hundreds (if not thousands) of robotic factories are going to be built in America and Europe, that will require capital financing. Four of the top 10 banks in the world are Chinese, two of which have “Industrial” or “Construction” in their names. China also happens to be home to six of the world’s largest construction firms. With leading positions in banking, construction and robotics China is going to build most of the world’s new factories.

Adidas pointed out the value of reshoring, and other big-brand athletic gear companies are hot on their heels to find new onshore manufacturing efficiencies. If China dominates in robotics, energy production, financing, and construction, they will move beyond the title of “The World’s Manufacturer”. China is positioned to also dominate in building the next generation of factories throughout the world, or at the very least to be the default option for every factory that is built in the 2020s.

The latest generation of technology will level the playing field for manufacturing, making a factory built onshore as financially attractive as locations halfway around the world. After a very long time, the tide has turned and new factories will be built in America and Europe. The trend has just begun, but every week we’re going to see new models of industrial robots at ever lower price points.

Everyone who manufactures offshore will soon start thinking, “Does it make sense to stay offshore?” If you are an outsourcing provider, you need to ask yourself, “If low wages no longer matter, what is my new value proposition?”

When it comes to robotic factories, onshore and local has big advantages over offshore and distant. As all factories become robot factories, the change in locations is just the beginning of changes that factory owners, outsourcers, consumers and experience as technology replaces workers, and the world’s factories are made in China!

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The Evolution Of The Millenial


The Robot Revolution is on their heels and catching up! By the second decade of the 21st century, everyone can see that “change” is speeding up. By the third decade, a quick glance in the rearview mirror and all you can see is the Robot Revolution. Robots are expected to take over half of the world’s jobs. Self-driving cars, banking on your mobile phone, order kiosks at McDonald’s, virtual reality, and automated factories are our future.

What about the human beings? You remember them? The rulers of the planet… the top of the food chain? It’s obvious that technology is changing our world, but is technology changing us? As more of our economy and our culture becomes robotic, will humanity could become nothing more than a wetware interface to the corporate machine? Technology could change the very definition of what it means to be human. But this isn’t the first time that the evolution of man has been dictated by technology.

Humans started out as nomadic hunters. After tens of thousands of years we developed tools to produce more food. Farming became a better option than hunting. We settled down. First in small settlements and then in cities. We discovered metals, which made better tools than bone or wood. Humanity experienced the bronze age. Then an iron age. And, a long time later, we built our civilization on steel. Soon, it will be carbon fiber and robots.

When the human race moved from settlements to cities, we went from individual self-sufficiency to becoming specialists. Specialists… such as blacksmiths… would make their specialty products (swords, shields, nails, and iron wheels) and then trade for foods and other necessities. Trade-based society requires other technologies… shipbuilders, gold miners, coin makers, horse breeders, paper mills, insurance… which fuel the trading routes that spread goods and technologies around the globe. Well, after we invent the globe, of course.

Other species ruled the earth before, but they changed themselves. They evolved into new species to fill in gaps in the environment. Humanity, on the other hand, makes the environment change until it suits us. We leveled mountains, changed the course of rivers, turned forests into farmland, and then our well-clothed ancestors moved into colder climates. As difficult as it is to believe, the next century will bring even bigger changes.

Human beings can change faster than any other species. In fact, humanity has changed so quickly in the last few centuries that the rest of the planet is having a hard time keeping up with us. We’ve heated up our atmosphere, wiped out countless species, emptied the ocean of fish, cleared away rainforests. 

When archeologists examine ancient civilizations, they look for artifacts. These bits and pieces, a fragment of pottery here and an arrowhead there,  tell us how this civilization came into being, how it’s people lived and how a new civilization came to replace them. For example, let’s consider Otzi. 

Back in 1991, archaeologists discovered the body of Otzi. Otzi lived 5,000 years ago, during the end of the last ice age. One cold winter night, he froze to death. For thousands of years, Otzi and all of his possessions were entombed in ice, beneath an Alpine tundra. When the ice above Otzi melted, he was found by mountain climbers and whisked away to a local museum. His perfectly frozen body… and a knapsack full of artifacts… tell us all about his civilization and even Otzi’s last days on earth.

What if we could do the same? What if we could look at our world from the point of view of a future archaeologist? What would they think about our lives and culture? Imagine if one of our Millenials was found a thousand years from now? Along with an iPad clutched in his frozen hands? Let’s call our future corpse, Milo.

Meet Milo: Milo is a typical Millenial. He is ambitious, well educated, overly stressed, too often medicated, and a tad… ahhh… fat. Still, even though he has a few problems Milo, and all the Millenials, lived a long life. Longer than any generation before him.

Millenials are generally considered to be weak, soft and temperamental. And they are, at least compared to earlier generations. But they had problems unique to their generation. If we look back at our iceman, Otzi, we believe that he died escaping… someone. He was injured just before he died, possibly by a flint knife. He was carrying an ax with a copper blade, indicating that he was either wealthy or important. He might have trespassed on someone’s property, or he just might have made a good hostage. In either case, he escaped his pursuers by hiding in a ditch in the hills. Unfortunately, that’s where he froze to death and was later covered by an Alpine Glacier.

Milo never feared these life or death situations. Except when he plays Call Of Duty. His office job did not leave scars upon his body, although his bathroom scale would beg to differ. The unique thing about the Millenials, Milo included, were their brains. Just about every generation of workers in the world worked with their hands and their muscles. Milo’s was the first generation where Knowledge Workers dominated the workforce.

Food: You can tell a culture by what the people eat. And drink. Otzi had a simple diet, and he burned off his calories running cross country, up and down and across the Alps. Otzi’s last meal was fatty meat, providing lots of energy for mountain climbing. It was probably an early form of bacon. Milo was not unfamiliar with bacon. While many Millenials were vegetarian, bacon was very popular. Still, when it comes to energy, Milo and the Millenials had a special secret. They called it…  

Caffeine! The Millenials didn’t discover caffeine, but they may have perfected it. Sure there was coffee. Millenials love coffee. And soda. But it was Millenials that doubled down and became the energy drink generation. Milo loved coffee. On an average day, Milo drank 2 cups of coffee, a half cup of tea, 2-3 glasses of cola, plus an occasional energy drink.

You can understand why Otzi would need caffeine to elude his pursuers, but why did Milo need so many stimulants? When Milo graduated college with an MBA, he expected to become a corporate executive. Instead, he spent years in other low-level positions, including a job as a barista. A bit ironic, eh?

Milo had a much more varied diet that our Iceman. Otzi would have been jealous of Milo’s dietary choices. Rather than being thrilled with his choices, food made Milo anxious. Is today’s lunch special organic, or all natural? Is it gluten-free? The shrimp look good, but doesn’t shrimping destroy the sea floor? Can’t have the hamburger. Cattle make methane. Maybe almond milk? Nope! Almond trees use too much water. Millenials are hyper-aware of their environment and know that everything will doom them… eventually. For Millennial, life is like that line from GhostBusters, “Choose and perish!” Then the Stay Puft Marshmallow Man attacks New York. I wonder if the Stay Puft Marshmallow Man is free trade?

Education: Milo was privileged to belong to the most educated generation in history. Milo had an MBA, a degree in business. This late 20th-century invention was intended to make business management more predictable, reduce financial risks and make business more profitable. For Milo, an MBA was synonymous with debt. He needed two barista jobs to pay his school loans, while he waited for several years to land a “real” corporate job. Milo spent endless sleepless nights worrying about his loans. Good thing barista’s get a discount for that midnight coffee run!

But coffee alone won’t get you through school. It takes focus, determination, and willpower. Or Adderall. Traces of Adderal in Milo’s system tell our future archaeologists that he first tried Adderall in grade school, and became a daily user in high school and then in college. Of course, Milo didn’t have a prescription for Adderall. Milo didn’t have attention deficit or any other specific complaint. He just needed Adderall to give him the super-human focus needed to get into a highly ranked college.

Unlike the opioid crisis, or the anti-depressant crisis, or the sleeping pill crisis, or even the diet pill crisis, Adderall isn’t addictive. But Milo was never an “A” student, before Adderall. It got him into a good college. Of course, staying in a good college, meant 4 more years of Adderall. OK, 6 years. Milo had a few setbacks.

If we go through the files on his iPad we can see that it was easy for any Millenial to obtain Adderall. Just turn to Craigslist. Put in an order and have it delivered to your dorm room. Along with just about any other drug you need. Eventually, after Milo graduated and went through a few dead-end jobs, Milo went back to his Adderall addiction to compete for a high paying corporate job.

Work: Slavery and warfare fueled the prosperity of many civilizations. Work was long and hard and took place out in the fields. You worked on a farm, or dug in a mine, or traveled with a caravan. Perhaps you were a soldier. Very few workers, such as craftsmen and artists, worked indoors. Glorious, glorious indoors! You didn’t get rained on. There weren’t any wild animals. You rarely dealt with floods and avalanches.

Milo lived in the golden age of work. Milo works indoors in airconditioned splendor! As a knowledge worker, Milo is even allowed to sit… all day long. Most of America’s workforce has similar indoor jobs. That’s historically unprecedented! Yet, these spectacular working conditions led to the greatest paradox of the early 21st century.

Factory workers used to be the core of the economy. They manipulated materials, creating higher value goods. Knowledge workers manipulate data, also creating value. In the last quarter of the 20th-century knowledge workers… financial analysts, lawyers, computer specialists… were relatively rare. By the time Milo was promoted to a corporate executive, the workforce was full to the brim with knowledge workers. For example, Milo’s bank had tens of thousands of financial analysts. To manage this number of knowledge workers, positions needed to be more standardized and templated.

The irony, of course, if that you hired knowledge workers for their brains, for the independent decisions they could make. But as their numbers swelled it was more important to get everyone to work the same way. Like a factory. A Knowledge Factory. Banks, accountants, consulting and law firms have all “evolved” into knowledge factories. The rise of knowledge workers happened alongside the rise of computers.

Knowledge workers combined with computer processing made a powerful… and irreversible… alliance. Now every corporation was becoming a knowledge factory. If we look at the files on Milo’s iPad, we can see that his job required him to fill out computer templates and fix templates from other workers. Everyone used the same software and the same templates. Milo was a cog in the machine. Or maybe a CPU cycle in the corporate computer. When all of the workers work in exactly the same way, it certainly increases efficiency. But it also means that the computer that assisted the Millenials could soon do their jobs. And, as we’ll see, they did.

Recreation: Previous civilizations had little time for leisure. Work was too tiring. By the time you were middle-aged, assuming that you lived that long, you were bent over and arthritic. When Milo was middle-aged, he stood up straight, need neither walking stick nor wheelchair. His blood pressure was too high, but he felt relatively good. And his lifespan was the longest in history so far.

Milo had more time for recreation than any generation before him. Workers in the mid 20th century watched Baseball and participated in urban team sports like Bowling and Pool. If Milo ever played bowling or pool it was on a game console. Milo’s preferred his recreation as video games. He also has binge nights streaming NetFlix and media services. A big part of Milo’s recreation is keeping up with his friends from college and the gaming world, who are spread around the globe.

Milo spends hours every week on his social network, what he did, ate and met. His iPod (and his iPhone and his computer) was central to his recreation. At work, he spent all day on the computer and at home he spent all night on a computer. Hey, those selfies aren’t going to take themselves! While the Millenials were very intelligent, they failed to notice that they were being shaped to fit the way that computers worked, and computers were being shaped to fit the way that Millenials lived. Millenials and microchips were co-evolving. Soon their work would be interchangeable.

Robot Revolution: And then it happened. The technology took over. The first self-driving cars were cool! It was great when his smart TV told Milo about a new movie to watch. As artificial intelligence improved, AIs arrived in the workplace. At first, AIs helped knowledge workers. But just a little while later, AIs replaced many of Milo’s friends.  Every year computers became faster and cheaper. Alternatively, a Millenial’s brainpower peaks in the late 20’s or early 30’s, and every year they ask for a raise. If buying an AI isn’t a better deal than hiring a Millenial, just wait a year or two and it will be.

Every year computers got faster and cheaper, while the brainpower of a Millenial probably peaked by their late 20’s or early 30’s. Millenials expected a raise every year, compared to computers which got cheaper and faster with time. Inevitably, computers stopped assisting and started directing. With a small twist in job descriptions and a slight change in HR rules, Milo found himself reporting to an AI.

The computer revolution was a good thing. Computers improved our lives. Computer-driven cars eliminated the 35,000 deaths a year that human drivers caused. The stock market prospered when financial analysts like Milo selected the stocks for Mutual Funds. But computer managed funds consistently outperformed humans, including Milo.

As AI’s took over, the world became a safer place and everyday goods became cheaper. On the downside, a lot fewer people were employed. It used to be that new technology meant new jobs. AIs created new jobs, but they also took those jobs as quickly as they were created. Eventually, the government realized that it wasn’t getting anywhere with 6 months of unemployment insurance and job training for jobs that no longer exist. Slowly, the Federal government piloted UBI payments. UBI (Universal Basic Income) is basically a paycheck for being a citizen. The idea is that no matter how cheap things get in an AI world, people still need some money.

Some of Milo’s co-workers tried to keep up by taking higher doses of Adderall, using enough stimulants to work all night and even using electrical stimulation to improve brain functions. For a while, they were hyper-productive, but a year or two later a new  AIs could outperform them.

By the mid-21st century, Millenials were pushed out of employment and forced to play game and binge TV watching all day long. With his bills paid by the UBI, Milo and his generation retreated to their man caves and worked no more. A terrible end for a promising generation, but a better ending than getting flash frozen and buried under a Tundra.

Life After Milo: Wipe away your tears for Milo. Remember, Milo life is a possible future. Like Scrooge said to the Ghost of Christmas Future, “I yet may change these shadows you have shown me, by an altered life!” Maybe. Millenials still have a few years to change. The Robot Revolution will be focused on big corporations and manufacturers. Small firms will adopt far aggressive automation and will take longer to replace jobs. The creative economy will continue to make millionaires and billionaires, in art, music and innovative services.

Our Iceman, Otzi, was a victim of the dangerous times he lived in. He probably spent his entire life just one step ahead of the bandits that eventually killed him. Milo, on the other hand, never had to deal with physical violence. Just the same, those robots are catching up with Milo and the temperature is dropping. Will the Millenials learn and change their ways? Don’t ask me! In my house, Alexa gives all the advice!



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Back To The Future… Of Outsourcing!

Future Image

Photo, All rights Kristian Bjornard

(Previously Published in Outsourcing Magazine Sept., 30, 2017)

To understand the future, it often helps to examine the past. The past may not have all our answers, but we often find useful models that can be repurposed in new ways. Turn back the clock one hundred years, and we will find just such a model for future outsourcing… the modern hospital! Don’t worry, you don’t need to get the croup or have the vapors! We will step back in time to the early days of the modern hospital, and Go Back to the Future… of Outsourcing!

Hospitals have been around for millennia. Early hospitals had few effective medicines. Instead, they were more like rest camps. Still, the best hospitals were relatively clean and they were often built by a mountain or a lake where patients had clean air and fresh water. Removed from a polluted city and it’s contaminated water, and given regular meals, a patient had a much better chance to recover.

Prior to the turn of the last century, “intensive care” meant little more than sawing off infected limbs. Hygiene was a bit of a mystery to the medical staff, and the operating room was often fatal. Still, with a little luck, you just might get better. By the mid-1800’s medicine became “scientific” and the rate of recovery for patients slowly improved. By 1920, a hospital had a 50/50 chance of improving your condition.

As hospitals improved, health improved… in hospitals, and across every developed nation. Infectious Diseases… cholera, diphtheria, tuberculosis… were the primary causes of death in the early 20th century. Hospitals joined with departments of sanitation and medical colleges, and infectious diseases began to disappear. By the mid-20th century developed countries eliminated most infectious diseases. Hospitals turned to more complex medical challenges… heart disease, cancer, and genetic research.

To meet these new challenges, hospitals needed to retool. Early hospitals had a lot of beds, trained staff, and operating rooms. Early hospital labs had a lot of test tubes and Bunsen burners, but conquering cancer required more advanced medicine and sophisticated diagnostic equipment.

X-ray machines were one of the first miracle machines. Doctors could now look inside patients without cutting them open. Ultrasound, MRI and PET scanners soon followed and the inner workings of human biology became an open book. To cure cancer, radiation equipment, cryotherapy, and many other devices were invented. Hospitals were soon filled to the brim with futuristic equipment.

Doctors and nurses, however talented, were not trained to deal with this sophisticated equipment. With too many multi-million dollar pieces of equipment to count, hospitals needed help to maintained and repair their fleet of medical devices. Some equipment, especially in nuclear medicine, requires special care in its use and in the disposal of radioactive components. And, of course, this technology requires extensive training. Tools like the “Gamma Knife” (a knifelike beam of radiation), can cure if correctly used, but can also do great damage when operators are not properly trained. With life and death consequences, outsourcing is essential!

Just containing all this equipment, and providing room for the volume of patients needed to keep these expensive devices fully occupied, forced hospitals to grow even larger. Typical hospitals contain multiple buildings and thousands of workers. These “Super-Hospitals” have become campus-wide structures, with power plants, warehouses and immense parking lots to keep the hospital running and fully stocked.

“Super-Hospitals” are incredibly capable, but even they need help as medicine has begun to peer into humanity’s own genetic code. Healthcare is now dominated by clusters or networks of organizations that work together to cure patients… government agencies, insurance groups, education and certification bodies, specialty clinics, and (most recently) data outsourcers using tools like IBM’s WATSON to develop insights into medical care and personalized treatments.

Very impressive! But exactly how does the evolution of the hospital predict the way that outsourcing will evolve? Let’s take a look, starting with…

Last Generation Outsourcing: We’re just at the tipping point where outsourcing becomes something new. Until very recently, outsourcing was driven by lower wages in common offshore locations, such as India and China. However, we until recently, outsourcing meant moving from a relatively sophisticated work environment to a less sophisticated one. The offshore factory would have less automation and equipment than the previous factory. Buying all of that equipment offshore would have raised the cost of operation, increased capital investments, and slowed down implementation. 

Instead, we chose to hire more people offshore than we had onshore. It meant working in a different way, but the results often satisfied all parties. Remember, offshore nations allowed us to work in their country because we provided employment. Money spent on equipment (that was manufactured in another country) did not help the offshore economy. Besides, when offshore wages are one-fifth of onshore wages, you could hire two workers for every one you had onshore, and still be ahead financially.

50/50 Chance: Early on, outsourcing was unreliable. Some projects worked well and some failed. “Lift and shift” alone failed. When outsourcing exploded in size at the turn of the 21st century, outsourcers had very variable results. Around this time McKinsey, both the world’s largest consulting firm and an early outsourcer, stated that only 50% of outsourcing is successful. Failures often arose from skipping necessary steps, lack of specific skills, and unreasonable expectations.

Now outsourcing… at least when a reputable outsourcing firm is used… is better understood and generally more successful. Yet, there remains a nagging sense that some forms of outsourcing, especially for knowledge work, just won’t work offshore. At the very least, it is more difficult to convince some customers that they can perform work offshore rather than onshore.  

Proximity: Intelligent automation and robotics diminish the role of wages in outsourcing. Automation produces products with few or no wage earners. The more we automate business functions, the lower the total cost of production. We’ve also learned that when we offshore, wages eventually rise. Offshore wages usually will rise far faster than onshore. The cost of automation, on the other hand, falls over time.  

We are at the beginning of a wave of onshoring. Athletic shoe manufacturers were a big part of the offshoring culture of past decades. Athletic shoes, and athletic clothing, aggressively moved offshore, leaving little production onshore. Automation makes onshore manufacturing viable. By being onshore, manufacturing not only met the price of offshore but could add new value.

Work can be sent halfway around the world efficiently, but it adds to turnaround time. When the next iPhone is released, orange might be the most popular color. But if there weren’t enough orange phones on hand, a request will be sent to an offshore factory to for the orange phones. Total turnaround time to produce new parts, assemble the phone and ship them back to the customer? A month or more. By then, the buyer might give up and buy a different phone.

Size: When manufacturing was outsourced to China, the scale of outsourcing changed. The U.S. and Europe already had big factories, producing cars and airplanes. In the last decade, China built over 500 new cities (capable of supporting a million citizens). These cities were created to house the workers needed by new factories. Factories and related networks of factories (bicycle factories built next to bicycle tire factories) took on a new scale in China. 

This scale of operations not only created big single use factories, it has created a new type of outsourcing. Foxconn corporation is the world’s largest private employer and is based in China. What does Foxconn do? They assemble consumer electronics. They don’t build CPUs, or memory chips, or circuit boards. They just assemble the parts into a phone, for almost every cell phone in the world. They also assemble a huge percent of the computers, tablets, flat screens and other electronics that consumers buy.

By assembling every possible type of cellphone, Foxconn developed unique expertise in phone assembly. When a new iPhone is released, Apple’s marketing campaign has publically announced (and very tight) release dates. This has been amazingly effective in marketing the iPhone, creating huge lines at Apple stores when a new iPhone is released. Samsung’s Galaxy and other top-tier phones are now released in the same way. Without the massive capacity of Foxconn, this would not be possible. Assembly firms like Foxconn didn’t exist a decade ago, but now many products cannot exist without them. We’ll get back to Foxconn in just a little bit.   

Technology: As discussed earlier, when work moved offshore, key equipment and technology were left behind. This reduced the time to ramp up and required less investment to implement. It took more people offshore to replace a team onshore, but if wages were low enough it still made financial sense.

To understand relative levels of technology between the U.S. and China, consider the “robot ratio”, the number of robots per 10,000 workers. In early 2016, China had 36 robots for every 10,000 workers. Today, China may have as many as 50 per 10,000. The U.S. has 175. As you can see, workers in China have quite a disadvantage. Still, you can see that China is quickly catching up. By the early 2020’s China will pass 100 robots per 10,000. However, the world’s robotic leader is South Korea, with 530 robots. That tells us that there is a LOT of room for automation even with just existing technology.

China is investing heavily in robots. They are already the world’s largest buyer of industrial robots, and China is investing in its own domestic robot industry. Recently, China started investing in European robotics firms and has already bought several multi-billion dollar firms. As soon as 2020, the majority of the world’s industrial robots will be “Made in China” or will be made by firms owned by China.

Onshoring will explode in size in the next few years. Domestic factories will become much more automated. Work will move from China back to the U.S. and Europe. But only a fraction of the jobs will be re-shored. Robots will do most of the work. Traditional factories in the U.S. won’t always have the ability to maintain these robots. Just as hospitals turned to outsourcing to deal with training and maintenance, the arrival of a massive number of industrial robots provides a huge opportunity to outsourcers… IF they have the skills and the scale needed to support this transition.

Need another example? Consider… computer support. The old model was that any corporation of significant size ran its own IT department to roll out servers, add hard drives, and monitor networks. Amazon WEB Services (AWS) and Microsoft Azure have taken over the IT functions of thousands of companies. Startups are now starting up without server rooms. Amazon Marketplace has taken over warehousing, distribution, and other aspects of America’s small businesses.  

Consolidation: What’s next? Remember our friend’s over at Foxconn? They negotiated a deal to build an “assembly factory” in Wisconsin. The key factors to follow in this deal are…

  • Scale: The factory, when fully built, will employ 13,000. Keeping in mind that Foxconn has stated that it will build a VERY automated factory, that makes it a VERY BIG factory. Inside of this huge factory, Foxconn will initially build flat screen TV’s, but by building on the expertise they developed in China, they can create virtual assembly lines for smaller customers with a variety of assembly needs.  
  • Automation: Whoever builds the robots usually gets the first opportunity to maintain them. Because China is building these machines, and will soon be seen as the nation that best understands robots, we can expect Chinese competition. Both the firms that build the robots and a new generation of Chinese outsourcers. Local outsourcers must step up their game if they want to compete in this area.  
  • Government Relations: Giant factories need government support. Mega-factories lead to mega-employment or at least new revenue. Foxconn shopped around its plans to several states and chose the one that offers the most. Modifications to the minimum wage, changes to environmental regulations, and many other “perks” that can be offered only by the government are being discussed. Future outsourcing will involve more mega-projects. Tomorrow’s outsourcers need to be skilled in government negotiations.
  • Financing: Wisconsin will provide $3,000,000,000 in government incentives. That’s a staggering amount of money. If all government incentive packages start to look like this, government funding could become the key element in every new project.
  • New Industry: Foxconn and Amazon are developing new types of outsourcing. In a world where our homes are filled with electronic gadgets, assembly and technical support will be HUGE and growing industries. Start-up firms increasingly want to focus on design and market, leaving it to other partners to manufacture their products.
  • Customization: This new model of automated, onshore, manufacturing allows more products to be released, more often. Soon, customization will become the norm. For example, smartphones offer different amounts of memory, color options, and processor types. But these customizations are built-in to the phone and must be installed when you buy the phone. That means a long wait for the next batch of phones if you choose popular options. When the factory is just a few miles away, and robots can be quickly reprogrammed, new assembly lines can be instantly converted to build your product. Then, your custom phone could be just a day away… especially if it is delivered by an Amazon drone!

Hospitals grew, developed new technologies, grew some more, developed a network of services and suppliers, and then outsourced many of their day to day functions. On-shore manufacturers are in a very similar position. The new wave of onshoring will trigger the movement of more work in product distribution, IT support, hardware management and other services to outsourcing providers. 

If the Foxconn deal proceeds, who will build the factory? Foxconn has powerful connections with China’s government, construction firms and banks. In other nations, Chinese companies that build new factories use Chinese construction firms (the largest in the world) and Chinese banks (which are in the top 10 largest) to finance projects. If Chinese firms are not brought into the Foxconn deal, Foxconn is likely to make major investments in local construction firms and contractors.   

The arrival of intelligent robots and advanced automation are changing the way that factories manufacture and corporations work. This in turn will lead to larger outsourcing projects, and the need for multifaceted outsourcers with a wide range of skills and deep pockets. There will still be room for specialized outsourcing and smaller implementations, but more and more money will be tied up in big projects that only a small number of outsourcers can deliver. If you want to be in this elite group, now is the time to start lining up your partners!

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Ready For The New Normal… In Weather?


Sex, politics and the weather. Until someone can figure out which bathroom school kids can use, or until EVERY NIGHT isn’t a new story about dysfunctional politics in Washington… I’ll just talk about something non-controversial. Like the weather. I mean, at least THAT’S not controversial, right? Yep, weather. No controversy there. So… How are things going in Puerto Rico?

Geeze! Why does everything need to be so political? As we rolled into hurricane season, the worst of the climate deniers in Washington were either dropping out of the conversation or had their hands out for money for hurricane relief. It’s been one of the worst years ever, and it’s still weeks before the Hurricane season ends. Have we learned anything?

I HOPE we’ve learned that the climate is changing. The weather has been consistent with the changes predicted by climate scientists. Not just the three big hurricanes that we have seen so far in 2017, but changes that have been we documented for decades. Rising seas, melting glaciers, storms on the coasts, droughts in the interior, and of course a warming earth.

The conditions that are facing FEMA and other disaster agencies are different than a decade or two ago. It’s not just a matter of a bigger budget. The future will certainly require more money to address bigger storms and larger flood disaster zones. But it is also going to require different thinking from our leaders. Consider the following…

Acceleration: For decades climate scientists have said that the weather would change. It has. Then they told us the reason it was changing was “human activities”, including CO2 emissions, byproducts of industry, urban development (especially building on wetlands), the loss of forestlands, and of course… more people. The speed of change in our climate is still accelerating.

While we cannot predict what the weather will be tomorrow, we can predict that for at least the next 10 years the weather will be warmer, windier, wetter (on the coasts) and more destructive than 10 years ago. Climate change will only become faster. Expect that America will spend more money on storm damage every year.   

Frequency: A mid-term report card for 2017 could be… Houston: B+, Florida: B+, Puerto Rico: D- . Puerto Rico’s low score has less to do with FEMA, than the fact that Puerto Rico was hit by two hurricanes in two weeks. When one hurricane weakens infrastructure, the second needn’t be very strong to completely destroy whatever is left standing.

As the earth continues to warm, the chances of a double, or even triple hit by hurricanes increases. It takes months or years for a city to fully recover from hurricane damage. The first hit could happen in late November (end of the hurricane season) with a second hit a few months later when the next year’s season begins (in June). Cities with double hits, or even with a hit every 3 or 4 years, can expect insurance carriers to shrink or kill their coverage. In the past few years, the Federal government has picked up the business the Insurance Industry abandoned. But it has been a money-losing business.

Finances: Money affects everything. Communities with more money are often better engineered. More paved roads mean better access during floods. Higher priced properties are usually on land that is well graded, and without low spots that easily flood. Poor communities have fewer drains and uneven ground and “water traps” that frequently strand vehicles. Poor and poorly built communities are easily isolated by flood waters.  

Puerto Rico is very poor, with only half of the US median family income. They can’t afford to stockpile in advance of a storm, and they lack emergency equipment. Add to that the decades of financial crises. They lost key tax credits in the early 2000’s, defaulted on government debt in 2015,  and since then eliminated many government jobs that they need now to deal with this disaster. 

Before the storm, home mortgage defaults were already at a record high. Not surprisingly, few homes have wind or flood insurance. After the immediate disaster is taken care of, and lives are no longer at risk, Puerto Rico’s long-term survival… the ongoing fate of the island’s 3.4 million population… will depend on financing. Yes, America will help Puerto Rico, but will we invest in it? Especially if more storms are on the way? This horrid little question is going to be asked over and over again, as one post-disaster community after another looks for the billions of dollars they will need to rebuild.

Protection: Storms and floods will damage coastal cities, Tornados will tear up the center of the US, and dangerous rivers (Mississippi, Red, Ohio) will have record floods. In-between the storms, old buildings are repaired or torn down. But what prevention? What about the problems that make these storms so damaging? A seawall might keep out a high tide. Flood waters can be temporarily directed to underground storage tanks. Low lying areas can be raised. Or you could even build new wetlands and plant trees.

Over the past couple of decades very little has been done to reduce the risk of flooded cities. Instead, bad urban planning, often done to generate short-term revenues, has eliminated natural storm protection. Hurricane damage from Katrina was worse due to lost wetlands that once slowed incoming tides and soaked up flood waters. Preserving and expanding natural protection, engineering ways to keep water out, and developing systems to get flood waters out… could be the only thing that keeps the “potential” in our potential flood cities.     

Atlantic City, Boston, Charleston, Miami, New Orleans, New York, and Tampa… to name just a few US cities… are all on the flood city list.  Just 10 years ago, Boston completed the Big Dig, a project to ease traffic congestion in central Boston. At $22 billion, this is the most expensive highway project in the US to date. Construction projects of a similar or even greater size will be needed to save each city.  

Moving On: The big picture for global climate change can be too big to wrap your arms around. Let’s look at it more locally. In Houston, 50 inches of rain fell over 5 days during hurricane Harvey. To understand this, Houston is about 630 square miles. A gallon of water is 231 square inches. That equals 550 billion gallons of water. While this was only 1.5% of the water Harvey dumped on Texas, it’s too big a number for mere humans to understand. Have you ever seen an Olympic pool? They’re huge! In Houston 2 Olympic pools worth of water needed to get out of the city every minute! It’s just math. The water has got to go somewhere. But, when the tide is high… that water cannot get through to the sea.   

When the next storm arrives the same scenario will play out once again, and the city drowns. Areas closest to the water are usually the oldest part of town, and the most likely to flood. In a world where flood insurance is harder to obtain, how many times can the homeowners… or the city… afford to rebuild the most frequently flooded areas? Some cities may close neighborhoods rather than fight this losing battle.

“What happens to the homeowners?”, is the big question for the next few decades. Without insurance or local governments to buy out homeowners where can they turn? Don’t look to Washington! The Fed has no plans, and no appetite, for any kind of bailout!

A Way Out?: In 1900, less than 40% of the US population lived in cities; in 2015 it rose to over 80%. Storm soaked Florida has gone Urban even faster. At the same time, Florida went from 20% urban to 90%. Rural counties and small towns are less able to deal with big infrastructure projects than big cities. As sea levels rise, coastal populations will move into cities. That means we can protect fewer square miles of land, but at the cost of more urbanization around cities.

Perhaps, the solution is right under our noses. While the entire world is busy fighting climate change, another global change taking place… The Robot Revolution. Experts tell us that 50% of all of the jobs that exist today will be lost in just a decade or two. Without replacement positions, unemployment will rise to unprecedented levels. For this reason, governments around the world are considering how to adopt something called a UBI, which would provide all citizens with a stipend to replace lost income.     

With a greatly reduced need for paid employees, many worry that even with financial issues  taken care of by a UBS payment, people still need a purpose in life. Perhaps, these two efforts can go together. This could take any form, but imagine an organization something like the old Peace Corps. Make it a primarily volunteer organization, that allows citizens to work on projects to help before and after storms.

The Future: Climate change is still accelerating. Even the most optimistic plans to address urbanization and air pollution won’t stop or reverse the rise in global temperatures that make our weather more violent. And with more urbanization, there will be more creating bigger and more destructive storms

While two wrongs rarely make a right, we have a rare opportunity to take two problems and create one very timely solution. Many of our cities are at risk of flooding. We have seen early signs of how extensive our flooding risks are. Before cities flood, we need to develop a consensus on how each threatened city can be helped. When do we rescue a neighborhood, and when do we let it go? Which issues will be handled locally and which must be part of a central plan controlled by the Federal government?

Let’s not miss this opportunity! We will need many different kinds of skills to keep America’s cities above water and operating. Automation and artificial intelligence may make the second half of the 21st century a “jobless future”. But no job doesn’t mean no work. Enormous changes in the economy just might provide the volunteers to save us from the enormous changes in the environment. Let’s hope so! The future is now no farther away than the next change in the weather!


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Everyone Into The Cloud!

Cloud 6

(Previously published in Outsource Magazine, 9/8/2017)

Outsourcers fear that the coming Robot Revolution. Robots and A.I.s will wipe out traditional outsourcing… or so you have been told! The reality is that the technologies behind the Robot Revolution will create the greatest outsourcing opportunity of all time, Cloud Services! Let’s dive in and see how the Robot Revolution will save Outsourcing!

Cloud Services are a new way to support IT. Or at least a new name for support. Back in the 1960’s when computers and IT were just taking off, IT was already outsourced. Yet the model was clearly similar. The granddaddy of American computer services was IBM. IBM did not sell their MainFrame computers. You could either buy slices of computers that ran at IBM headquarters, or you might even be allowed to have IBM computers on your site, as long as they remained under IBM control.

Not even to America’s military could buy IBM computers. By the 1980’s competition in the market changed the model and managed facilities, equipment buy-outs, sub-contracting, subscription services and every other method of paying for IT was launched. Including traditional third party outsourcing.   

However, the proliferation of options suddenly made it very difficult to answer a simple question, “How many people are in IT?”. Earlier, headcount would give you a simple way to measure IT growth. But contract workers, outsourced workers and “IT as a service” obscured this number and IT managers only vaguely understood their headcount. Every year IT services would change and new devices fell under the responsibility of IT. The phone PBX, ISP’s, external data providers, research services, voice mail, cell phones, even printers, and copiers might get thrown onto the every growing IT heap.

Then the Internet arrived! Just connecting a single user to your network could be a complex and expensive project. Now, you had a way that you could connect to the world and the world could connect to you. More expensive ways to connect were retired. Even sending printed documents to users was replaced by URL connection to a library of PDF’s.

For overwhelmed IT workers, it was like a fairy tale. One of your many impossible tasks could finally be accomplished!  By the way. Have you read a fairy tale… lately? They all go something like this… you have a problem, it gets solved, you expect to be happy, then you find out that no one gets anything for free. That great solution from the traveling bean salesman? It didn’t quite live up to the demo, did it?  

Managing IT has been like a fairy tale lately. But not the part where Jack climbs the beanstalk up to the Cloud to take the Giant’s treasures. No, we’re dealing with the part where the Giant says, “Fee-Fi-Foe-Fum, I smell the blood of…” Well, YOU. Something just got dropped on the grill and it smells like IT. All of those wonderful solutions that the Internet planted throughout your infrastructure? They don’t look much like magical gifts today, do they?

Instead, it looks like a decade of living on the Internet has punched holes into every part of your firewalls. Bad guys can even attack your clients and then tunnel back through your network. Viruses, malware, phishing, Trojan Horses, and ransomware are everywhere. Corporate IT departments can no longer keep up with the pace of new cyber threats.

Of course, not all of the threats are from the outside. Not all of the protocols and technologies on your network play well together. An obscure application that some other department occasionally uses has suddenly knocked your team off the network. Is something wrong with the software, is it a faulty upgrade? Hundreds of updates must be carefully examined to find the problem. Every issue takes too long to fix, costs too much, breaks down too often. But that’s not the worst of it.

For every story about a million stolen IDs or hijacked tax records, you can bet that an IT career went down in flames. The perpetrators? Perhaps a small criminal ring in Estonia, or hacktivists in London, or maybe just some disgruntled teen in suburbia. Not the most formidable opposition. Cyberclowns, more interested in embarrassing the corporate world than burning it down. But our Cyberclowns are being replaced by professional Cyber warriors.

For years China’s government has sponsored attacks on the US and Europe. Websites have been crashed, corporate documents stolen. When the New York Times ran a series of articles on Chinese corruption, they were repeatedly and successfully attacked by Chinese hackers. The NYT is not some small, technologically literate firm. Their IT department is at least as good as the average and knows a thing or two about espionage. If the NYT can be hacked, so can you!      

North Korea, upset by the politics of a recently released Sony movie, hacked Sony and the information they released led to the firing of their Co-Chair. North Korea? Not exactly an IT  powerhouse. What about the real IT powerhouses… like Russia? It is just possible that if you have been living in a monastery with a strict code of silence that you haven’t heard…  no, No, NO! Not even then! You could still use sign language! Yeah, we all now know that Russia spends A LOT of time hacking America.

By interfering in the American Presidential election, without any visible penalty, we have guaranteed that Russia will try again. Thanks to a series of almost unbelievable events in Washington, the unraveling of America’s national security has been the world’s # 1 rated soap opera for 2017.

The world now knows that even America can be beaten by anonymous hackers. Every regional dictator who has ever lusted after nuclear weapons or an aircraft carrier to elevate their status will soon realize that a team of professional hackers can be bought for a tiny fraction of the cost of military weapons. The threat level is about to go through the roof, and there is little that IT can do about it. We have moved the world’s business onto the Internet, but the Internet was never built to be secure.

The Internet was created to connect a handful of research Universities, and a few thousand graduate students and Ph.D.’s that worked on government funded projects. They were guided by formal ethical codes. Cybercrime? Internet trolls? Early pioneers lived in terror of a releasing a report with a mistake in their footnotes. The small community and high ethical standards ensured that even being slightly impolite could cause expulsion. The idea of security, forcing limits on data and people, was seen as a crazy at best and Fascist policy at worst. Espionage and financial crime were laughable!

There are millions of companies around the world. Their IT departments have wildly variable technical skills. What skills they have are spread across innumerable operating systems, applications and devices. It has been impossible for IT to mount an effective defense. Until now. The answer is pretty simple… we all need to head into the Cloud!

Cloud Services like Microsoft Azure and Amazon Web Services (AWS) have massive scale. JPMC had 58,000 servers in 2014. That’s enormous! Yet, that number is tiny when we compare it to the 1.5 million servers at AWS. Amazon can buy more equipment at a lower price, has the staff to develop expertise in far more applications, and can buy the most advanced technology (Solid State hard drives and graphics processors rather than platters and CPUs). They also have on-site virus and malware experts and have the expertise to ensure that every server runs the most current updates. One financial analyst concluded that AWS is three times as efficient as a typical IT department.

Because of their enormous scale, Amazon has developed its own management and automation tools, allowing them to do the work with a fraction of the staff.  It also allows Amazon clients to add storage or CPU cycles to their environment with the flip of a switch. The uniformity of this environment plus their concentration of expertise makes cloud services like AWS far more secure than most internally managed IT facilities. The cost is lower, the maintenance is better and the chance of surviving a cyber attack is a lot higher.

Cloud services will not solve every problem in IT, it can elevate IT quality and security. Can the Cloud cut the cost of IT? Of course, it can! But more importantly, Professional hackers are raising the threat level to your data. That’s a very compelling reason to use Cloud Services. Every IT department is facing giant problems. Your solution, and even a few treasures could be waiting for you in the Clouds!

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The Trump Conundrum: American Jobs vs. Good Jobs vs. American Made

Factory Floor

Candidate Trump told America that he would bring back, “Good, well-paying jobs, with benefits.”  Which is what we want. We don’t just want low paying jobs without time off or health benefits. However, as Trump has learned, just the health care part of the job can take quite a bit of effort to define and deliver. When we take a look at what Trump is doing, and the bills that he supports, it’s difficult to imagine how his action will yield the sort of jobs we want, yet his approach may provide some benefits to the economy… just not the ones we expect. We need to dive into this issue and see just what Trump is doing to “Make America Great”.

Bring back jobs or create jobs – At the low end of the labor market, we don’t have a shortage of jobs. Quite the opposite, we have millions of jobs that Americans cannot or will not fill. There are 5–20 million more jobs in the US than we can fill. America’s illegal immigrant issue is really an illegal labor problem. Most of the “illegals” in the US are here to work. They would like to pay taxes, but to do so could get them arrested and deported. Some politicians admit that if illegals paid taxes everyone would be better off… But it creates the problem of illegal workers getting the same or similar treatment as legal workers and citizens. Individual morality is in conflict with economics.

In the 20th century, the illegal worker issue was largely restricted to agricultural work and agricultural states. In the last half of the 20th century, women entered the workforce in large numbers. Two income families became common, which caused an explosion in the service industry. With both parents working, America “outsourced” day to day functions… Fast food restaurants, cleaning services, lawn care, etc. The average American was making more money and wanted professional jobs. Services fell to illegal workers.    

The estimated 11 million illegal workers were able to find jobs because there were so many jobs that Americans will not take, at least not at the wages that are currently offered. Even during our last economic downturn, Americans refused to take jobs such as picking lettuce. Politicians debated over whether this was true or just an urban rumor. Well, during the summer of 2017 we had a chance to test this theory.

The shrimping industry in Texas was an excellent test. The season is determined by nature and shrimp breeding rules. The shrimping season happens during the summer in Texas. One of the hardest jobs, that has to be performed on the boats during hurricane season, is taking the heads off of shrimp. Before 2017, shrimpers brought in labor. Some from Mexico, but most from the Caribbean and Africa. In 2017 the Federal Government told shrimpers that were needed to use American labor. Taking the heads off of shrimp is low paying $7.25 per hour (minimum wage in Texas), dangerous (bad weather), requires expertise to do correctly and is very hard work.

The results were that not enough workers would be hired. Often “newbies” would find that they could not do the work while they were in a storm, and the ship needed to return to port. The summer harvest is down by 75% due to these labor issues (expect a sharp rise in shrimp prices later this year). Similar outcomes were experienced in restaurants in tourist areas… but for different reasons. You see, even if you can get American workers for these restaurants, most American workers are young college students. They need to return to school 30 days BEFORE the high season ends. These restaurants make most of their profit for the year in these last 30 days. They cannot shut down, and they cannot change the season. For different reasons there are many other jobs, seasonal and permanent, that American’s cannot fill. If the US government does not allow foreign workers next year, tens of thousands of small businesses could go out of business in 2018.

Create good jobs – Candidate Trump talked about good jobs, workers rights, workers having a say in outsourcing, jobs with health care and other benefits, etc. Trump sounded surprisingly like a 20th century union boss… “Trust me and I will make it happen, I will make America Great Again”.

Notice the similarity between “Make America Great again” with the old union ad for “Made in America”. Made in America was an ad campaign by the Amalgamated Clothing and Textile Workers Union. Trump clearly borrowed from the earlier campaign, yet it is telling that Trump’s campaign materials (flags, hats, etc), were all made in China.

This lack of awareness flows through Trump’s pro-worker policies. Trump stated that he is for the common worker, but he has also signed or requested bills that slash the budget for the Department of Labor. Remember, the one Federal agency that is supposed to protect American workers is the DOL.

Trump has stated his opposition to unions, but that’s almost a requirement for any Republican. But while candidate Trump asked for worker rights, President Trump has backed legislation that makes it harder to join a union and he has supports court decisions that reduce overtime payments to workers. Trump may genuinely sympathize with workers, and want the same kind of jobs that unions pushed for in the past, but when it comes to specific actions or laws, he goes against his campaign promised. Trump may be thinking about the good of America’s workers, but we have as yet to see Trump acting for the good of workers.

American made – To understand how much the American labor market has changed, let’s go back to that “Made in America” ad. Back in the 1980’s when the ad was running, producing textiles required a lot of manpower, even though the automation of textile manufacturing began more than a century earlier. American textiles were some of the best in the world. But the economy changed, and big factories moved south, first to the southern states, then to mexico and South America. Eventually it moved to India and Bangladesh. No place on earth has a lower textile manufacturing cost than Bangladesh.

“Made in America” was created to stop the flow of work offshore. A century ago, New York City was a major manufacturing location. It was a center of textile manufacturing, that worked with the design industry in NYC, which was also one of the to markets for high quality textiles. It made sense for all of these industries and workers to be near each other. As communications technology improved (telephone, computers, etc.) it became possible to gain the advantages of offshore markets (low cost labor) while still being able to manage all of the suppliers, regardless of where they are. This is the logic that led to offshoring from the middle of the last century to about a decade ago. Importantly, this is the business logic that President Trump was raised on.    

Now, new technologies have changed this equation. It makes business sense to build products in America once more. BUT just moving the work to America doesn’t mean that you’re building American jobs.

Consider running shoes. This was one of the first significant industries that totally moved out of America. Brands like Reebok and Converse defined the running shoe as an American icon. Yet,  by the 1970’s the manufacturing of American running shoes started to move offshore. By the 1990’s, no running shoes were manufactured in America or in Europe. But starting in 2016, Adidas opened its first shoe factory in Germany, and then another one just outside of Atlanta in 2017. This is only the first of a huge wave of “re-shoring” that will hit starting in 2018.

There’s just one problem. Moving work to the US will not create many new jobs. Automation is now capable of performing more jobs, at a lower price. Athletic shoes… and a growing list of other products… can now be manufactured on shore for just slightly more than the offshore price. When you eliminate the time and cost of shipping goods around the world, “Made in America” goods can cost less than offshore.

Foxconn is a Chinese firm that is the world’s largest employer. Foxconn assembles parts made by other firms… into LED TV’s, smart phones, and other consumer electronics. Foxconn is inking a deal with the state of Wisconsin for a mega-factory that will employ 13,000. However, the state will pay $3 billion for Foxconn to start the project. You can bet that this will be the most automated factory in the world, and could produce as many goods as a factory with ten times as many employees.

But if the work is all performed by machines, what does America truly gain? It would bring money into the economy. We are entering a new economy where the majority of “workers” may be machines rather than humans.  If governments are going to encourage new businesses to move in, and they plan to subsidize their work, there needs to be a very clear understanding of what that firm needs to deliver. Just revenue for state, jobs, good jobs, or something else?

Sum it up? – Trump believes that cutting worker rights and employment benefits can make America a more attractive place for some businesses. He could be right. Trump’s strategy could improve the economy and raise revenues. A few jobs might even be created. But those actions probably can’t create high paying jobs with good benefits.

If new factories open in the US, they can easily produce high value goods and increase profits. But the new generation of automated factories will employ few workers. Political leaders need to understand that manufacturing technology has changed. “Made in America” is still a good battle cry for manufacturing. But if Trump and other leaders do not understand the new technology, “Made in America” may ironically mean no more than made by American robots.

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7 Lessons Ted Cruise Can Learn From Hurricane Harvey


“Super hurricane” Harvey ended just two weeks ago, and the next super hurricane… Irma… is headed straight for Florida. Storm of the Century? We’ve suffered through so many superstorms that have caused multi-billion dollar damage… Katrina ($108 billion), Sandy ($75 billion), Ike ($37.5 billion), Wilma ($29.4 billion), Andrew ($26.5 billion) that we’re getting a bit numb to the term “storm of the century”. Maybe these used to be storms of the century, but in the 21st century, they’re just… storms. If the climate science people are correct, this level of storm will soon be an annual event.

Isn’t it strange that when a storm is in progress, everyone… the governor, the mayor, and the President… intently watches the news for any clues on when to evacuate, areas that will be underwater, which shelters need to be opened, and which travel routes are safe. Yet, when the flood waters recede and it’s time to plan for next year (or five or ten years from now), that same governor, mayor and President say, “Climate scientists? What do they know! You can’t predict the weather!). But all of these super storms ARE what the Climate scientists told us would happen a decade ago after Hurricane Katrina. 

Regardless of what politicians believe, next year will come, and it will bring more storms. Even this year, we still have three months before the hurricane season is over. Hurricane Sandy hit at the end of October. There’s still time for another 2017 superstorm. Even a moderately strong storm could devastate Huston if it strikes in the next few weeks. It’s time to end the debate about whether there is Global Warming (Answer: Yes, there is!), figure out what it costs to do nothing (Answer: Trillions of dollars), and agree on how we can reduce the risks of Climate Change.    

Flood cities aren’t just on the coasts.  Big rivers have also been flooding. The Mississippi, the Red River, Ohio and other major rivers have all taken lives and destroyed property. Climate Change affects more than just the US. The UK is experiencing the worst flooding in almost 300 years. Venice has been flooding for centuries, but today floors happen just about every year, and every year the floods get deeper and deeper.

The storm toll is enormous. As of this writing, the death count in Houston is at 70 and is still rising. But, if we look on the other side of the world… in Bangladesh, Nepal, and India… over 1,200 have died so far in their version of the Hurricane (Monsoon) season. Weather is global. Industry in the US impacts other countries around the world, and the growing economies of China, India, and Africa increasingly impact our own weather. That’s why it is so important that the most advanced nations, including the US, set an example for the rest of the world. If not, we will all pay an enormous penalty.   

How big is that penalty? Hurricane Harvey will cost between $50 billion and $200 billion, costing as much or more than Hurricane Katrina. As more and more private insurance firms drop out of the flood insurance industry,  FEMA (a Federal program) will increasingly be responsible for paying the bills. Hopefully, Ted Cruise and other Climate Change naysayers will learn a few lessons from Harvey.

  1. Global Climate Change Predictions – If we cut through the hype, Climate Change experts made a simple prediction about floods. The weather will get warmer, storms get bigger, and more super storms would happen. Which is exactly what has happened over the last decade. We lived through Katrina and Sandy, and Larsen ice shelves A, B, and now C have almost entirely melted away. Recently, it was revealed that big oil companies had their scientists advising them about Climate Change wince the 1970’s, even though oil CEO’s (such as former ExxonMobile’s CEO  and current Secretary of State Rex Tillerson) have repeatedly said that no evidence of Climate Change exists. Will Ted Cruise will ExxonMobil’s scientists?
  2. Storm of the Century – When you have a storm of the century every year, how do you pay for it? Think quick Ted! The Federal Flood Insurance program runs out at the end of September. If superstorms are the new baseline for storms, funding needs to go way, way up. Especially as private insurance companies are exiting the flood insurance business. That means that the cost of GCC will be paid by US taxpayers.
  3. Human Activity – Climate Change predictions go back to the last century, but now there is increasing certainty about the cause… “human activity”. Pollution is one contributor, but the destruction of our wetlands may be even more important. Wetlands soak up rain. Turn wetlands into condos and cities flood. If you don’t save the wetlands you can build storm drains and runoff systems, but Huston consumed it’s wetlands and failed to engineer flood systems. How about that Ted! Maybe we can shift the flooding problem from big oil pollution to unscrupulous Real Estate developers. The Donald should love that discussion!
  4. Environmental Regulations – After years of a depressed economy, local governments bend over backward to accommodate new businesses. Like the Foxconn deal in Wisconsin. Foxconn will receive a huge state tax credit, and will probably be given exemptions from environmental regulations. Chemical factories in Houston negotiated exemptions from some environmental regulations. Today these factories are venting toxic smoke and have had several explosions. Executives have stated that at some point, they expect the factory to burn down. Nearby, are toxic Superfund sites, which have flooded and the contaminated waters may mix with the local drinking water. Are we going to storm-proof toxic sites?
  5. Housing – As Hurricane waters recede, housing becomes an urgent issue. After Katrina 45,000 personal shelters were needed; Harvey is expected to require at least 30,000 shelters. Katrina-era shelters are worn out and have been disposed of. Newer, high-tech shelters and mini-homes can more be moved, assembled, and stored more quickly. HUD (Housing and Urban Development) usually provides guidance and manages these shelters. If super storms hit every year, America needs a stock of mobile shelters that can be swiftly deployed.
  6. Corruption – Today we focus on the victims, but soon scam artists and swindlers will catch our attention when billions in federal funds are stolen or mishandled. Major corporations and minor thieves will overbill or defraud housing and rebuilding projects. This cycle will repeat in the next disaster. If Climate Change means going from disaster to disaster, it also means going from scam to scam. FEMA’s need to invest in “warehouses” to store portable housing units and supplies for the next disaster, and a standing task force to deal with corruption.
  7. The Long View – Harvey is over, but Hurricane Irma, which has the strongest winds ever recorded, is just beginning. Just behind Irma are tropical storms Jose and Katia. Triple storm? Yep, yet another “only happens once in a century” storm conditions in the last two weeks. Is it time for the Climate Change deniers in Washington to give up discredit changes in the weather or debating who caused Climate Change, and instead identify ways to flood proof our cities? This will cost hundreds of billions of dollars… but so too will just a couple of super storms. TED! Are you taking notes?

Storms are expensive, and big storms are more expensive. So far, Climate Change predictions have been pretty accurate, and we are told that more storms that will cause record damage are on the way. We have treated big storms and big flooding as occasional disasters instead of seasonal events. As a nation, we need to raise the priority of flood prevention. Storm proofing out flood cities will be hugely expensive. But, there is one thing that is many times more expensive… doing nothing!



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More News About MiFID II


In the 21st century, Wall Street has faced repeated crises, each of which each followed the same pattern. At first, the impending problem is ignored by all except a few experts, in specialty publications. A few months before the problem is due to hit, the pace of discussion picks up. Just before “going over the cliff”, the nightly news begins to mention the impending disaster. Soon… if it’s “too big to fail”, “the Great Recession”, or “Cybersecurity”… we all get a new word for our financial vocabulary. Today, we learn about, “MiFID”: our next Financial crisis.    

MiFID or “Markets in Financial Instruments Directive”, is a European directive that started in 2004. This was a European reaction to problems in the Equities Market. Lack of transparency in trading and antiquated fee structures from the last century needed reform. MiFID delivered a laundry list of changes, and set MiFID II into motion, to drive further transparency.

On January 3rd, a key component of MiFID II takes effect. While the rules were released in 2012 and were to take force in 2017, implementation was delayed until January 2018. What are these rules? Today, when institutional investors buy stock, brokers charge a single fee, and research is provided for “free”. After January, brokers must charge separately for executing a stock purchase, and for research. Simple, right? Maybe not.

MiFID II technically applies to just European firms, and even if just Europe was the only market impacted, MiFID could still be the biggest change to the financial world in the 21st century. However, it may not be possible to just change Europe and leave the US market alone. Investment Banks have the largest equity research departments. Not only have I-Banks integrated both markets, but research departments have long since merged, now sharing staff and contracts for market data (Reuters, Bloomberg, Moody’s, etc.).

Separating the costs of these two markets will be difficult, and will create unexpected issues. MiFID demands that research and execution costs are separated, but it gives little guidance on how (or it) the cost of European research is separated from US research and research for other markets, such as China, Africa, the Middle East. Yet, in just a few months, every broker must start billing for research. Here’s why everyone is talking about MiFIDJanuary…

Billing: Just dealing with delivering the mechanics of billing by January is a tall order. Especially when so few firms have settled on billing details. Brokers that tentatively discussed how they will bill released new plans a few weeks later. Some plan to simply split the current fees into execution and research. Others will charge a flat monthly fee for research, while others will add an hourly fee for talking with analysts (perhaps as much as $10,000 an hour). The ongoing changes suggest that few clients like what they have heard.

Transactions: While the big issue is research, once execution fees are paid separately, it will become another argument with clients. Will there be a big enough difference in fees to influence which brokers are used? Brokerage fees today are a tenth of what they were a couple of decades ago and falling fact. Clearly, whatever the announced fees on January 3rd, we can expect them to fall significantly by the end of 2018. With billions of dollars of fees at stake, don’t expect negotiations to be… ahem … genteel.

Research: Today, just the top 15 Investment Banks produce 40,000 research reports every week. Most of these reports have a “buy/sell/hold” recommendation, with “buy” being the overwhelming recommendation. Surveys indicate that less than 1% of reports are actually read. Once research is paid for, how many reports will analysts need? Or, are analysts even getting ANY research that they truly want? In a paid world, the smart money says that research departments will need to shed staff very quickly.    

Awareness: Bloomberg reported that in the last 5 months of 2016 there were just 10 mentions of MiFID II in company earning calls. That rose to 50 mentions in the last 5 weeks. For months, regulators have been rejecting requests for MiFID extensions, so expect mentions to rise into the hundreds over the coming weeks.

The news is our, MiFID is coming. We’re all going to see more stories about MiFID, starting with what some well-known research departments are charging for their work. In just a little bit, the news will shift to the loss of thousands of high paying research jobs. After that… it’s anyone’s guess, but in 2019 I’m betting that the top I-Banks will cut the number of reports and ask their clients what kind of research they want to pay for! That’s my Niccolls worth for today!

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Countdown To Armageddon: MiFID II Arrives!

Nuclear Explosion

Change is on the way… BIG change! On January 3rd, 2018, MiFID II takes effect. MiFID was designed to make the global markets more transparent, but one seemingly innocent new rule could blow the markets apart. Starting January 3rd, Equity Research must be paid for, instead of being bundled in “trading fees”. Trading fees and research fees must then be separately and explicitly billed. Let’s dive right in and see just how much today’s “free” research is worth!

Equities valued at trillions of dollars are traded around the world. But which stocks should you buy and sell, and when? The answers are found through research! Equity research is a multi-billion industry. Investment banks have huge Equity Research departments. Smaller trading firms have specialized research groups. A few firms even independently sell research. And then, of course, there are global data providers (Bloomberg, Thomson-Reuters, S&P, Moody’s etc.) that sell Research departments all of their data from stock exchanges.

Yet, research is given away to Institutional Investors for free. In exchange, Institutional Investors buy stocks from those brokers that provide research. But when research isn’t for free? PAYING FOR RESEARCH changes everything! Not only will fund managers (and their financial managers), question what research costs and how much is needed, they will question how they are charged. There is, unfortunately, no roadmap.

Every broker will have a different plan on how to charge. Some will bill each transaction with execution and research fees, others will charge a flat monthly rate. A few will further separate billing into written research vs. consulting time with analysts. Better known research departments are expected to charge $5,000 to $10,000 per hour to discuss stock insights with analysts.

MiFID is not a US regulation. It was created by European regulators and only applies to equity sales in Europe. MiFID was created to level the fragmented EU playing field. Since research is given away, but Institutional Investors only buy from brokers with “free” research… this arrangement has the appearance of an “inducement” to do business. When “gifts” worth millions of dollars are given away, it’s not a level field. Alternatively, when research is no longer free, will clients still need the thousands of reports that are created every week?

January 3rd could be a quickly forgotten blip, or it might be the day that all hell breaks loose! Let’s do our own countdown to MiFID II and see what we learn! Starting with…

10… Cost  Some research groups only research a few stocks, others offer global coverage. That translates into different billing rates. Some will be visibly higher, some considerably lower, and some will be more difficult to compare. On day one, expect client feedback to contain a lot of negative comments about overcharging, and demands for remediation. The rest of 2018 could be a firefight over rates. Billing will be renegotiated, and research products will be re-aligned to match client demand. Expect changes in the number of research providers and their staff by mid-year.

9… Competition  Institutional Investors manage trading disruption risks by working with multiple brokers. But after January 3rd, multiple brokers cause duplicate research fees. If you use 5 brokers, are they each providing unique research or are two or more providing the same information? Are you willing to pay for duplicate research? Does every broker give you value for each research Euro?” Or Dollar? Speaking of which…

8… US vs. EU Clients  MiFID is a European regulation, but global clients will quickly ask, “If European clients know their costs, why can’t I?” Wall Street is very aware of MiFID. Clients will demand voluntary adoption of MiFID billing rules. Don’t want to provide it? Are you willing to bet that Washington will provide a better standard? If your firm follows MiFID today, you might have a single U.S. and European rate. But if you wait, you might be required to follow separate U.S. and European billing rules. And how will you bill for research in China (and “other” areas)?

7… US vs. EU Regulators  Most global firms consolidated their local research offices into a central operation years ago. But MiFID complicates how global operations work.  It’s more than just how they allocate billing. EU research must be produced by EU registered analysts, just as US research publications require FINRA registered analysts. Managing analyst registration and duplications in expertise is another task that MiFID adds to global research. As MiFID regulations continue to be written, more conflicts will arise between US and EU offices, raising costs.

6… Duplication  Billions are spent on research, but what is it really worth? A study from Reuters found that the top 15 Investment Banks produce 40,000 research reports every week, but clients read less than 1% of these documents. Even with this huge number of research reports, not every stock is fully covered. Research is overly focused on the “top stocks”. Thirty analysts cover HSBC, with 50 covering Apple. The top 3 or 4 analysts might have original insights about a stock. But what about the least insightful analysts? Fund managers don’t read 99% of reports. How many will they pay for?

5… Bias  The Financial Times of London stated, “The “Buy/Sell/Hold” headline is both heavily regulated and more or less worthless.” If research reports are sales documents, we expect them to over-hype equities, just as they do today. For example, McKinsey, the world’s largest consulting firm, reported that earning growth estimates are 100% overstated. When research is no longer free, will accuracy matter? But accurate research would produce fewer buy recommendations, and lower trading volumes?

4… Indexing  Index Funds and passive investing are now 30% of total equity fund assets and growing. Index funds, outperformed 80% of actively managed funds, without traditional research. As more money flows into Indexed Funds, fewer traditional trades must absorb research costs. Either fees will rise or costs must fall.

3… Whale Hunt  The more a stock is traded, the more coverage it receives. Top firms are over-covered and small cap firms (with low trading volumes) lack coverage. Small cap firms rarely produce the revenue needed to pay for research coverage. However, research departments that are able to dramatically lower the cost of research can transform small cap from a financial burden to a profitable new market.

2…D.I.Y.  According to the Financial Times, Vanguard expects to pay $5 million in research fees in 2018. Another firm that is a mere 10% of Vanguard’s size, but with more complex research needs, expects to pay $10 million. That’s enough to start a research department. It is inevitable that some Institutional Investors will simply write their own research. How many will “defect” from the current system?

1… Market Data Services  We’ve only discussed brokers and Institutional Investors. If just a portion of these changes take place… the breakup of global research, fewer researchers, changing research products… market data providers must quickly pivot, and develop a new research model with fewer subscribers and smaller budgets.

Launch…  It’s anyone’s guess what research will look like in 2019. But in 2018, research quality must rise, costs must fall, and operations must be flexible enough to deal with ongoing changes. Artificial Intelligence is the key technology to offset MiFID changes. AI can write the primary research, allowing high-end analysts to identify new trends and provide original insight. Research departments that do not aggressively adopt AI will lack the resources to produce the quality research clients demand, or they will simply price themselves out of the market.

Tough times are ahead for Equity Research. MiFID is still open to interpretation, but it has already triggered seismic changes. Research departments will soon struggle to reinvent themselves, with fewer analysts, reduced budgets, and a mandate to create unique research. Not every research department will survive. But a few of today’s research departments will aggressively adapt Artificial Intelligence and other new technologies that transform the cost of research and define the next stage in Equity Research.


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