The New Golden Age

The history of investment and technology suggests that economic recovery is closer than you think, with a new silicon-based global elite at the helm.

strategy+business
by Mark Stahlman
… The global economy is poised to en­ter a new phase of robust, dependable growth. Technological and economic historian Carlota Perez calls it a “golden age.” Such ages occur roughly every 60 years, and they last for a decade or more, part of a long cycle of technological change and financial activity. (See Exhibit 1.)

…[The] details of long cycles vary, the overall pattern of progress remains the same: An economy spends 30 years in what Perez calls “installation,” using financial capital (largely from investors) to put in place new technologies. Ultimately, overinvestment and excessive speculation lead to a financial crisis, after which installation gives way to “de­ployment”: a time of gradually in­creasing prosperity and income from improved goods and services.
This time, linchpins of the golden age will include the worldwide build-out of a new services-oriented infrastructure based on dig­ital technology and a general shift to cleaner energy and environmentally safer technologies. In the emerging markets of China, India, Brazil, Russia, and dozens of smaller developing nations, a billion people will enter the expanding global middle class. …

Tracking the Cycle

Long cycles of technology and investment have been tracked and analyzed by an impressive roster of scholars, including Perez, Joseph Schumpeter, and others. (See “Carlota Perez: The Thought Leader Interview,” by Art Kleiner, s+b, Winter 2005.) Five such cycles have occurred since the late 1700s. The first, lasting from the 1770s through the 1820s, was based on water power and introduced factories and canals, primarily in Britain. The second, the age of steam, coal, iron, and railways, lasted from the 1820s to the 1870s. The third, involving steel and heavy engineering (the giant electrical and transportation technologies of the Gilded Age), expanded to include Germany and the United States. This cycle ended around 1910, giving way to the mass production era of the 20th century, a fourth long cycle encompassing the rise of the automobile, petroleum-based materials, the assembly line, and the motion picture and television.
Our current long cycle, which began around 1970, is based on silicon: the integrated circuit, the digital computer, global telecommunications and the Internet. … In a typical “technological–economic paradigm,” as Perez calls it, new technologies are rolled out during the first 30 years of installation with funding from fi­nancial capital. Investors are drawn in because they receive speculative gains that come, in effect, from other people making similar in­vestments. … As some bets lead to rapid gains, enthusiasm and impatience fuel a more widespread appetite for jumping on board, risks be damned. The consequence is irrational exuberance, a crash — and then a period of crisis.
The current crisis began in 2000 with the Internet bubble collapse. It was prolonged by the financial-services industry. Not wanting to give up easy profits, and applying the technological innovations that computer “geeks” had provided, traders continued to push for rapid returns. … This culminated in the catastrophic meltdown of 2008 and a historic moment of shifting establishment priorities.
Every crisis ends in such a moment. The last crisis, which began with the stock market crash of 1929, ended with the Bretton Woods agreements of 1944. In each case, once the widespread debacle bottoms out, the speculators of the old era are reined in, expectations are reset, and new business and government elites start to rebuild the world’s governing institutions. After World War II, the locus of power and influence was the oil economy. … The symbols of elite power, including the Rockefeller-built World Trade Center, were all linked to oil.
Only with a similar restructuring can a new period of extended growth, a golden age, be ushered in. This time, the leaders will be linked to silicon. IBM, Intel, and Microsoft will be more important in the next two decades than Exxon or the World Bank. …
When deployment begins, gen­eral assumptions about business shift accordingly. Financial capital, which is relatively indifferent to particular technologies, becomes less of an economic force. Businesses depend more on industrial capital, derived from profits from the sale of goods and services. Executives with a greater interest in long-term stability than in rapid returns are placed in charge of global affairs.
There are clear signs that this is happening now. Financial regulations are being put in place around the world to improve market monitoring, limit leverage, and mandate heftier reserves. …
One telling indicator of this shift from speculation to real growth is the official attitude toward bubbles. In the 1990s, the U.S. Federal Reserve, under Alan Greenspan, took a hands-off approach to speculation. Now the Fed is discussing what actions it might take to cool off overheated markets in advance, and is admitting that its earlier ap­proach to bubbles and risk management was a mistake. New authority is being sought by regulators such as the U.S. Commodity Futures Trading Commission and its European counterparts. …

The Emerging Silicon Economy

Goldman Sachs will probably be part of the new Silicon Establishment, along with dominant enterprises in information and communications technology and others involved in deploying these technologies. For the first time in decades, a commonality of purpose and shared reservoir of knowledge will bridge the many differences among governing bodies. … Both customers and manufacturers have learned to factor life-cycle costs and long-term plans into their decisions.
The priorities of the new technology-based elite include access to larger groups of customers, such as those in emerging nations. Thus, one hallmark of the coming golden age will be its global inclusiveness. Although oppression and slavery may remain widespread, the social systems that reinforced a “haves” and “have-nots” status quo, holding back economic opportunities for the majority of the human population, will give way. …
A new global economic infrastructure is emerging, built on networked, shared computing re­sources and commonly called cloud computing. … A more responsible approach to the natural environment is also gaining ground, one that advocates using energy more efficiently and re­ducing pollution, greenhouse gases, and hazardous waste. Meanwhile, innovative new service offerings will displace entrenched but inefficient medical and financial practices.
…For those who would like to continue rolling the dice of global finance, a more planned and regulated future will feel like an attack on freedom. Adding a billion new people to the global middle class will add to the labor arbitrage that has already begun to affect many lawyers, journalists, software engineers, and accountants. It will now affect professionals in health, finance, and education. …
After a couple of decades, the silicon era will grow moribund, as the oil era did before it. Sometime around 2030, there will be a silicon equivalent to the oil crisis of the early 1970s. Then a new long cycle will emerge. This one will probably be based on the technologies just emerging now: biotechnology and nanotechnology, along with molecular manufacturing (the ability to cheaply build any material from scratch). Then the pattern of frenzied investment will begin again, with another cycle to come.

Author Profile:

• Mark Stahlman is a Wall Street technology strategist who has been writing about tech-driven growth cycles for more than 20 years.

10 Trends for 2010: Piecing Together a Technology Strategy

Baseline

By Samuel Greengard
2009-12-08
Despite a brutal economy and tight budgets, organizations are making plans to deploy the technologies that are most likely to drive their business in 2010. Here are 10 business and technology trends that will help solidify those plans. …
Following are the 10 most significant technology trends for next year, based on a survey of almost 1,200 technology and business managers, conducted by Ziff Davis Enterprise Research.
1 Green Computing and Energy Efficiency
… Skyrocketing energy costs and tight budgets, coupled with growing public and government pressure, have forced companies to put this issue on the front burner. …
…Better energy auditing tools, a more thorough understanding of carbon footprints, improved engineering and design, and a developing ecosystem for managing equipment from cradle to grave all make green computing more feasible.
In addition, organizations are adopting new and improved tools for managing computers and ensuring that they’re in sleep mode when they’re not in use. Many organizations are also getting serious about training employees to switch systems off when they’re not needed.
Fisher adds that manufacturers are beginning to place data about energy usage on their products, and companies are accelerating refresh cycles to take advantage of technology advances and energy savings. …
2 Public and Private Cloud Computing
… Two-thirds of Baseline survey respondents plan to expand the use of public clouds, which reside on the Internet, provide access to shared computing resources and are operated by third-party providers. Sixty-four percent said they’re interested in private clouds, which, according to the National Institute of Standards and Technology, are “owned or leased by a single organization and operated solely for that organization.” …
Organizations are also turning to clouds to keep mobile data in sync. Apple, Research in Motion and other vendors have simplified syncing contacts, e-mails, notes and calendar items across multiple devices. …
3 Virtual Desktop Infrastructure (VDI)
…Interest in VDI is growing rapidly. The technology virtualizes a desktop and stores it on a remote central server. By making desktops and data more uniform and available—across various platforms and devices in the enterprise—it’s possible to weather a natural or human disruption with minimal downtime or loss in productivity. …
4 Mobility, Telecommuting and Virtual Meetings
…Wireless networks are becoming ubiquitous, devices are advancing rapidly, and an array of tools and technologies are making virtual meetings, collaboration and telecommuting a seamless proposition. Thirty-five percent of Baseline survey respondents said they’re expecting the use of these tools to increase in 2010. …
This connected and collaborative environment also promises to usher in better desktop video conferencing, along with more advanced telepresence capabilities. The widespread availability of high-bandwidth networks, along with more sophisticated and less-expensive technologies, makes it possible for organizations to work virtually and seamlessly. …
5 Centralization, Standards and Governance
…Baseline’s survey of IT executives indicates that 85 percent of organizations will boost their investment in governance processes and applications in 2010. Mobility, managed services, cloud computing, virtualization, Web 2.0, security, SLA management and an array of other initiatives—often revolving around more effective asset management—have prompted organizations to focus on developing better governance and standardization strategies.
In addition, businesses find themselves facing a growing array of government and industry regulations. As a result, governance, risk and compliance (GRC) play an important role in corporate strategy. …
6 Knowledge Sharing, Business Intelligence and Social Networking
…Web 2.0—including blogs, wikis and social networking—has transformed the landscape and made knowledge sharing a reality. At the same time, XML-based tools and service-oriented architecture (SOA) components have made it easier and simpler to share documents and data.
… More than two-thirds of Baseline respondents indicated increased interest in social networking at their firms, and 60 percent said their companies are gravitating toward knowledge and document management applications. …
In some cases, organizations are adapting social media and combining these tools with business intelligence to provide real-time analytics on how data, information and knowledge are flowing throughout the organization—and beyond. … Other enterprises are tapping social media to assemble teams, document practices and expertise, and to identify subject matter experts who would have fallen between the cracks in the past. …
Meanwhile, many other organizations are using social networking to handle everything from sales to customer support.
7 Security, E-Discovery and Business Continuity
Cyber-security, business continuity and managing risk are all core issues for any organization. Although the Internet and increasingly sophisticated technology have created enormous business opportunities, the risk of a security breach and the threat of downtime are growing. Worse, the cost of a failure can prove catastrophic. …
Unfortunately, as the calendar rolls over to 2010, this laissez-faire attitude about security and other risk-oriented issues—including business continuity and e-discovery—could prove costly. Baseline found that 70 percent of companies expect little or no significant investment in security, and 71 percent expect little or no significant investment in business continuity. …
8 Advances in Application Infrastructure
…One of the biggest trends is the widespread use of open source code. From running operating systems to handling Web programming, it has changed the face of computing.
…Baseline found that 22 percent of IT executives expect increased investment in application infrastructure next year.
At the same time, Manes sees ongoing interest in software as a service, SOA and business process management. Major enterprise applications are also opening up through APIs, and many of them are moving into the cloud as well. Not surprisingly, mainstream software providers are tweaking and adapting their applications to keep pace with the growing demand. …
9 Investments in Hardware Infrastructure
…To be sure, organizations are looking to step up hardware and networking investments. Approximately 43 percent of respondents to the Baseline survey plan said they expect their companies to spend more on hardware, and 42 percent said their firms will increase spending on storage or storage systems.
In addition to virtualization, organizations are looking at Fibre Channel over Ethernet to build a more unified computing infrastructure. They’re also seeking more advanced management tools and investigating ways to integrate cloud computing into the internal IT environment.
An emerging trend is the use of solid-state drives, which offer greater dependability and energy savings. …
10 Collaboration, Workflow and Productivity
…The extension of productivity and workflow to the mobile environment is a huge trend. Thirty-five percent of Baseline survey respondents said that mobility systems will expand at their company in 2010. …
In fact, mobile access to SharePoint, BI, reporting dashboards, document viewers, databases and CRM apps is fast becoming the norm. …
Document and file sharing are advancing in other ways, too. About 25 percent of the survey respondents said that workflow apps will be more prominent at their companies. Thanks to technologies such as SharePoint and Adobe Flex, paper and static forms are bowing to workflow automation, data capture, e-forms, e-signatures and collaboration tools. …
How We Conducted the Research
A two-stage study was conducted for this article by Ziff Davis Enterprise Research. In the first stage, 300 technology and business professionals and managers involved in technology at organizations of all sizes were polled using an open-ended questionnaire. …
These responses were then analyzed, so that the trends that were mentioned most often could be tested in the second, quantitative stage of the study. The trends list arising out of the first stage was supplemented with input from the editors and experts to ensure completeness and clarity. In the second stage, a multiple-choice questionnaire was fielded to 878 technology and business managers in firms with at least 100 employees: 248 in firms with 100 to 499 employees, 398 in firms with 500 to 9,999 employees and 232 in firms with 10,000 or more employees. Of the 878 respondents, 230 had vice president or higher titles, 236 had director titles and 412 had manager titles.
The second-stage survey asked a series of questions about each trend in order to gauge the relative strength of each, as well as the chief factors that might be driving or potentially hindering it. The trends covered in this story are the 10 that received the strongest results because of widespread adoption, intense (highly committed) adoption or both.

Consumer misconceptions abound about funding long-term care

Life Insurance Selling

• Paul Hogan

Published 12/2/2009 
…[According] to a recent Home Instead Senior Care study … conducted by the Boomer Project (www.boomerproject.com) among 166 seniors and 444 adults, revealed that both seniors and adult children would use Social Security and Medicare to pay for senior care. The truth is, neither of these options is a viable funding mechanism for long-term care. The study participants were less likely to identify those sources of funds typically used to pay for senior care such as personal savings and retirement plans. …
“The reality is the best-laid retirement plans will be wiped out by a long-term care event,” Bill Comfort, a long-term care insurance specialist, broker and trainer who owns Comfort Assurance Group in St. Louis,says. “People fail to consider the extra costs associated with a long-term care disability in retirement, and that nothing will pay for the kind of care they want except their own money.”
The idea that Medicare and Social Security will pay for senior care is rooted in the misconception that … a government entitlement program … will cover such costs. “Many people do see the government taking care of disabled seniors in nursing homes,” Comfort says. “…Medicare only covers short-term acute and rehabilitative costs. When a nursing home is needed, Medicaid — a ‘means tested’ welfare program designed to help the poor of all ages — will pay. But that’s only when a senior has exhausted almost all of his or her own resources. And Medicaid generally pays only for care where a senior least wants to go: A certified nursing home.”
Medicaid not only requires seniors to deplete their assets, but once qualified, they must pay any remaining monthly income, including Social Security or a pension check, to the nursing home. Medicaid only pays the difference between the senior’s remaining income and the nursing home’s monthly charge. …
Comfort relates a story about a client who pays for long-term care insurance for her father as a result of an experience with her stepmother. “Her step-mother needed Alzheimer’s care and she qualified immediately for Medicaid. What the family didn’t realize is that they couldn’t choose the nursing home they wanted so she was placed farther away from her home,” Comfort says. “The daughter is paying for long-term care insurance now so that her father has more options if he needs care. …”
…“Growing older, which we all hope to do, will create some need for care, and that costs money…,” Comfort says. …
Paul Hogan is co-founder and CEO of Home Instead Senior Care. Home Instead Senior Care is among the nation’s largest providers of at-home care for seniors and has served more than 400,000 clients through a network of 800 franchise offices in the U.S. and 15 other countries. Hogan and his wife, Lori, are co-authors of Stages of Senior Care: Your Step-by-Step Guide to Making the Best Decisions (November 2009/McGraw Hill).  For more information, go to http://www.stagesofseniorcare.com/.

Why don’t back-office efficiency drives stick?

A granular look at back-office operations shows why across-the-board cuts make no sense.

McKinsey Quarterly

JANUARY 2010 • Marco Ferber, Jürgen Geiger, and Klaus Kunkel



Difficult economic times are spurring many CEOs to demand cuts in corporate back offices. … Yet the savings are often fleeting—we find that barely four in ten companies meet their targets one year into a cost-cutting program, and by year four fully 90 percent of back-office costs are right back where they started.
Why? One reason is that many companies pursue sweeping, top-down cuts that—while fast, easy, and seemingly fair—can unintentionally lower the effectiveness of back-office services and thereby fuel resistance among business units, many of which hire back the workers at first opportunity. To understand the risks associated with a broad-brush approach, consider the experience of a global European manufacturer’s finance group, highlighted in the exhibits in this article. This snapshot of one company’s situation is drawn from an ongoing proprietary benchmarking initiative that maps a range of back-office efficiency and effectiveness data at more than 900 companies in Europe and North America.¹
A simple head count comparison suggests that the manufacturer’s finance department is somewhat leaner than that of its average competitors, though about a third less lean than that of its most efficient one (Exhibit 1). Many COOs, CFOs, and other executives armed primarily with such high-level information initiate across-the-board layoffs, process improvements, or both. That’s a mistake. In fact, a more granular look at the efficiency of the finance department’s constituent parts (general accounting, treasury, and so on) reveals that only its revenue-management operation has a leaner head count than that of the company’s average competitors. In other words, superior efficiency in one area masks moderate inefficiency throughout the rest (Exhibit 2, left side). Across-the-board layoffs would eliminate muscle as well as fat.

Exhibit 1: A global European manufacturer did not measure the performance of the finance department in a sufficiently detailed way.

Exhibit 2: In-depth analyses reveal many opportunities for improvement within the function.
Of course, efficiency is only half of the equation. To capitalize on the potential for improvement and make changes stick, executives must also consider the effectiveness of back-office services. Here too a closer look is revealing, as it suggests that the manufacturer’s revenue-management operation, which takes fully twice as long as its rivals do to secure payment, is far less effective than its peers in managing receivables. Applying this lens to the rest of the company’s finance group suggests that its services could be 50 percent more effective (Exhibit 2, right side). The manufacturer’s executives could use that information to begin developing more accurate—and realistic—targets for efficiency and effectiveness. Simultaneously, they could probe the root causes of these performance deficits to learn where lean and other process-improvement techniques might be advantageous.
Companies miss such opportunities when they take a hands-off approach to managing back-office complexity. By contrast, top companies closely monitor both the efficiency and the effectiveness of support activities and recognize that improvements to the former need not come at the expense of the latter (a key insight confirmed by our research). In fact, there are often interdependencies between the two. Greater effectiveness can even contribute to higher efficiency. Within the finance function, for example, paying more attention to the creditworthiness of customers and setting shorter payment cycles (effectiveness gains) help reduce the need for write-offs and make posting to accounts more straightforward (greater efficiency).
Mastering such interdependencies across the breadth of a company’s back-office operations pays big dividends. … Moreover, greater transparency allows companies to make better offshoring decisions and to integrate back-office services more closely with core businesses, improving productivity in adjacent areas—all while helping to ensure that operational improvements stick.

About the Authors

Marco Ferber is an associate principal in McKinsey’s Stuttgart office; Jürgen Geiger is a principal in the Düsseldorf office, where Klaus Kunkel is a consultant.
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Notes

¹ The data include employment figures, as well as various effectiveness metrics for 920 companies in Europe, North America, and elsewhere. The study spans a range of industries (automotive and assembly, banking, basic materials, consumer goods and services, among others) and includes all major general and administrative functions (for instance, data processing and IT, finance, HR, marketing, purchasing, and real estate). When possible, we break the functions down into subfunctions, such as employee benefits (HR) and accounts receivable (finance).

Indemnification Garrotte

PLANSPONSOR.com

Are you indemnified for a fiduciary breach? 
…The beginning of the year is a good time to examine or assess your indemnification and insurance coverage. It … appears that the position recently taken by the Labor Department … has put into question the ability of plans … to indemnify plan fiduciaries in instances where there has been an allegation of fiduciary breach. …
In one recent 9th Circuit decision, the court actually admitted that prohibiting the advancement of attorneys’ fees created difficult hardships for fiduciaries who are trying to defend themselves. Nevertheless, the court concluded that advancement was precluded and the defendant trustees would have to fend for themselves. …
Moreover, it gets worse. We had always thought that, while the provision of indemnification by a plan is tricky, primarily because “plan assets” are being used to defend fiduciaries of plans, indemnification using corporate funds would not be subject to the same level of ERISA scrutiny. However, in some recent cases, courts have been willing to go much further and actually impose fiduciary responsibility on decisions not directly involving plan assets. In that 9th Circuit decision, which involved an ESOP, the appeals court said that, while decisions relating to corporate matters generally do not fall within ERISA’s purview, where an ESOP fiduciary also serves as a corporate officer or director, “imposing ERISA duties on business decisions” does not “seem unworkable.” …
In summary, I am worried that, in cases involving a Labor Department investigation and the like, the agency or plaintiffs around the country will now try to cut off the payment of legal fees for plan fiduciaries from a company’s assets because such payment would adversely affect, albeit indirectly, the financial strength of the plan. If other courts jump on this bandwagon, continued reliance on corporate indemnification by fiduciary members of plan boards of trustees or investment committees will be undermined.

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Stephen M. Saxon is a Partner with the Washington-based Groom Law Group. Groom is one of the preeminent employee ­benefits firms in the country. Steve and his colleagues have worked on virtually every major legislative and regulatory initiative affecting employee benefits since the enactment of ERISA.
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