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January 30, 2006
RBC adds bandwidth to remote bank machines
A nationwide upgrade will provide Canada's largest financial institution with a foundation for future applications. Plus: Why 56K is fast enough
1/30/2006 5:00:00 PM
by Neil Sutton
The Royal Bank of Canada Monday said it has reached an agreement with Allstream to upgrade its standalone bank machines nationwide.
The deal, which will affect the 1,900 automated banking machines (ABMs) that are not connected to an RBC branch, will provide the bank with more bandwidth which could be used to add more applications. Financial terms of the agreement were not disclosed.
Currently, the standalone or “remote” ABMs use a Bell Canada multi-drop line with 2,400 bits per second. RBC recently issued a request for proposals to upgrade the network to all Canadian service providers and Allstream came back with the best offer, said Bob Matthews, RBC’s senior manager for telecom.
The Allstream upgrade will increase network speeds to 56K via a multiprotocol label switching (MPLS) IP platform. The ABMs themselves will be also be replaced with NCR machines. Spokespeople from NCR were unavailable for comment at press time.
A small pilot project was introduced in December with half a dozen ABMs and the upgrade will begin in earnest next month. The rollout will take approximately 18 months, said Matthews.
While 56K may not sound very fast compared to broadband Internet connectivity, it is sufficient for most ABM applications, he added. “The application that uses these lines doesn’t need a lot of bandwidth at this point in time. Down the road (broadband) could be in the future for us, but right now, dial-up satisfies the business requirements.”
Matthews said he couldn’t elaborate on the types of ABM services RBC customers may see in the future, but noted that MPLS is becoming the connectivity standard of choice for the Canadian banking industry.
Chris Long, sales vice-president, central region for Allstream said that most Canadian banks are taking a wait-and-see attitude towards more advanced ABM applications. The ground is being broken in Europe, he said, where financial institutions are moving ahead more rapidly with application upgrades.
“You don’t see a lot in Canada, but if you look globally, you do see a lot of progressive banks or finance institutions have chosen to have a direct link-up with an actual live video feed,” said Long.
“They’d be able to connect up to a branch. A lot of the banks in Canada have the capability and strategy in place, but they often like to see other, more progressive markets roll things out and see how they go before they make a huge investment.”
Just over a year ago, Allstream signed a deal with Scotiabank to migrate its 1,050 branch locations to an MPLS IP network. ABMs in branches tend to enjoy slightly higher bandwidth than remote machines, said Long, because they can take advantage of on-site connectivity.
But, he said, the new remote RBC ABMs will have “sufficient bandwidth to roll out a variety of applications, if they choose to do so.”
January 30, 2006 at 10:08 PM in Financial Services | Permalink | TrackBack (36) | Top of page | Blog Home
January 29, 2006
We are all edge cases
I think Scoble is taking this personally! But this is something he should be proud of, and shrug off. It reminds me of the "geek' moniker in the 1999 timeframe when at first geeks were to be laughed at, but subsequently to be admired because of heir salary.
Relax Robert!
Scobleizer - Microsoft Geek Blogger » More on edge cases
Really, I sensed a tone of “don’t listen to Scoble cause he’s a weirdo.”
January 29, 2006 at 01:58 AM in Web lifestyle | Permalink | TrackBack (70) | Top of page | Blog Home
January 26, 2006
Restore confidence in the exchanges of information
Along with the boom of online banking transactions and the rise of e-commerce, the number of hacking and identity theft attempts grows, and lead to ever growing losses, not only for banks, but also for their clients. Being “open” more often, information systems also become more vulnerable.
In the face of these risks, the usual protections, like the use of a static password, showed their limits. The only answer offering a real security guarantee consists in using an unpredictable one time password, generated by an object held only by the duly authorized user (a token), and completed by a code known only by him (the PIN code).
Nevertheless, these technologies around the dynamic password (OTP or One Time Password) have a major handicap: the tokens that are available on the maket nowadays are relatively cumbersome. By embedding a battery, a flexible screen, a button and a cryptoprocessor in a card that is the size of a credit card, nCryptone offers an ultraportable token displaying a 6 or 8 digit dynamic password.
Existing in several versions, this product benefits from work led jointly by and the American company InCard, linked to Visa International by nCryptone an exclusive agreement for the conception and marketing of financial cards.
January 26, 2006 at 02:55 PM in Smart Cards | Permalink | TrackBack (13) | Top of page | Blog Home
Web won't tear us apart : new survey
Web won't tear us apart : new survey - Yahoo! News
Thu Jan 26, 1:28 AM ET
WASHINGTON (AFP) - Not long ago, the Internet was decried by dissidents of the online revolution as a threat to society, sure to split families, fracture friendships and turn users into computer crazed geeks.
That's not how things are unfolding, according to a new survey published Wednesday which finds that far from driving people apart, new tools for email, online phone calls, webcams and instant messaging are bringing them closer.
The Pew Internet and American Life project research, one of the first studies to uncover such a trend, finds people are increasingly turning to the net for help at a crisis point in life, or to seek a new job or home.
"There has been a growing realisation the Internet is not this strange beast," sociologist Barry Wellman of the University of Toronto in Canada, who helped prepare the report, told AFP.
The report, "The Strength of Internet Ties," finds that rather than supplanting contact with others, the Internet, largely through email, fits into people's lives and makes it easier to stay in touch.
"The larger, the more far-flung, and the more diverse a person's network, the more important email is," said Jeffrey Boase, another University of Toronto researcher who co-authored the report.
"You can't make phone calls or personal visits to all your friends very often, but you can 'cc' them regularly with a couple of keystrokes. That turns out to be very important."
The Pew report finds that people "mobilize" their social networks when they face problems or important decisions.
"When you need help these days, you don't need a bugle to call the cavalry, you need a big buddy list," said John Horrigan, Associate Director for Research at the Pew Internet Project.
Wellman argues the Internet and the cellphone have transformed communications and led to what he calls "networked individualism" whereby people's social lives are not necessarily constrained by where they live.
"This creates a new basis for community. Rather than relying on a single community for social support, individuals often must actively seek out a variety of appropriate people and resources for different situations," Wellman said.
The report cites Pew research that shows that 45 percent of Internet users -- about 60 million Americans -- say the web has been an important, or critical factor in a major decision in the last two years.
The research found people had used the web to get career training, research an illness from which a friend or relative was suffering, choose a school for their child or buy a car.
Some 16 million people said the web had played a crucial or important role in making a major financial decision, while 10 million said the Internet had played a crucial or important role in finding a new place to live.
January 26, 2006 at 08:43 AM in Internet evolution | Permalink | TrackBack (11) | Top of page | Blog Home
Google - The bubbling sound of stock flowing down the plug hole
Google - The bubbling sound of stock flowing down the plug hole
By Paul Hales: Thursday 26 January 2006, 10:42
IT TOOK JUST a week for Google to move from all-conquering hero to bad-ass villain.
Last week, the company founded on a single search algorithm was being lauded for standing up against the US administration’s Big Brother-style thirst for information on its own citizens. The only people then concerned that Google was refusing to open up its databanks to Government snoops were the shareholders, worried the impact of such a move may have on the fatness of their wallets.
This week, Google’s in the dock for daring to allow the authorities in China to control what can be seen on Google’s search pages from the within the People’s Republic. In standing up to the US (hurrah!) while kowtowing to the Chinese (boo!) Google has put itself in the glare of the media spotlight for all the wrong reasons. From here on it, can only get worse.
Ordinary folk who use Google to look stuff up are discovering that Google keeps a file on them. Media darling of the day is Californian Kathryn Hanson, who according to Katie Hafner in the New York Times, panicked after entering the phrase 'rent boy' into Google’s ubiquitous engine, after reading about failed UK Liberal Democrat leadership candidate Mark Oaten’s penchant for pairs of the aforementioned article. So close is Hafner to Hanson that she observed that latter turning "immediately" to her boyfriend, concerned that she could now be, "whisked away to some navy prison in the middle of the night".
Hafner/Hanson was concerned over the US moves to get Google to cough up the search data. She may now be more concerned to learn that Google's professed aim, according to its founders, is to know more about her than she herself does.
For the search favourite certainly likes to record users’ IP addresses. It also likes to employ a lifetime cookie what won’t expire until 2038. Users of the firm’s Gmail service will be aware that they are urged never to throw away a single email. Why? Well it may be of no practical use to the user to have to search - cumbersomely, we might add – through masses of saved mail to find the one or two that may be of some use. But it will be of commercial use to Google to build up a profile of your mailing habits over, say, thirty years. Oh. And is the email service tied to the search engine? Yup? Rent boy worries indeed.
So Google now has a problem on its hands, and one which will cause more shareholders to jump ship that those that already did so last week. For the public will begin not to trust it. No wonder Yahoo, having thrown in the towel as a web search outfit, has decided that it is back in with a shout.
Strange that Google, having risen so high has gotten itself in such a pickle. It’s done a Microsoft and outgrown its boots and begun to alienate its users. Unfortnately for it, the only way is down. Still, it likely has collected more data on individual web users than the CIA. And information, after all, is power – or so they say.
January 26, 2006 at 08:36 AM in Portals | Permalink | TrackBack (14) | Top of page | Blog Home
January 25, 2006
The Ballmer tirade: Ballmer vowed to "kill" Google CEO, court hears
"I'm going to f***ing bury that guy"
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By Ina Fried
Published: Monday 5 September 2005
Microsoft CEO Steve Ballmer vowed to "kill" Google in an expletive-laced, chair-throwing tirade when a senior engineer told him he was leaving the company to go to work for Google, the engineer claimed in court documents made public on Friday.
The allegation, filed in Washington state court, is the latest salvo in an increasingly nasty court fight triggered when Microsoft executive Kai-Fu Lee jumped to Google in July in what Microsoft claims is a violation of a one-year, non-compete agreement.
In a sworn statement made public on Friday, Mark Lucovsky, another Microsoft senior engineer who left for Google in November 2004, recounted Ballmer's angry reaction when Lucovsky told Ballmer he was going to work for the search engine company.
Lucovsky said in his statement: "At some point in the conversation, Mr Ballmer said: 'Just tell me it's not Google'." Lucovsky replied that he was joining Google.
"At that point, Mr Ballmer picked up a chair and threw it across the room hitting a table in his office," Lucovsky recounted, adding that Ballmer then launched into a tirade about Google CEO Eric Schmidt. "I'm going to f***ing bury that guy, I have done it before, and I will do it again. I'm going to f***ing kill Google." Schmidt previously worked for Sun Microsystems and was the CEO of Novell.
Late on Friday, Ballmer issued a statement disputing Lucovsky's declaration. "Mark Lucovsky's account of our conversation last November is a gross exaggeration of what actually took place," Ballmer said. "Mark's decision to leave was disappointing and I urged him strongly to change his mind. But his characterisation of that meeting is not accurate."
The Lucovsky declaration is the latest salvo in the heated battle between Google and Microsoft over Google's hiring of Lee. Google has said Microsoft is attempting to scare its employees away from Google.
In the filing made public on Friday, Google also said that if Lee is allowed to join the company before a trial he will not "work or consult in any of the technical areas identified in Microsoft's proposed preliminary injunction. Rather, pending trial, he will open a product development centre in China, and staff it with non-Microsoft personnel".
Meanwhile, in separate court documents also made public on Friday, Microsoft said emails Kai-Fu Lee sent to Google executives bolster its case that the researcher is seeking to violate his employment contract by taking up a position as head of the search giant's China efforts.
According to the filing, Lee sent a 7 May email to Google's founder and chief executive saying he had heard Google was opening a China office and expressing interest in discussing the matter. In the email, Lee described himself as "corporate VP at Microsoft working on areas very related to Google", Microsoft reveals in the court documents.
Microsoft also notes that, in the same email, Lee linked to his corporate biography, which Google has cited as evidence Lee's work was not directly related to the work he would do at Google.
In addition, for the first time, the filing notes the size of Lee's pay package from Google. Microsoft said the search company agreed to compensation "worth in excess of $10m, including a $2.5m cash 'signing bonus' and another $1.5m cash payment after one year, a package referred to internally at Google as 'unprecedented'".
The document is part of Microsoft's argument as to why a judge should issue a preliminary injunction preventing Lee from taking a position at Google that would compete with his work at Microsoft until a trial can be held in the case. A hearing on the injunction request is planned for Tuesday in King County Superior Court in Seattle. The judge hearing the case has already granted Microsoft's request for a temporary restraining order preventing Lee from doing such work for Google until Tuesday's hearing.
A representative for Microsoft did not comment beyond the filing. A Google representative was not immediately available for comment.
Ina Fried writes for CNET News.com
January 25, 2006 at 09:16 PM in Microsoft | Permalink | TrackBack (1) | Top of page | Blog Home
Next Simplicity
Next Simplicity - Royal Philips Electronics
Not since Vision of the Future has an exploratory design project received so much attention. How did Next Simplicity come about?
"The starting point was to develop a common understanding of what simplicity is," says Marion Verbücken, responsible for project coordination and content direction. "You may still strive for very advanced solutions, as long as you reduce the effort required to operate them. Or if you have very basic, single-function products, the challenge is to enhance the experience associated with these products.After all, the existing light bulb could hardly be simpler; you flick a switch and get light. We examined how to retain simplicity while broadening the scope, which is, for example, how we arrived at 'ledbulbs' that change color."
"There is enormous diversity in the Philips portfolio," continues Bertrand Rigot, also involved in project coordination and content direction, "from mono functional items, such as toasters to multi-functional systems such as media centers. We aimed at embedding simplicity at all levels. That is why we treated Next Simplicity as a collection, ensuring a balance between basic but also more advanced product concepts."
New codes of simplicity
Central to the project was defining the new codes of simplicity; not just the look and feel of an object, but also its behavior. "Take, for example, a mobile phone," says Verbücken. "You could design it so, held vertically, it is a phone, held horizontally it automatically becomes a camera, and flipped over it turns into an MP3 player.And each time users will only be confronted with the features relevant to that particular function."
Gesture-based operation
Gestural interaction is a recurring theme in Next Simplicity. For instance, instead of a remote control for a television there is a 'magic wand'.You scroll through on-screen content by waving the wand up and down, left and right, clock wise and counter clock wise. These kinds of gestures are extremely logical, easy to remember, and - unlike pressing buttons on a 57 key remote - distinct for a particular function. "You hardly need a user guide at all for any of the concepts," says Verbücken.
Another important aspect in the project was to address not only the rational but also the emotional. "Rational benefits are easier to quantify, such as faster response time or increased memory," says Verbücken. "But emotions are also crucial. You put a lot more of yourself in a written letter than you do in an e-mail. We wanted to address rational values, making things more understandable, as well as emotional values in the form of rich and enhanced product responses such as magical surprise effects, color changes, glowing lights, subtle movements, etc. Emotional values make objects behave more humanly."
Work on Next Simplicity started in January 2005, with an analysis of all the available research material.A great deal of dedicated web-based research was carried out, including competitor analysis and checking out relevant blogs. Roadmaps from the various Philips businesses have been gathered and visualized. Personas were used, though in a different way than usual. "Because the scope of the project was so broad, addressing all product divisions, we have concentrated on examining mass shared values and needs, rather than specific individual values and needs, as well as keeping diversity within" says Rigot. "By 'diversity' we mean gender, age, marital status, attitude towards technology, areas of interests etc.We always started by examining what makes sense in people's lives before puzzling over how we bring the solution to life."
A multidisciplinary team
The number of people involved in the project grew as it progressed. For approximately the first month it was just Verbücken and Rigot, collecting background data, creating tools, developing a framework, and defining the themes for the concept creation. Then followed another month of more or less non-stop brainstorming with a multi-disciplinary team of 8 people from Philips Design to define initial ideas. Somewhere in the region of 600 ideas were hatched for possible Next Simplicity concepts.
The key ingredients from the original framework were used as selection criteria to determine whether proposals were 'Philips fit', exhibited mass-market behavior or had the potential for growth, were meaningful and relevant for people, were focused on ease of use and pleasure and above all gave a positive feeling of addressing new codes of simplicity.
Once it became clear which ideas would be followed up, and then matured by a team of 25 designers, more than 50 people from Philips Applied Technologies helped develop the working models.All in all, approximately 120 people participated."We put product designers and interface designers together, so they could discuss, challenge each other's input, and come up with genuinely clever proposals that balanced physicality and interaction," says Rigot. "In fact, this was a feature of the project."
Inspirational provocation
"It was not the intention of Next Simplicity to come up with exact product proposals but to create inspirational propositions.This is why we needed a healthy distance from the business during the creation process. Otherwise we could not create a communication tool provocative enough to inspire the organization.
However, the data we gathered at the start ensured we stayed on track, and that the provocation was to be appropriate to the business," says Rigot. "Next Simplicity is a starting point, not an end in itself," adds Verbücken.
Because the project scope was looking three to five years ahead, the solutions proposed are similar to the products of today. There are many known typologies such as a television, remote control and electric kettle. "It was more a matter of how than what," says Verbücken. "We didn't create completely new paradigms; we chose to make known paradigms much simpler and/or more pleasurable."
Another feature of the Next Simplicity concepts, shown for the first time during September's Simplicity Event in Paris, is that they are all experiential models.Visitors can experience and interact with them. "The focus is on the usability, functionality and interaction, so we knew which aspects to demonstrate and which to leave out," says Rigot. "For instance, we mocked up the interface on the Air Tree air purifier, but didn't engineer it to actually purify air, because that isn't relevant in the context of the demonstration (since people would not really notice at the exhibition if the air would become cleaner)."
A successful launch
The launch was a runaway success, with more than 90% of the analysts, press, customers, Philips people and other visitors in Paris ranking Next Simplicity as 'very positive'. People from different Philips product divisions became enthusiastic and even started coming up with their own ideas after seeing it," says Verbücken. "The project also proves that design is a potent tool in marketing & strategy, and can also stimulate new business creations."
"Such projects are so enriching for those involved, that more people in the organization should be given the chance to participate," she concludes.
It looks like her wish will come true. A new collection of Next Simplicity concepts is under discussion for 2006, meanwhile the current collection is soon to hit the road with a traveling exhibition to spread the message worldwide.
What is Next Simplicity?
Next Simplicity was intended to be a tangible and inspirational way of communicating the brand promise for the coming three to five years. There were five themes: care, glow, play, share and trust. Together they covered all the Philips divisions; a true One Philips initiative. For each theme, approximately four concepts were created and shown as working models. Each was characterized by exceptionally straightforward operation, with an almost total absence of buttons and switches. According to Andrea Ragnetti, Philips Chief Marketing Officer, Next Simplicity is "an exploration of a vision for simplicity, all the time keeping end-user insights, technological innovations and sociological trends at the center of our thinking."
Gerard Kleisterlee, President and Chief Executive Officer of Philips commented: "Our Simplicity Event marks a real milestone in the transformation of Philips into a truly market-driven company. Many companies recognize the role of design-led innovation. But we at Philips have gone one step further with a special differentiator in this area: we believe in simplicity-led design. We have focused and refined our thinking on design-led innovation and the result is simplicity-led design, which is our springboard to even greater innovation."
January 25, 2006 at 08:09 PM in Web 2.0 | Permalink | TrackBack (23) | Top of page | Blog Home
Fraud puts online banking at risk of collapse
Fraud puts online banking at risk of collapse - vnunet.com
Consumer confidence 'fragile', reports FSA
Iain Thomson, vnunet.com 23 Jan 2006
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Over three-quarters of UK surfers currently using internet banking could abandon the services because of fraud, according figures to be released on Wednesday by the Financial Services Authority (FSA).
The watchdog's Financial Risk Outlook 2006 warns that 77 per cent of UK users would close their accounts if banks started refusing to reimburse customers for internet fraud.
The FSA went on to describe consumer confidence in the internet banking system as "fragile".
"If consumers were asked to foot the bill for internet banking fraud losses, our research shows that they would stop using the tool," said Philip Robinson, financial crime sector leader at the FSA.
"Most consumers recognise that they have some responsibility for security but they are not necessarily following this obligation through.
"To tackle the losses associated with fraud, banks should continue to drive security and this must include educating consumers on the importance of protecting themselves."
The report quoted figures from the Association for Payment Clearing Services suggesting that fraud losses through internet banking reached £14.5m in the six months to June 2005.
Although this is relatively low, losses have more than trebled since the same period in 2004 when the total was £4m.
Nearly all users (95 per cent) surveyed believe that at least some security responsibility should lie with the bank, and 45 per cent believe that banks should take sole responsibility. One in 20 respondents had no security software on their PC.
Research by Forrester last year estimated that 600,000 UK internet users had stopped using online banking because of security fears.
"We recognise that many banks are already taking steps to engage consumers. Initiatives like the Get Safe Online campaign by the government and the private sector show that consumer education is beginning to happen," said Robinson.
"But banks need to look carefully at consumer attitudes and whether their initiatives are effective in maintaining confidence."
January 25, 2006 at 09:12 AM in Financial Services | Permalink | TrackBack (18) | Top of page | Blog Home
January 24, 2006
Yorkshire introduces virtual agent to chat with mortgage customers
Finextra: Yorkshire introduces virtual agent to chat with mortgage customers
he UK's Yorkshire Building Society (YBS) has introduced a virtual assistant to its Web site to answer online queries from mortgage customers.
Web site visitors are able to ask the virtual assistant - which is known as Helen - questions in natural language, instead of having to choose the right combination of key words to retrieve the correct answer from the search engine.
YBS says the virtual assistant creates an emotional and entertaining experience, increasing customer loyalty and Web site "stickiness", and initial results show that a significant number of people enjoy having a "chat" with her.
Typically Helen is asked about best rates and types of mortgages on offer.
Since Helen was introduced, the virtual assistant has had over 3000 users and answered over 7000 questions.
January 24, 2006 at 08:09 PM in Financial Services | Permalink | TrackBack (2) | Top of page | Blog Home
The personalization of newspapers
1995 paper from Krishna Bharat, who is the creator or Google News, that just came out of beta. Additional background here at "the next big thing".
An interactive, personalized, newspaper on the WWW - Kamba, Bharat, Albers (ResearchIndex)
Abstract: This paper discusses the personalization of online newspapers based on our experience with the Krakatoa Chronicle, an interactive, personalized, newspaper on the World Wide Web (WWW). The personalization of newspapers involves both social and technical issues. In social terms, it is important that users can control the extent of personalization, because newspapers are not only a means to get personally interesting articles but also a way to get information you are not explicitly looking for
January 24, 2006 at 12:51 PM in Portals | Permalink | TrackBack (9) | Top of page | Blog Home
Yahoo! gives up quest for search dominance
Yahoo! gives up quest for search dominance
By JONATHAN THAW
BLOOMBERG NEWS
Yahoo! Inc., one of the first Internet search companies, has capitulated to Google Inc. in the battle for market dominance.
"We don't think it's reasonable to assume we're going to gain a lot of share from Google," Chief Financial Officer Susan Decker said in an interview. "It's not our goal to be No. 1 in Internet search. We would be very happy to maintain our market share."
Yahoo!'s comments underline the difficulties any Internet company faces in trying to challenge Google's dominance of the Web search industry. Google has at least double the market share of Yahoo! and Microsoft Corp. in Internet search, the largest and most profitable segment of online advertising.
"In some countries, it's already game over in search, with Google the clear victor," said RBC Capital Markets analyst Jordan Rohan in New York. "Google's product development pipeline runs at such a fast rate that it's very difficult for any company, Microsoft or Yahoo! to catch up."
Shares of Yahoo! fell as much as 13 percent Wednesday, the day after the Sunnyvale, Calif.-based company reported fourth-quarter profit that missed analysts' expectations. The stock rose 43 cents to $34.17 Monday in Nasdaq stock market composite trading.
"It kind of makes you wonder about how serious they are about search," said Danny Sullivan, editor of London-based SearchEngineWatch.com, which tracks the search industry. "It really ought to be their goal" to be No. 1, he said. "Whether it's realistic or not."
Yahoo! founded in 1994 as one of the first online directories of Web sites, switched from Google's search engine to its own technology two years ago.
To boost revenue from each search, Yahoo! plans to make ads more relevant to search terms, meaning people will be more likely to click on them. Advertisers pay Yahoo! a fee when Internet users click on the ads.
"We have held our own, and we should gain revenue share in the industry as we roll out these new initiatives," Decker said in the interview after the company reported earnings last week.
advertising
"Our goal has been to hold our share and to be a leading, if not the leading, total marketing platform, which would include both brand and search."
Yahoo! handled 19 percent of global Internet searches in November, a drop from 27 percent a year earlier, according to Web tracker ComScore Networks Inc.
Google's share, by contrast, rose to 60 percent from 47 percent.
Decker last week cautioned analysts on a conference call against taking the ComScore figures too literally, saying the data exclude Asian countries where Yahoo! is "exceptionally strong."
January 24, 2006 at 12:42 PM in Portals | Permalink | TrackBack (8) | Top of page | Blog Home
Yahoo tumbles on profit news
TheStar.com - Yahoo tumbles on profit news
Jan. 18, 2006. 10:50 AM
MICHAEL LIEDTKE
ASSOCIATED PRESS
SAN FRANCISCO — Yahoo Inc.'s shares dropped more than 11 per cent early Wednesday as investors expressed their disappointment with the Internet powerhouse's inability to reap bigger gains as advertisers shift more of their spending to the web.
Yahoo's shares plunged $4.66, or 11.6 per cent, to $35.45 (U.S.) in early trading Wednesday on the Nasdaq Stock Market.
he selloff came after Sunnyvale, Calif.-based company reported late Tuesday that its fourth-quarter profit nearly doubled but fell shy of analyst expectations.
It marked the second consecutive quarter in which Yahoo reported earnings growth that investors interpreted as a sign that the company isn't capitalizing on the online advertising boom as well as its rival, online search engine leader Google Inc.
"Yahoo has a good story going; it's just not as good as Google's," said Internet industry analyst Safa Rashtchy of Piper Jaffray. "We would expect to see faster growth in a growth market that seems to be on fire like this one."
Yahoo earned $683.2 million, or 46 cents per share, during the three months ended in December. That represented an 83 per cent increase from net income of $372.5 million, or 25 cents per share, at the same time in 2004.
The 2005 results included a $310-million gain triggered by a complex deal that left Yahoo with a 40 per cent stake in Alibaba.com, China's largest e-commerce company.
If not for that gain and other accounting items unrelated to its ongoing operations, Yahoo said it would have earned 16 cents per share. That figure fell a penny below the average estimate among analysts polled by Thomson Financial.
Revenue for the quarter totalled $1.5 billion, a 39 per cent increase from $1.08 billion in the comparable 2004 period.
After subtracting the advertising commissions that Yahoo paid to other websites, the company's fourth-quarter revenue stood at $1.07 billion, in line with analyst estimates.
Although Yahoo's profits have been steadily rising in recent years, the company has struggled to develop an automated system that's as effective at serving up moneymaking ads as Google.
"Frankly, Google has done a better job than us," Yahoo chairman Terry Semel acknowledged during a Tuesday interview.
Both Yahoo and Google display text-based ads on hundreds of websites in addition to their own, but only get paid when the links are clicked on.
Google's knack for enticing clicks has generated a long stretch of stellar earnings growth that has eclipsed Yahoo's. As a result, Google is currently worth twice as much as Yahoo, even though it started three years later.
"It's like we built our house first and someone came along and built an even better house," Semel said.
Investors have been betting Google will surpass analyst expectations Jan. 31 when it's scheduled to report its fourth-quarter earnings.
January 24, 2006 at 12:08 PM in Portals | Permalink | TrackBack (11) | Top of page | Blog Home
January 23, 2006
The next revolution in interactions
The McKinsey Quarterly: The next revolution in interactions
Successful efforts to exploit the growing importance of complex interactions could well generate durable competitive advantages.
Bradford C. Johnson, James M. Manyika, and Lareina A. Yee
An introductory note
Scott C. Beardsley, James M. Manyika, and Roger P. Roberts
Economists have long tended to describe the critical shifts in the European and North American labor markets over the past 200 years as movements between broad sectors—from agricultural to industrial jobs and from manufacturing to service ones. While this assessment is certainly true, the big picture obscures important nuances in what workers and professionals actually do. The finer details of the employment landscape hold important lessons for the way companies organize to manage their talent and technology, for competition within industries, and for public policy in developed nations.
In today's developed economies, the significant nuances in employment concern interactions: the searching, monitoring, and coordinating required to manage the exchange of goods and services. Since 1997, extensive McKinsey research on jobs in many industries has revealed that globalization, specialization, and new technologies are making interactions far more pervasive in developed economies. Currently, jobs that involve participating in interactions rather than extracting raw materials or making finished goods account for more than 80 percent of all employment in the United States. And jobs involving the most complex type of interactions—those requiring employees to analyze information, grapple with ambiguity, and solve problems—make up the fastest-growing segment.
This shift toward more complex interactions has dramatic implications for how companies organize and operate. In the mid-1990s, McKinsey studied the growing impact of interactions on the way people exchange ideas and information and how businesses cooperate or compete. In 1997, "A revolution in interaction" presented the findings of that research.
Over this past year, we looked closely at different kinds of interactions. Companies in many sectors are hiring additional employees for more complex interactions and fewer employees for less complex ones. For instance, frontline managers and nurses—who must exercise high levels of judgment and often draw on what economists call tacit knowledge, or experience- are in great demand. Workers who perform more routine interactions, such as clerical tasks, are less sought after. In fact, companies have been automating and outsourcing jobs that involve many of these transactional interactions.
The article that follows, "The next revolution in interactions," shows that the shift from transactional to tacit interactions requires companies to think differently about how to improve performance—and about their technology investments. Moreover, the rise of tacit occupations opens up the possibility that companies can again create capabilities and advantages that rivals can't easily duplicate.
Finally, "Mapping interactions by industry," a Web-exclusive series of interactive exhibits, examines the way tacit workers are deployed. In some industries, for instance, they create products and services, while in others they are concentrated largely in noncore areas such as administration, finance, and IT. In addition, each industry uses a different mix of tacit and transactional workers to manage its interactions with customers.
About the Authors
Scott Beardsley is a director in McKinsey's Brussels office, James Manyika is a principal in the San Francisco office, and Roger Roberts is a principal in the Silicon Valley office.
Like vinyl records and Volkswagen Beetles, sustainable competitive advantages are back in style—or will be as companies turn their attention to making their most talented, highly paid workers more productive. For the past 30 years, companies have boosted their labor productivity by reengineering, automating, or outsourcing production and clerical jobs. But any advantage in costs or distinctiveness that companies gained in this way was usually short lived, for their rivals adopted similar technologies and process improvements and thus quickly matched the leaders.
But advantages that companies gain by raising the productivity of their most valuable workers may well be more enduring, for their rivals will find these improvements much harder to copy. This kind of work is undertaken by, for example, managers, salespeople, and customer service reps, whose tasks are anything but routine. Such employees interact with other employees, customers, and suppliers and make complex decisions based on knowledge, judgment, experience, and instinct.
New McKinsey research reveals that these high-value decision makers are growing in number and importance throughout many companies. As businesses come to have more problem solvers and fewer doers in their ranks, the way they organize for business changes. So does the economics of labor: workers who undertake complex, interactive jobs typically command higher salaries, and their actions have a disproportionate impact on the ability of companies to woo customers, to compete, and to earn profits. Thus, the potential gains to be realized by making these employees more effective at what they do and by helping them to do it more cost effectively are huge—as is the downside of ignoring this trend.
But to improve these employees' labor performance, executives must put aside much of what they know about reengineering—and about managing technology, organizations, and talent to boost productivity. Technology can replace a checkout clerk at a supermarket but not a marketing manager. Machines can log deposits and dispense cash, but they can't choose an advertising campaign. Process cookbooks can show how to operate a modern warehouse but not what happens when managers band together to solve a crisis.
Machines can help managers make more decisions more effectively and quickly. The use of technology to complement and enhance what talented decision makers do rather than to replace them calls for a very different kind of thinking about the organizational structures that best facilitate their work, the mix of skills companies need, hiring and developing talent, and the way technology supports high-value labor. Technology and organizational strategies are inextricably conjoined in this new world of performance improvement.1
Raising the labor performance of professionals won't be easy, and it is uncertain whether any of the innovations and experiments that some pioneering companies are now undertaking will prove to be winning formulas. As in the early days of the Internet revolution, the direction is clear but the path isn't. That's the bad news—or, rather, the challenge (and opportunity) for innovators.
The good news concerns competitive advantage. As companies figure out how to raise the performance of their most valuable employees in a range of business activities, they will build distinctive capabilities based on a mix of talent and technology. Reducing these capabilities to a checklist of procedures and IT systems (which rivals would be able to copy) isn't going to be easy. Best practice thus won't become everyday practice quite as quickly as it has in recent years. Building sustainable advantages will again be possible—and, of course, worthwhile.
The interactions revolution
Today's most valuable workers undertake business activities that economists call "interactions": in the broadest sense, the searching, coordinating, and monitoring required to exchange goods or services. Recent studies—including landmark research McKinsey conducted in 19972—show that specialization, globalization, and technology are making interactions far more pervasive in developed economies. As Adam Smith predicted, specialization tends to atomize work and to increase the need to interact. Outsourcing, like the boom in global operations and marketing, has dramatically increased the need to interact with vendors and partners. And communications technologies such as e-mail and instant messaging have made interaction easier and far less expensive.
The growth of interactions represents a broad shift in the nature of economic activity. At the turn of the last century, most nonagricultural labor in business involved extracting raw materials or converting them into finished goods. We call these activities transformational because they involve more than just jobs in production.3 By the turn of the 21st century, however, only 15 percent of US employees undertook transformational work such as mining coal, running heavy machinery, or operating production lines—in part because in a globalizing economy many such jobs are shifting from developed to developing nations. The rest of the workforce now consists of people who largely or wholly spend their time interacting.
Within the realm of interactions, another shift is in full swing as well, and it has dramatic implications for the way companies organize and compete. Eight years after McKinsey's 1997 study, the firm's new research on job trends in a number of sectors finds that companies are hiring more workers for complex than for less complex interactions. Recording a shipment of parts to a warehouse, for example, is a routine interaction; managing a supply chain is a complex one.
Complex interactions typically require people to deal with ambiguity—there are no rule books to follow—and to exercise high levels of judgment. These men and women (such as managers, salespeople, nurses, lawyers, judges, and mediators) must often draw on deep experience, which economists call "tacit knowledge." For the sake of clarity, we will therefore refer to the more complex interactions as tacit and to the more routine ones as transactional. Transactional interactions include not just clerical and accounting work, which companies have long been automating or eliminating, but also most of what IT specialists, auditors, biochemists, and many others do (see sidebar, "About the research").
Most jobs mix both kinds of activities—when managers fill out their expense reports, that's a transaction; leading workshops on corporate strategy with their direct reports is tacit work. But what counts in a job are its predominant and necessary activities, which determine its value added and compensation.
During the past six years, the number of US jobs that include tacit interactions as an essential component has been growing two and a half times faster than the number of transactional jobs and three times faster than employment in the entire national economy. To put it another way, 70 percent of all US jobs created since 1998—4.5 million, or roughly the combined US workforce of the 56 largest public companies by market capitalization—require judgment and experience. These jobs now make up 41 percent of the labor market in the United States (Exhibit 1). Indeed, most developed nations are experiencing this trend.
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The number of jobs that involve relatively complex interactions is growing at a phenomenal rate
The balance is tipping toward complexity, in part because companies have been eliminating the least complex jobs by streamlining processes, outsourcing, and automating routine tasks. From 1998 to 2004, for example, insurance carriers, fund-management companies, and securities firms cut the number of transactional jobs on their books by 10 percent, 6.5 percent, and 2.7 percent a year, respectively. Likewise, a more automated check-in process at airports makes for smaller airline check-in staffs, automated replenishment systems reduce the need for supply chain bookkeepers, and outsourcing helps companies shed IT help desk workers. Manufacturers too have eliminated transactional jobs.
Meanwhile, the number of jobs involving more complex interactions among skilled and educated workers who make decisions is growing at a phenomenal rate. Salaries reflect the value that companies place on these jobs, which pay 55 and 75 percent more, respectively, than those of employees who undertake routine transactions and transformations.
Demand for tacit workers varies among sectors, of course. The jobs of most employees in air transportation, retailing, utilities, and recreation are transactional. Tacit jobs dominate fields such as health care and many financial-services and software segments (Exhibit 2). But all sectors employ tacit workers, and demand for them is growing; most companies, for example, have an acute need for savvy frontline managers.
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A new path to better performance
The demand for tacit employees and the high cost of employing them are a clear call to arms. Companies need to make this part of the workforce more productive, just as they have already raised the productivity of transactional and manufacturing labor. Unproductive tacit employees will be an increasingly costly disadvantage.
The point isn't how many tacit interactions occur in a company—what's important is that they ought to add value. This shift toward tacit interactions upends everything we know about organizations. Since the days of Alfred Sloan, corporations have resembled pyramids, with a limited number of tacit employees (managers) on top coordinating a broad span of workers engaged in production and transactional labor. Hierarchical structures and strict performance metrics that tabulate inputs and outputs therefore lie at the heart of most organizations today.
But the rise of the tacit workforce and the decline of the transformational and transactional ones demand new thinking about the organizational structures that could help companies make the best use of this shifting blend of talent. There is no road map to show them how to do so. Over time, innovations and experiments to raise the productivity of tacit employees (for instance, by helping them collaborate more effectively inside and outside their companies) and innovations involving loosely coupled teams will suggest new organizational structures.
The two critical changes that executives must take into account as they explore how to make tacit employees more productive are already clear, however. First, the way companies deploy technology to improve the performance of the tacit workforce is very different from the way they have used it to streamline transactions or improve manufacturing. Machines can't recognize uncodified patterns, solve novel problems, or sense emotional responses and react appropriately; that is, they can't substitute for tacit labor as they did for transactional labor. Instead machines will have to make tacit employees better at their jobs by complementing and extending their tacit capabilities and activities.
Second, a look back at what it took to raise labor productivity over the past ten years shows that the overall performance of sectors improves when the companies in them adopt one another's managerial best practices, usually involving technology. In retailing, for instance, Wal-Mart Stores was a pioneer in automating a number of formerly manual transactional activities, such as tracking goods, trading information with suppliers, and forecasting demand. During the 1990s, most other general-merchandise retailers adopted Wal-Mart's innovations, boosting labor productivity throughout the sector.4
But in the world of tacit work, it's less likely that companies will succeed in adopting best practices quite so readily. Capabilities founded on talented people who make smarter decisions about how to deploy tangible and intangible assets can't be coded in software and process diagrams and then disseminated throughout a sector.
Tacit technology
Companies have three ways of using technology to enhance and extend the work of tacit labor. First, and most obviously, they can use it to eliminate low-value-added transactional activities that keep employees from undertaking higher-value work. Pharmacies, for example, are using robots to fill prescriptions in an effort to maximize the amount of time pharmacists can interact with their customers. Meanwhile, The Home Depot is trying out automated self-checkout counters in some stores. The retailer isn't just automating and eliminating transactional tasks; its chairman and CEO, Robert Nardelli, believes that automated counters can reduce by as much as 40 percent the time customers spend waiting at cash registers. Just as important, the new counters mean that people who used to operate the old manual ones can be deployed in store aisles as sales staff—a much higher-value use of time.
Furthermore, technology can allocate activities more efficiently between tacit and transactional workers. At some companies, for example, technology support—traditionally, tacit work undertaken by staff experts on PCs and networks—has been split into tacit and transactional roles. Transactional workers armed with scripts and some automated tools handle the IT problems of business users; only when no easy solution can be found is a tacit employee brought in.
Second, technology makes it possible to boost the quality, speed, and scalability of the decisions employees make. IT, for instance, can give them easier access to filtered and structured information, thereby helping to prevent such time wasters as volumes of unproductive e-mail. Useful databases could, say, provide details about the performance of offshore suppliers or expanded lists of experts in a given field. Technology tools can also help employees to identify key trends, such as the buying behavior of a customer segment, quickly and accurately.
Kaiser Permanente is one of the organizations now pioneering the use of such technologies to improve the quality of complex interactions. The health care provider has developed not only unified digital records on its patients but also innovative decision-support tools, such as programs that track the schedules of caregivers for patients with diabetes and heart disease. Although it is hard to determine quantitatively whether physicians are making better judgments about medical care, data suggest that Kaiser has cut its patients' mortality rate for heart disease to levels well below the US national average.
Finally, new and emerging technologies will let companies extend the breadth and impact of tacit interactions. Loosely coupled systems are more likely than hard-coded systems and connections to be adapted successfully to the highly dynamic work of tacit employees. This point will be particularly critical, since tacit interactions will occur as much within companies as across them.5 Broadband connectivity and novel applications (including collaborative software, multiple-source videoconferencing, and IP telephony) can facilitate, speed up, and progressively cut the cost of such interactions as collaboration among communities of interest and build consensus across great distances. Companies might then involve greater numbers of workers in these activities, reach rural consumers and suppliers more effectively, and connect with networks of people and specialized talent around the world.6
Competitive advantage redux
Technology itself can't improve patient care or customer service or make better strategic decisions. It does help talented workers to achieve these ends, but so, for example, do organizational models that motivate tacit employees and help them spot and act on ideas. These kinds of models usually involve environments that encourage tacit employees to explore new ideas, to operate in a less hierarchical (that is, more team-oriented and unstructured) way, and to organize themselves for work. Most of today's organizational models, by contrast, aim to maximize the performance of transactional or transformational workers. Tacit models are new territory.
The rigidity of traditional organizational models too often limits innovation and learning. See "From push to pull: The next frontier of innovation"
As a result, it won't be easy for companies to identify and develop distinctive new capabilities that make the best use of tacit interactions—new ways to speed innovations to market, to make sales channels more effective, or to divine customer needs, for instance. But at least such capabilities will also be difficult for competitors to duplicate. Best practices will be hard to transplant from one company to another if they are based on talented people supported by unique organizational and leadership models and armed with a panoply of complementary technologies. If it becomes harder for performance innovations to spread through a sector and thereby to boost the performance of all players, it will once again be possible to build operating-cost advantages and distinctive capabilities sustainable for more than a brief moment.
During the past few years, advantages related to costs and distinctiveness have rarely lasted for long: they eroded quickly when companies built them from innovations in the handling of what are essentially transactional interactions. E*Trade Financial, for instance, gained tactical advantages by optimizing transactional activities to create more efficient and less expensive ways of making trades but then watched its unique position evaporate when other discount brokers and financial advisers embraced the new technology and cut their trading fees. Cheap trades were no longer a sufficient point of differentiation.
By contrast, advantages built on tacit interactions might stand. A company could, for example, focus on improving the tacit interactions among its marketing and product-development staff, customers, and suppliers to better discern what customers want and then to provide them with more effective value-added products and services. That approach would create a formidable competitive capability—and it is difficult to see how any rival could easily implement the same mix of tacit interactions within its organization and throughout its value chain.
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Looking forward
As companies explore how to expand the potential of their most valuable employees, they face more than a few challenges. For one thing, they will have to understand what profile of interactions—transactional and tacit—is critical to their business success and to allocate investments for improving the performance of each. Some companies will have to redeploy talent from transactional to tacit activities, as Home Depot did. Others, following the example of companies such as Toyota Motor and Cisco Systems, may find it necessary to redeploy their available tacit capacity to transformational and transactional activities, thus bringing a new level of problem solving to many kinds of transformational jobs. At the same time, it will be necessary to guard against becoming overly reliant on a few star tacit employees and to manage critical tacit or transactional activities undertaken by partners or vendors.
On the human-resources side, companies will need a better understanding of how they can hire, develop, and manage for tacit skills rather than transactional ones—something that will increasingly determine their ability to grow. Certain organizations must therefore learn to develop their tacit skills internally, perhaps through apprenticeship programs, or to provide the right set of opportunities so that their employees can become more seasoned and knowledgeable. What's more, performance is more complex to measure and reward when tacit employees collaborate to achieve results. How, after all, do you measure the interactions of managers?7
Companies will also have to think differently about the way they prioritize their investments in technology. On the whole, such investments are now intended largely to boost the performance of transformational activities—manufacturing, construction, and so on—or of transactional ones. Companies invest far less to support tacit tasks (Exhibit 3).
So they must shift more of their IT dollars to tacit tools, even while they still try to get whatever additional (though declining) improvements can be had, in particular, from streamlining transactions. The performance spread8 between the most and least productive manufacturing companies is relatively narrow. The spread widens in transaction-based sectors—meaning that investments to improve performance in this area still make sense. But the variability of company-level performance is more than 50 percent greater in tacit-based sectors than in manufacturing-based ones (Exhibit 4). Tacit activities are now a green pasture for improvement.
About the research
The next wave of performance improvements—to raise the effectiveness of tacit workers—will be far more difficult than the improvement efforts of the past. But companies that can innovate to make their complex, higher-value business activities deliver what their customers care about most will probably gain significant (and not easily duplicated) advantages in distinctiveness, quality, and cost.
We looked at the range of business activities involved in more than 800 occupations in the United States. Building on McKinsey's 1997 study, we placed every job in one of three categories: transformational (extracting raw materials or converting them into finished goods), transactional (interactions that unfold in a generally rule-based manner and can thus be scripted or automated), and tacit (more complex interactions requiring a higher level of judgment, involving ambiguity, and drawing on tacit, or experiential, knowledge). While any kind of work clearly involves activities in all three of our categories, we placed each job by determining its predominant activity. This occupational segmentation allowed us to develop a macroeconomic view of employment and wage shifts and to isolate trends in tacit interactions. We cross-checked the results with the 1997 activity-level analysis and with other economists' findings on interactions.
Then we linked the occupational analysis to the US government's industry classifications and quantified the mix of tacit, transactional, and transformational activities within and across industries. In addition, we used data from the International Labour Organization, the World Bank, and other sources to analyze these trends on a global basis. Finally, interviews with economists and with functional and industry experts throughout McKinsey helped us to identify and understand the key enablers of tacit and transactional interactions in today's companies.
Return to reference
About the Authors
Brad Johnson is an associate principal in McKinsey's Silicon Valley office, and James Manyika is a principal in the San Francisco office, where Lareina Yee is a consultant.
The authors wish to acknowledge the contributions of their colleagues Scott Beardsley, Lowell Bryan, Luis Enriquez, Dan Ewing, Diana Farrell, Sumit Gupta, Lenny Mendonca, Navin Ramachandran, and Roger Roberts, as well as of John Hagel, Professor Hal Varian of the University of California, Berkeley, and the Cisco Thought Leadership Team.
Notes
1 Lowell L. Bryan and Claudia Joyce, "The 21st-century organization," The McKinsey Quarterly, 2005 Number 3, pp. 24–33; and Lowell L. Bryan, "Getting bigger," The McKinsey Quarterly, 2005 Number 3, pp. 4–5.
2 Patrick Butler, Ted W. Hall, Alistair M. Hanna, Lenny Mendonca, Byron Auguste, James Manyika, and Anupam Sahay, "A revolution in interaction," The McKinsey Quarterly, 1997 Number 1, pp. 4–23.
3 Douglass C. North, "Institutions, Transaction Costs, and Productivity in the Long Run," Washington University at St. Louis economics working paper, economic history series, number 9309004, September 1993; Douglass C. North, "Transaction Costs Through Time," Washington University at St. Louis economics working paper, economic history series, number 9411006, November 1994; and Douglass C. North, "Institutions and Productivity in History," Washington University at St. Louis economics working paper, economic history series, number 9411003, November 1994. All are available online.
4 Brad Johnson, James Manyika, and Lenny Mendonca, US Productivity Growth 1995–2000: Understanding the Contributions of Information Technology Relative to Other Factors, McKinsey Global Institute, October 2001; Diana Farrell, Terra Terwilliger, and Allen P. Webb, "Getting IT spending right this time," The McKinsey Quarterly, 2003 Number 2, pp. 118–29; and Diana Farrell, "The real new economy," Harvard Business Review, October 2003, Volume 81, Number 10, pp. 104–12.
5 John Seely Brown and John Hagel III, "Flexible IT, better strategy," The McKinsey Quarterly, 2003 Number 4, pp. 50–9.
6 Scott Beardsley, Luis Enriquez, Carsten Kipping, and Ingo Beyer von Morgenstern, "Telecommunications sector reform—A prerequisite for networked readiness," Global Information Technology Report 2001–2002: Readiness for the Networked World, World Economic Forum, Oxford University Press, June 2002, pp. 118–37.
7 Lowell L. Bryan, "Making a market in knowledge," The McKinsey Quarterly, 2004 Number 3, pp. 100–11.
8 As measured by revenue or EBITDA (earnings before interest, taxes, depreciation, and amortization) per employee.
January 23, 2006 at 02:43 PM in Business Models | Permalink | TrackBack (49) | Top of page | Blog Home
New strategies for consumer goods
The McKinsey Quarterly: The Online Journal of McKinsey & Co.
The industry has already extracted much of the benefit to be had from improving productivity and concentrating on core brands. Meanwhile, its dynamics are changing. What comes next?
Peter D. Haden, Olivier Sibony, and Kevin D. Sneader
Web exclusive, December 2004
At first glance, the leading consumer goods companies' strategy for handling the fierce competition of the past ten years looks robust enough to carry them through the next ten. Indeed, with the industry still caught between price-sensitive consumers and powerful retailers, some of the challenges facing it remain the same.
In the 1990s the industry's executives developed strikingly similar strategies to address these issues: focusing rigorously on the strongest brands and pursuing productivity gains. The results confounded those who forecast the demise of brands and the industry's rapid consolidation. Remember "Marlboro Friday," the day in 1993 when Philip Morris slashed the price of its core cigarette brand by almost 20 percent? A business weekly wrote, "Many brands will perish or never be so profitable again."1 But such pessimists were wrong. Anyone who invested every year since 1993 in the top 50 consumer goods companies (minus the tobacco companies, whose shares were affected by liability lawsuits) received a 12 percent annual return over ten years—results that outperformed those of most industry sectors. Eight of the top ten companies of 1993 (ranked by sales) were still in the list of leaders in 2003, and roughly in the same order.
But the strategy that worked so well might have run its course. A string of recent profit warnings at big consumer goods companies hints that the industry's dynamics may be shifting in important ways. The surge of discount retailing and the spread of private-label products are putting ever greater pressure on the price of branded goods. Companies have extracted much of the financial benefit from restructuring their portfolios and concentrating on core brands. And though managers doggedly pursue further improvements in productivity, most of the obvious gains have already been achieved.
The glory days
In confronting the challenges of the past ten years, big consumer goods companies all chose much the same strategy. They began by reshaping their product portfolios through mergers and acquisitions, with the aim of becoming global leaders in a few core categories. Danone, an extreme case, went from a dozen categories to three in just a few years. These companies made acquisitions to fill geographic gaps (L'Oréal in Asia) or to strengthen a specific category (Procter & Gamble's hair-care business).
Then, most companies focused on their core brands, where they concentrated marketing and other resources, and eliminated weaker ones. Strengthened brands made it more difficult for retailers to insist on price cuts. Even the cross-category heavyweights—Kraft Foods, Nestlé, Procter & Gamble, and Unilever—concentrated on fewer brands.
Next, to reduce costs and finance growth, most companies in the industry went after productivity gains. Large savings came from global purchasing and from centralized supply chains facilitated by information technology. But plant closures were the most visible sign of the push for higher productivity: Nestlé and Unilever each disposed of more than 100 manufacturing sites in the past few years alone.
For many companies, this strategy created a virtuous circle. Productivity gains financed investments in marketing and product innovation. Brands gained market share and expanded internationally. Their growth unleashed further productivity gains as burgeoning companies generated new economies of scale. Contrary to conventional wisdom, it did not take a unique, creative strategy to win; companies of different sizes successfully applied the same approach. The key lay in how well, and how quickly, they executed it.
Their results were impressive. A composite index of the top 50 consumer goods companies, excluding tobacco, shows that over the past decade gross margins improved by an average of five percentage points and earnings before interest, taxes, and amortization (EBITA) by four percentage points. The strategy has weaknesses, however.
First, it is proving difficult to propel the virtuous circle beyond portfolio restructuring and core brands. Acquisitions did make up for the lack of organic growth and helped increase margins as companies reaped the benefits of postmerger synergies. But they were costly: the industry-wide return on capital has been flat since 1998 as the amortization of billions of dollars in intangibles and goodwill absorbed from these acquisitions weighed on corporate balance sheets (exhibit).
Chart: Margins rise while returns fall flat
Another worry is that the easiest savings from improvements in purchasing, logistics, and manufacturing have already been pocketed. The move to centralized purchasing, for example, saved plenty of money but can take place only once; furthermore, the savings were achieved in a decade of favorable raw-material costs. The industry's strategic position is also troubling. Retailers continue to consolidate, adding to the bargaining power of the bulked-up survivors, and discounters continue to grow, especially in Europe, where chains offering inexpensive private-label and branded goods are gaining strength.
Where now?
Given this list of concerns, senior management could be excused for wondering how companies will grow. In our view, they must accelerate the pace at which they build capabilities in core functions, because day-to-day execution is—and will remain—an important factor for success. They must also serve emerging markets better, respond to the growing emphasis on value in advanced countries, and reap the benefits of scale and scope. Finally, we believe, some companies will strike out in bold new directions: outsourcing, entering new service businesses, or developing product categories that others have shunned.
Improving execution
Discipline in execution is nothing new, but it remains a top priority, despite the likelihood of decreasing returns. The important point is that big differences in the performance of companies persist; in other words, superior capabilities can be built and exploited. In the coming years, success will require ever sharper capabilities in the four main areas that sustain consumer goods companies: brand marketing, sales, innovation, and the supply chain. Average performance and best practices have improved spectacularly in each area compared with a decade ago. Tomorrow's winners will be the companies that not only adopt and roll out best practices more quickly but also introduce new approaches, often borrowed from other industries.
Marketing effectiveness remains a big source of gain for consumer goods companies; most, for example, are still struggling to maximize the value of trade spending—the money passed on to retailers to promote sales. Given how much money these companies invest in marketing, and the declining productivity of traditional advertising in many markets, managers will be under increasing pressure to allocate resources wisely across not only brands but also marketing tools and consumer segments. In sales, managing relations with retailers and the customer interface they control will be particularly important for the biggest multicategory companies, which will seek to take advantage of scale and scope.
Although every consumer goods company views innovation as vital, few are happy with what they have accomplished in this respect, especially compared with pharmaceutical and consumer electronics companies. The most successful consumer businesses will treat innovation as a strategic and organizational challenge, striving particularly to blur the distinction between home-grown and external ideas (obtained through acquisitions or partnerships) and tailoring their approaches to different types of innovation.
Some leading companies will also find ways to squeeze more efficiency from their supply chains by offshoring some of their operations, employing new technologies (such as radio frequency identification tags to track inventories), or redesigning processes to reduce waste and variability, as manufacturers in other sectors have done.
Winning in emerging markets
Although almost all consumer goods companies are active in countries such as Brazil, China, and India, few take advantage of their full potential. Many concentrate on the minority of the population that can afford expensive, Western-style goods, leaving local competitors to target the overwhelming majority of consumers with modest means. The locals have the edge in supplying neighborhood stores, which global companies find harder to reach, and have held off the big players by selling some products at very low prices while nonetheless generating profits. The Peruvian soft-drink maker Kola Real, for example, has gained ground not only in Peru but also in the large and profitable Mexican market.
It is hardly news to senior executives that big consumer goods companies must tailor their products to meet local needs; indeed, companies such as Procter & Gamble in China and Unilever in India have had some success with that formula. But many others still find it hard to come to grips with the big changes required in branding, distribution, and manufacturing strategies. Competing for the mass market in developing countries means rethinking the way things are done—not easy for huge, successful organizations. Those that do well there will become truly global corporations and will shake up the industry's balance of power.
The value conundrum
Serving value-conscious consumers in mature markets is also increasingly necessary. This notion might seem counterintuitive, since many companies have focused on introducing expensive innovations at the premium end of their markets. Nonetheless, though the premium segment is growing in many categories, the shift toward value is a more important trend for companies that mainly target the mass market. Retreating to a narrow premium segment might make sense in categories such as vodka but would prove self-defeating in household cleaners. In addition, price competition stalks the premium segment: a growing number of retailers, such as the United Kingdom's Tesco, excel at offering consumers premium private-label alternatives.
The growth of discounters has accelerated the trend toward private-label goods and split companies into two camps. A few hard-liners continue to make and market only branded products and deploy marketing and sales skills to defend their share at the low end of the market. Many other manufacturers, in a spirit of "if you can't beat them, join them," supply retailers with private-label products, at least in some categories and countries. A number of paper-product companies, for instance, have developed a sizable private-label business outside their home markets while retaining a strong branded domestic business.
To decide which approach to take, companies must weigh their strengths and weaknesses. Those whose brands are below second or third place in market share and don't occupy a clearly defined niche might find making private-label goods the most attractive option. The same goes for companies that can't sustain the advertising and research spending needed to keep brands on top.
But underestimating the risks would be dangerous: private-label supply is no longer an amateur sport. The skills required to stand out in that business are different from the core know-how of a supplier of branded products—not just in manufacturing but also in product development, logistics, and sales. The decision to develop those new skills must be a conscious, strategic one, not an afterthought.
Exploiting scale and scope
The biggest companies are still trying to figure out how to wring a competitive advantage from global scale and broad scope. The aggregate financial and economic performance of industry heavyweights such as Kraft, Nestlé, Procter & Gamble, and Unilever, for example, hasn't been markedly different from that of the category champions, which compete in a more focused range of products. We can imagine two extreme scenarios.
One is that single-mindedness, responsiveness to consumer needs, and the ability to move quickly will continue to help category champions match or beat the giants' performance. Some of these champions will continue to consolidate fragmented categories—a trend that has already affected categories such as beer and some segments of personal care, among others. A handful, aiming to defend their independence, might join forces in mergers of equals, thereby avoiding the acquisition premiums that have hurt the industry's performance in the past. Others will seek to defend their independence by entering into alliances and joint ventures to find new avenues for growth (as PepsiCo and Unilever have done in tea-based drinks). Ultimately, new category champions will emerge as the heavyweights spin off some of their categories or break themselves up into several companies. This development would represent the final triumph of the focused category champion model.
In the alternative scenario, the heavyweights would find creative organizational solutions to the traditional trade-offs between the global management of a number of categories and brands, on the one hand, and local responsiveness, on the other. These companies would harness their considerable resources, for example, to pioneer breakthroughs in fundamental technologies. The payoff from using electronic identification tags to track inventories more efficiently would make it easier to swallow that technology's high cost. And they and some retailers would develop strategic partnerships leveraging scope advantages based on better insights into shoppers' preferences. Companies that succeed with these strategies will be in a good position to justify acquisitions—prompting a new wave of industry consolidation and challenging the prevailing orthodoxy that favors category champions.
Try unorthodox strategies
Some companies now limited by the orthodox approach might consider quite different strategies to spur growth. They have several innovative options.
New business models
Traditionally, consumer goods companies have been vertically integrated: they design, make, market, and sell their products. Increasingly, however, they will depart from this model and outsource some or all of their production to third parties—a trend that has already started in apparel and consumer electronics. The final form these consumer goods companies take will differ markedly from one category to another, but a range of business models could replace the integrated monoliths that now dominate. Contract manufacturers that make but don't brand products, for example, will coexist with pure branding companies that do no manufacturing. Often the former will build capacity by acquiring and restructuring assets from the latter.
This approach is less radical than it sounds. Coca-Cola and many other beverage companies routinely outsource bottling operations. High-end perfumes often come from contract manufacturers. And in some segments, such as home and personal-care products, the outsourcing strategy is steadily gaining ground: the contract manufacturer Budelpack, based in the Netherlands, recently announced its acquisition of manufacturing assets from Colgate-Palmolive, Henkel, Sara Lee Corporation, and Unilever.
Where brands continue to rule, the rationale for outsourcing is simple: management can concentrate entirely on dealing with customers and consumers—the main engines of growth. Indeed, many companies find that they can think more creatively about developing new products and stretching their brands into new categories when they no longer have to worry about keeping factories occupied. This approach would also promote a great leap in a company's return on capital employed.
The supply company too can create value. A management team focusing 100 percent on operations is better placed to build skills and generate improvements than the management of an integrated company. Operational excellence has a direct impact on profits; our evaluation of the best pure private-label suppliers shows that their profitability is on par with that of their average-performing branded counterparts. Moreover, the prospects for growth are better, since supply companies can produce goods for a variety of customers and tap into the growing market for value-oriented products.
Not every maker of branded goods should play this game. In some cases, proprietary manufacturing expertise is a source of competitive advantage that cannot be risked, even with watertight contracts to protect products and processes. In other categories, margins are too slim and the potential to cut costs is too slight for profits to be shared with a contract manufacturer. Concerns about product safety or the sourcing of ingredients are also easier to address with in-house operations. To decide whether outsourcing makes sense, companies need to assess each product and category in individual geographic regions—and, of course, evaluate possible suppliers.
Venturing into services
Nestlé's Nespresso system—gourmet coffees individually packaged for use in special espresso makers and sold through the mail and boutiques—is a service that extends a product. Another example: the drinking fountains and bottled water supplied by Danone Waters' home- and office-delivery division to 1.7 million residential and business customers in the United States.
These businesses and other successful forays into the world of services share several important characteristics. They have real consumer appeal and avoid head-on competition with mainstream retailers. They are managed separately from the core of the enterprise to avoid stifling them with big-company controls, costs, and attitudes. Most important of all, their senior executives understand that developing new businesses takes time and that nascent ones cannot be measured by the same yardsticks applied to established brands.
The move toward services is challenging. It requires new skills and runs the risk of damaging core brands by stretching them into territory that is hard to control. Moreover, during the initial growth phase, returns are paltry compared with those from a core business. Still, as consumers everywhere demand more service, some companies will find ways to provide it. In principle, any corporation, whether large or small, could enter this new arena, but the bar is high: you need not only creativity to invent attractive concepts but also determination to realize them.
The forgotten categories
A handful of companies might gain an advantage by focusing on product categories, such as traditional grocery products and canned foods, that global operators have forgotten. While multinational companies were busy consolidating, a new breed of consumer goods player stealthily gained ground: private equity firms that acquired local businesses in categories that multinationals were divesting or ignoring.
So far, the evidence suggests that firms such as BC Partners and Hicks, Muse, Tate & Furst have been highly successful in the industry. Their formula is well-known: acquire a stand-alone business, either from independent shareholders or from a multinational reshaping its portfolio, add financial leverage consistent with predictable cash flows, and give management the incentives and authority to improve the performance of the acquisition. After spending a few years building it up, such firms sell it—to a trade buyer, another private equity firm, or the public through a stock offering.
This approach provides a template for some consumer goods companies searching for growth. They can optimize a portfolio of local businesses—concentrating on categories that are too small or fragmented for the giants—without much regard for the synergies among them. Usually, these categories (which include some canned foods, breads, fresh-and-ready meals, and seafood) are relatively small, sensitive to local tastes, or dependent on local supply chains.
The industry's largest companies might have difficulty playing such a game: after all, they have spent the past decade getting rid of small brands and would have a hard time explaining an about-face to investors. But some midsize consumer goods companies could make this a viable strategy. They have little hope of becoming global category champions, because they lack the brands, the marketing capabilities, and sometimes the financial wherewithal. Rather than mimicking the global giants, they could adopt a different mind-set and organizational model, taking the private equity firms as their inspiration.
Ever greater price competition means that the pace of change in consumer goods is likely to accelerate. The companies best placed to thrive will be those prepared to take their quest for growth into new arenas.
About the Authors
Peter Haden is an associate principal in McKinsey's London office, Olivier Sibony is a director in the Paris office, and Kevin Sneader is a director in the New Jersey office.
The authors wish to acknowledge the contributions of Christian Barker, Peter Freedman, and Nicola Calicchio Neto.
Notes
1 "Brands lose shelf space," Economist, June 5, 1993.
January 23, 2006 at 02:40 PM in Business Models | Permalink | TrackBack (20) | Top of page | Blog Home
Boosting government productivity
The McKinsey Quarterly: Boosting government productivity
To pay for the care of the elderly, developed societies face plummeting levels of public services for everyone else—and soaring taxes. Productivity could be the answer.
Thomas Dohrmann and Lenny T. Mendonca
2004 Number 4
The costly retirement of 76 million US baby boomers will swell the ranks of the elderly to more than 20 percent of the population of the United States during the next 20 years. In Europe and Japan, the elderly will come to account for more than 30 percent of the population during the same period. This transformation is about to create a new sense of urgency to get the most from every government dollar. Public services beyond health care and pensions for seniors will face epic squeezes, and officials will struggle to balance the needs of retirees and younger citizens while still holding taxes to politically acceptable levels. Boosting the government's performance will be an imperative no country can ignore.
To be sure, attempts have been made before. In the United States, former Vice President Al Gore's efforts to "reinvent government" in the early 1990s scored some successes. The administration of President George W. Bush has made efforts to reform civil service rules that inhibit some sensible management practices. The Government Accountability Office (formerly the General Accounting Office) has shown perennial leadership in prodding government departments to address their management challenges. In the United Kingdom, Peter Gershon's recent review of government efficiency1 has galvanized work to improve productivity across the public sector, with a target of £20 billion in savings by the end of 2008.
But veterans of reform efforts agree that they have barely begun to scratch the surface of the government's performance potential. One reason is that reforms take sustained attention—often rare when they become caught up in partisan or interest group politics. What's more, political cultures remain oriented to legislation, not to executing and managing programs. Few people make their name by improving the way government runs.
Chart: A large share
Nonetheless, the coming era's extraordinary fiscal pressures will force leaders to overcome these obstacles. In the developed world, the state commands a large share of the economy, so improving the performance of government departments can generate hundreds of billions of dollars of value (Exhibit 1). Our experience working with public institutions in 50 countries has shown us that the opportunity, though hard to capture, is large enough to take some of the sting out of the hard choices that aging societies face. With the first baby boomers becoming eligible for retiree health and pension benefits in just a few years, there is no time to lose.
The size of the prize
Layoffs often lead to poorer service and thus to lower productivity; boosting productivity can bring both cost savings and better service
Productivity lies at the heart of government performance. Although many people think that improving productivity is synonymous with cost cutting and layoffs, this misconstrues its real meaning: the amount and quality of the goods and services that can be generated with a given set of inputs. Improved productivity can certainly be achieved by reducing inputs, but it can also come from increasing the quality or quantity of the output. In fact, layoffs often lead to poorer service and thus to lower productivity; perhaps paradoxically, boosting productivity can bring both cost savings and better service.
Either way, rising productivity—whether in the public or the private sector—is the key to rising living standards. In the US semiconductor industry, for instance, productivity growth averaged 75 percent a year from 1993 to 2000 because of advances in processing speed. The price of chips stayed roughly the same, but since they were more powerful and valuable to consumers, the industry's productivity increased. In the public sector, improving educational outcomes or reducing recidivism among criminals could likewise raise productivity even if more money was spent to do so. Collecting a higher percentage of the taxes owed by people and companies would improve the productivity of tax departments.
Chart: The rewards could be great
Huge potential savings or quality improvements could come from raising government productivity, which in ten years could increase by at least 5 percent in the United States and perhaps by 15 or 20 percent—estimates that are almost certainly conservative. The potential gains in other countries are equally impressive (Exhibit 2).
Admittedly, estimating the public sector's productivity is problematic because some of the data are sketchy at best. From 1969 to 1994, the US Bureau of Labor Statistics (BLS) experimented with productivity measures for key government functions, only to stop because of budget cutbacks and the waning interest of policy makers. The BLS metrics used results reported by government agencies and, in some areas, were not adjusted for the quality of services and value added. Yet even imperfect information offers a basis for assessing the value at stake.
To estimate the potential productivity gains, we start by comparing the productivity growth rates of the private and public sectors. For the United States, we use national-accounts data for the private sector and data from the Federal Productivity Measurement Program for the public sector. Of course, these two data sets use different selection and measurement methods, so it isn't possible to compare absolute productivity levels. But we can use the data to compare each sector's productivity growth rates and thereby to produce at least a rough estimate of the value at stake from improving government productivity.2
The data show that productivity in the public and private sectors rose at roughly the same pace until 1987, when a gap appeared (Exhibit 3). The private sector's productivity rose by 1.5 percent annually from 1987 to 1995 and by 3.0 percent annually thereafter. In contrast, our best estimates show that the public sector's productivity remained almost flat, rising by just 0.4 percent from 1987 to 1994, when the BLS stopped measuring it. No evidence suggests that since then it has experienced the growth spurt enjoyed by the private sector. A similar and growing gap appears in the United Kingdom as well.3 Data on government productivity in other countries are not available. If the US public sector could halve the estimated gap with the private sector, government productivity would be 5 to 15 percent higher in ten years, generating $104 billion to $312 billion annually.
Chart: The public sector lags
Is it fair, though, to compare productivity growth in the public and private sectors? The economist William Baumol famously noted in 19674 that services may lag behind manufacturing in productivity because their labor-intensive nature makes it hard to apply cost-saving technological innovations: it will always take the same amount of time for a teacher to read a story, for instance, or for a nurse to give a shot. In this view, since the public sector largely provides services such as education, health care, and law enforcement, there is little scope for productivity improvements.
Most government activities have private-sector analogs; processing Social Security payments resembles processing insurance claims
Yet Baumol's reasoning may not be as conclusive for government today as it seems. Technology is just beginning to change the nature of service delivery in health care and education fundamentally. Moreover, most government activities have direct private-sector analogs. Processing Social Security payments or tax returns resembles processing insurance claims. Managing logistics and real estate is much the same in the public and private sectors. So is procurement. Private enterprises have found ways to boost their performance substantially in each of these areas, and there is little reason to think that the public sector can't.
Our estimate of the size of the opportunity is also in line with work done by other credible researchers. John Wennberg and his colleagues at Dartmouth College, for instance, found that productivity in health care could increase by up to 25 percent.5 Their work shows that the substantial regional variations in US Medicare costs are not associated with differences in access to health care, its quality, or health outcomes. Reducing costs in all regions to those in the lowest quintile (adjusted for differences in the prevalence of illness, medical prices, age, sex, and race) would cut annual Medicare spending by about 20 percent without affecting the recipients' standard of care.6 Such a transformation implies a productivity increase of 25 percent. Furthermore, David Brailer, the new national coordinator for health information technology at the US Department of Health and Human Services, estimates that widespread modernization of the IT infrastructure will eventually reduce national health costs by 10 percent through administrative and clinical savings. Business Executives for National Security found that the Pentagon wastes up to 10 percent of its budget compared with more efficient private-sector organizations in functions such as housing, inventory management, payroll processing, and travel. Whatever the precise figure, all evidence points in the same direction: the opportunity to improve government productivity is huge.
Boosting the performance of government
Let us be clear: calling for a new focus on government productivity isn't meant to serve as a justification for thoughtless cuts in government spending or for "union bashing" inspired more by ideology than by a quest for effectiveness. Nor is it meant to induce complacency in the face of the hard budget choices that aging societies will face.
Instead, our call to action is meant to promote a necessary conversation on the role that government productivity can play in making the coming fiscal challenges more manageable and humane. In an era of permanent fiscal pressure, liberals should welcome a more efficient government to assure that more money is available for social needs. Conservatives should welcome it to help keep taxes at levels consistent with strong economic growth. Rightly understood, better performance by government can become that rare arena in which common ground is possible.
Over the past decade, a handful of public-sector organizations around the world—schools, public-welfare agencies, health care systems, postal and transit systems, and militaries—have improved their performance by 5 to 30 percent or more. Often they have chosen among three classic management tools to raise productivity: organizational redesign, strategic procurement, and operational redesign. In the most effective cases, these tools were part of a broader program of cultural change that transformed the organization's performance and measured it rigorously.7
Organizational redesign
A redesign that focuses on the end "customer," eliminates duplication, and streamlines processes can improve both the cost and the quality of services (see "Organizing for effectiveness in the public sector"). Consider the experience of the US state of Illinois. In 1997 it put public-aid programs from six separate departments under a single roof. Previously it had been necessary to approach each of them separately and to give them the same information, even though more than half of their 1.8 million customers received more than one service. The new Department of Human Services is a one-stop shop ensuring that recipients get all of the services they need—in the past many of them hadn't—and eliminating the duplication of programs and back-office processes. As a result, the department has redeployed money and staff to new programs, such as an early-intervention initiative.
The German Federal Employment Agency (Bundesagentur für Arbeit) is also reorganizing, amid a controversial and often bitter public debate about the future course of German social and labor policy. Headquarters have been shrunk down to 400 staff members, from 1,100, and operational responsibilities have in effect been decentralized to ten regional divisions. The radical redesign of local agencies and their service offerings has been successfully prototyped and now gives customers tangible benefits, such as halving waiting times and doubling the amount of time available for counseling. These changes have led to much higher customer satisfaction levels.
Procurement
Improving supplier-management and purchasing operations can help organizations cut their expenditures while raising the quality of the goods and services they buy. Governments mounting such efforts usually standardize and consolidate orders, designate preferred suppliers, reward them for meeting delivery and quality targets, and collaborate with them on ways to improve production processes and reduce costs. Government regulations sometimes make revamping public-sector procurement difficult, but enormous progress can still be made: Illinois saved more than $100 million in fiscal year 2004 and expects to save more than $200 million in fiscal year 2005 (see sidebar "How Illinois cut its purchasing bills"). For many items, the state is getting better quality.
Sometimes procurement officials cut costs dramatically by understanding the suppliers' economics. A US federal agency, for example, recently renewed an IT contract with outside vendors. By building a detailed model of the suppliers' costs and benchmarking their individual components, it negotiated prices that were more than 60 percent lower than the first set of competitive bids it received and will save several hundred million dollars over the term of a five-year deal.
These are not unique opportunities: Most government agencies could improve their procurement processes. The state of Tennessee, for instance, is projected to save more than $300 million annually in Medicare and Medicaid costs, without any changes in health outcomes, by purchasing the cheapest drugs available rather than name-brand ones. Schools throughout the United States have saved 10 to 35 percent on food, janitorial services, textbooks, and transportation by purchasing them more astutely. (Large school systems can save $30 million to $40 million a year in this way.) Military and security spending is an even bigger opportunity, in part because it accounts for more than 70 percent of total government contracting. The United Kingdom is trying to capture this opportunity through its Smart Acquisition program, a set of reforms designed to reduce bureaucracy, cut procurement costs, and speed up the delivery of equipment.
Operational redesign
Redesigning operational processes to reduce waste, eliminate unneeded effort, and correct mistakes quickly can also raise productivity to an astonishing extent. Consider the experience of the United States Postal Service (USPS). Since 1999, the number of addresses it serves has increased by seven million—nearly equivalent to the number of addresses in the entire Chicago metropolitan area. Nonetheless, the USPS has saved $5.5 billion by replicating the best practices of the best sorting plants and by improving its delivery and counter operations. In this way, it cut its full-time workforce to 69,000, mainly through retirement and normal attrition, and increased its productivity by 6 percent. Customer satisfaction ratings and other service-quality metrics are at all-time highs (see sidebar "You have mail, efficiently").
"E-government" initiatives too can radically improve service and customer satisfaction while reducing costs by 25 percent or more.8 In Singapore, an export license that formerly required 21 forms and took three weeks to process now involves one online application that can be approved in 15 seconds. The US Internal Revenue Service can process an online tax return for just $0.40, compared with $1.60 for a paper return, and the Arizona Department of Transportation can renew a driver's license online for $1.60, compared with $6.60 at a branch office. Combining online delivery with a redesign of the back-office processes supporting it can realize cost savings of 35 to 40 percent—while customer satisfaction soars.
Overcoming the barriers
If governments could improve their performance easily, they would have done so already. In fact, they face unusual challenges. Competition is the most important missing element. More than a decade of McKinsey Global Institute research around the world shows that monopolies, businesses protected by government regulation, and other private-sector companies without competitors nearly always have very low productivity.9 Without competition, managers have little incentive to take risks on new techniques.
For governments, the solution is creating competition to provide services and giving citizens the ability to choose among these alternatives. Charter schools, for example, create competition in public education. Outsourcing back-office services such as procurement, real-estate management, and payrolls and benefits creates competition in these functions. Allowing private-sector companies to bid on social-service contracts lets them compete with government providers.
When creating competition in the public sector isn't possible, its leaders can devise other incentives. For one thing, managers can be prodded to meet targets if governments budget in expected performance improvements; in the United Kingdom, the Gershon review of the public sector's efficiency has given each government department three-year productivity targets covering financial savings and head count reductions while at the same time ensuring that services will continue to be provided. Making the performance of governments more transparent by publishing the results of customer satisfaction surveys, benchmarking surveys, and service-quality metrics also helps citizens to take an active role in demanding change.<