Profiting from poverty

The new federal government has been remarkably silent on the state of the economy since winning office. I suspect most Australian business leaders are now simply relieved that the relentless media reports of “economic crisis” have ceased, and are thankful that the quotes are now being turned back, both economically and nautically.

In this void of economic discussion, the Productivity Commission has released important research into the impact of ageing on the Australian economy and workforce. The Productivity Commission is projecting that labour productivity growth is likely to average 1.5% from FY2013, and that real disposable income growth is likely to be 1.1% per annum, rather than the 2.7% Australia has managed on average over the last 20 years.

Aust Productivity commission report into aging 2013
Australian Productivity Commission report into aging 2013

The reasons are related to population demographics, and the fact that while Australia’s population is growing due to our current high immigration levels, it is not growing anywhere near fast enough to slow down the rapid ageing of our population. Health and welfare cost increases are being projected to require an additional 6% of GDP over the next 50 years, purely as a result this demographic shift.

At the recent annual dinner of the Australian Chamber of Commerce and Industry, Tony Abbott outlined his government’s immediate business priorities, describing his paid maternity leave initiative and 24 x 7 private childcare as key reforms for improving workplace productivity and overcoming the shrinking workforce.

Tony Abbott opened his speech with his economic vision, saying that “You cannot have strong communities without strong economies to sustain them and you can’t have a strong economy without profitable private businesses.” He later claimed that “Almost everything this government does is directed towards making doing business easier – because that leads to more jobs, higher wages and greater prosperity.”

In terms of the scale of the workforce supply challenge that Abbott is claiming to address, the Productivity Commission report indicates that in 2012 approximately 14% of Australians are 65+ years old. In 2050, 20% of the population is projected to be 65+.

According to ABS employment figures for August 2013, the average number of hours worked each week by Australians was 40 hours for males and 31 hours for females. These hours are almost identical to the figures from 1990, and have been steady every year in between. It is worth remembering that modern formal child care arrangements and funding were introduced in 2000, and appear to have had no noticeable effect on hours worked for either females or males.

While the new federal government’s economic policy trajectory is now starting to move beyond three word soundbites and marketing fluff, it is becoming clearer that deflation and economic stagnation are starting to seriously undermine the economic policy foundations of “small government” trickledown economics in other countries.

Japan has faced many years of deflation and economic stagnation while dealing with the social problems caused by a rapidly aging workforce. In many ways, Japan is already experiencing the dire economic scenarios projected by the productivity commission for a rapidly aging Australia.

According to OECD research, the average GDP produced per hour worked in 2012 was $40 USD for Japan, $53 USD for Australia, and $62 USD for the US. To put that into context, Germany achieved $58 USD and France $60 USD.

The economic pain in Japan has finally generated a willingness to address structural economic issues, returning ultra-conservative Shinzo Abe as prime minister to carry out sweeping economic reforms. Those reforms have included large rises in the minimum wage, arm twisting businesses to pay their employees much higher wages instead of hoarding profits, and using quantitative easing and other measures to achieve a huge devaluation of the Yen.

Abe expressed the “conservative” shift in economic policy quite bluntly, saying that “I don’t buy the concept of corporations against individuals. Many people work at companies to make a living. If revenues rise at corporations, they can share it by raising wages”.

The fundamental premise behind Japan’s conservative government policies is simple. Japanese businesses will not hire people or invest when consumer demand is not high enough to generate a return. Higher levels of consumer spending create higher revenues for businesses, and generate more tax revenue to pay down debt and fund government services.

Japan’s situation is particularly interesting because their highly educated workforce has lived with an incredibly low minimum wage for decades, equivalent to roughly $8 AUD per hour. Earlier in 2013, even Thailand increased their minimum wage to roughly $10.50 AUD per hour. The Japanese minimum wage is so low that citizens can earn significantly more than the minimum wage by simply not working.

While workforce poverty is nothing new, it is starting to become embarrassing for a number of G20 nations. It is now becoming quite clear that low US minimum wages have led to sharply increased demand for US government welfare, and that many of the largest US corporations are the direct beneficiaries of that welfare expense.

In a recent Berkeley University research study, it was estimated that roughly 73% of American welfare recipients are members of “working families” whose household income is simply not high enough to cover their basic life needs.

Berkeley University estimates that the US government provides $7b each year in welfare assistance to families of workers in the US fast food industry, because their wages are too low to meet their most basic needs. This is effectively an industry wide wage subsidy to the highly profitable fast food sector, as more than half the families of US fast food industry workers (working 40+ hours per week) currently receive direct government welfare to provide for their most basic needs.

The health impacts of US “food stamp” programs have also been dramatic, with cheap junk food often the most affordable option for welfare recipients, which has been linked to dramatic increases in obesity and diabetes rates amongst working families on the minimum wage.

Bloomberg - US Food Stamp enrollments
Bloomberg – US Food Stamp enrollments

A number of the largest junk and processed food manufacturers are also aggressive lobbyists for the expansion of the US “food stamp” program. Kraft has acknowledged that roughly 12% of their revenue comes from US “food stamps”. Yum foods, who operate KFC and Pizza Hut, have unsuccessfully lobbied for many years to be approved outlets for food stamp spending.

The net effect of these long running US policies has been a shift in costs, from private sector wages to direct government welfare programs, and ultimately to government health programs. Despite the well established nature of these arrangements, they are now starting to generate highly negative social media coverage, and impact on the image of some major US corporations.

Walmart is estimated to receive 18% of all US food stamp spending, which equates to roughly $14b per year, with the average Walmart employee estimated to earn $18k per year – a little more than the US poverty line. One Walmart store recently attracted negative publicity when it was discovered that their employees earn so little that they were unable to afford food for Thanksgiving, and were begging for charity food donations from their colleagues and customers.

McDonalds also recently faced social media ridicule when their HR department advised an employee struggling to pay bills to enrol in government welfare programs and find a second full time job.

Consumer spending makes up roughly 66% of US GDP, and is currently growing at an anaemic 1.5% per annum. Perhaps it shouldn’t be terribly surprising that the US federal government is attempting to lift the minimum US wage to $10 USD per hour, justifying the move based on projected welfare savings and increased consumer spending.

If anything, the last 20 years of government policy in Japan and the US have been the golden years for trickledown economics amongst political parties and business lobbyists, and have enabled the economic analysis of the effect of low minimum wages on national economic performance.

Australian business leaders should be focusing on improving business productivity, rather than simply measuring wages. Our workforce is rapidly aging, and retention and retraining of employees should be a critical priority for many businesses. The lessons from the decades of low minimum wages in Japan and the US are only now becoming clear, with corporate dependence on welfare spending emerging as a very serious political issue.

Death of the retail salesman

2013 has been another tough year of transition for many retailers, with major Australian retailers such as Billabong, Lisa Ho, and Payless Shoes all paying a high price for poor management decisions. The rising volume and value of e-commerce transactions has started to impact the retail property landscape, and promises structural change and pain for many retail property owners.

Shopping is clearly an essential part of modern existence, but then so is putting out the bins for council recycling. Necessity clearly isn’t enough to generate retail enthusiasm and profitable repeat business in a retail landscape overcrowded with options. So retailers stuff our letter boxes and inboxes with discount offers, putting considerable effort into convincing us to merely visit their virtual and physical stores.

The slow motion train wreck of the 2013 election campaign has already been widely blamed for poor retail spending. As you might expect, the National Retail Association and the Australian Retailers Association both jumped on the latest ABS retail figures to claim that confidence and retail sales were already showing signs of improvement due to the change to a stable, business friendly federal government.

ABS Retail Turnover Aug 2013
ABS Retail Turnover Aug 2013

These attempts by retail lobbyists to link poor retail performance with election campaigns certainly generate a lot of media reporting, but fall apart under scrutiny.

Australian Bureau of Statistics retail sales figures have shown that retail spending has been trending sideways now for most of 2013, after solid growth in 2011 and 2012. August 2013 figures show very flat retail spending across most product categories.

Australian’s were inundated in 2011 and 2012 with almost non-stop media speculation of the imminent demise of the Federal minority government. Australia has effectively endured a three year long election campaign. Strong ABS retail figures for 2011 and 2012 contradict the theory that constant media reporting of government instability and negative electioneering have a huge impact on retail spending.

An economic analysis by Goldman Sachs published in 2013 looked at the impact of Australian federal elections, and found that election campaigns actually lift retail spending, with a decline usually occurring immediately after an election.

The election campaign with the clearest post election boost on retail spending was the 2007 election, where Kevin Rudd deliberately provided cash handouts to Australian families, in an attempt to pump prime the economy in the midst of the global financial crisis.

Goldman Sachs - Effect of Election Campaigns on Retail and Consumer Confidence
Goldman Sachs – Effect of Election Campaigns on Australian Retail and Consumer Confidence

In case you were wondering whether it matters which political parties are involved, in October 2007 when John Howard set the election date, retail lobbyists warned that sales of household goods would dry up, or at best be delayed during the election period. With the luxury of hindsight, we can now see that the ABS figures for November 2007 household goods retail spending were strong both before and after the election.

Politicians and election campaigns are clearly not the core issue facing struggling Australian retailers. Many of the key problems facing Australian retailers are self inflicted, and related to a lack of innovation.

Inside Retail recently rated Big W, The Iconic, Sportsgirl, and Deals Direct as the top Australian e-commerce sites, and eBay and Amazon as the top international sites servicing Australian customers. Woolworths proudly announced in their recent corporate results that Big W is Australia’s largest domestic online retailer, with 42% growth in online sales in FY2013.

Most Australian retailers are however still just operating on a small scale online, using a modern version of catalogue and mail-order retailing.  It appears that we are however finally experiencing a period where major Australian retailers are implementing serious e-commerce capabilities.

Woolworths is projecting that online sales for Big W will reach $1b in FY2014, or roughly 22% of revenue for the division. This target is ambitious given their previous performance online, and shows enormous optimism. It is comparable to the online revenue benchmarks being achieved by top performing major bricks and mortar retailers in the US, such as Neiman Marcus. As a point of comparison, JB Hi-fi, Specialty Fashion Group, and David Jones all achieved online sales of less than 4% of their overall revenue in FY2013.

In terms of the transition to e-commerce revenue streams, major US bricks and mortar retailers are typically three to five years ahead of major Australian retailers, and have already substantially re-engineered their businesses to place e-commerce at the centre of their customer offering. There is widespread deployment of “click to collect” sales models, in-store purchasing of out of stock items, and even same day delivery in major urban areas.

In the US and China in 2012 and 2013, Kantar Retail pricing studies have shown that in-store prices for some product categories are already considerably lower than online prices. Bricks and mortar retailers are already taking advantage of the many opportunities they have to sell additional high margin products to a person who is in-store, allowing them to reduce prices below levels achievable online. In some cases retailers are already systematically undercutting their own online prices for their in-store offerings.

Mobile phone technologies are now also offering major new opportunities for e-commerce to occur in real-time wherever a customer might be. PayPal has been attempting to shoe-horn their way into shopping centres for some time now, and has recently continued that push with an interesting technology called Beacon. Beacon relies on a PayPal app being installed on a person’s phone, which then automatically communicates the shopper’s details to the retail point of sales computer system when a person enters a store.

PayPal’s new concept obviously creates the potential for creepy new invasions of personal privacy, while also offering new sophisticated customer service opportunities for businesses. The concept allows for customers to automatically “check-in and pay” by simply walking into the store. The pitch to consumers is “No cash, no cards, no signatures required”. It could perhaps just as easily be “Buy stuff without dealing with pesky staff”.

Samsung POS display
Samsung Australian POS display – source: Current.com.au

Not every in-store innovation is quite so intrusive or high tech. Samsung recently received a number of Australian industry awards for their in-store point of sale marketing.

Rather than relying on stunts or complex technology, Samsung showcased product ranges in dedicated displays, with strongly themed and relevant multi-media explaining the “story”.

According to Samsung, this lifted average sale price, and reduced the need for discounting. When a store is busy and customers can’t find sales staff, “it’s the dynamic point of sale material that does the silent selling”.

Retailers are clearly not the only businesses that are facing a bumpy transition to a more e-commerce focused world. But retail leaders have traditionally achieved business growth via opening new stores, while running very labour intensive operations. The future returns and viability of these traditional retail strategies are far from clear.

The Internet and powerful mobile phone applications have already had major impacts on suburban and inner-city lifestyles. Customers might not always be right, but they need to feel they are the centre of retail attention. Retail leaders should re-build their offerings around the changing lifestyles of their customers, and focus on embedding innovation into the core of their businesses.

Cloud computing faces a clear and present danger

Trust and paranoia seem to walk hand in hand in business. Many organisations walk a fine line between trying to entice customers with a pleasant experience, and protecting their assets.

Companies like Facebook, Google, and Apple have spent billions building their reputations around a particular style of customer experience, that is easy to understand and enjoy, and perhaps even indispensible to customers.

At their core, these interactions rely on the customer deliberately sharing some information to gain a better experience, and trusting that the organisation will keep that information safe.

Now consumers and businesses clearly have very different needs when it comes to technology services, and different legal responsibilities around the sharing of information. Many business have enthusiastically embraced consumer style cloud services, for their own customer interactions, and their internal workflows and IT operations.

This major shift towards cloud services has happened almost entirely in parallel with the “war on terror”. I think many Australians are almost immune to the political chatter surrounding the “war on terror”, and don’t truly consider themselves to be at war. The monotonous wartime rhetoric of politicians in both Australia and the US does actually serve a purpose.

In 1919, an American legal precedent was set in Schenck v United States, determining the basis for situations where the government could overrule constitutional rights, freedoms, and free speech.

“The question in every case is whether the words used are used in such circumstances and are of such a nature as to create a clear and present danger that they will bring about the substantive evils that the United States Congress has a right to prevent.”

“It is a question of proximity and degree. When a nation is at war, many things that might be said in time of peace are such a hindrance to its effort that their utterance will not be endured so long as men fight, and that no Court could regard them as protected by any constitutional right.”

The recent series of Snowden revelations published by the Guardian are just the latest confirmation of a long series of technology based intrusions into the private affairs of individuals and businesses. These intrusions have been justified largely due to the clear and present danger invoked by the “war on terror”.

XKeyscore map
Guardian: Snowden revelations of NSA XKeyscore surveillance capabilities

Snowden is certainly not the first whistleblower in this area, but he is the first to attract more than a few moments of attention amongst mainstream news journalists.

Company directors clearly need to comply with the legal environment their organisation operates within. When a government entity invokes powers to silence company directors about breaches of customer privacy and copying of intellectual property, directors are clearly placed in a truly precarious legal position.

Especially when those directors could be subject to legal proceedings instigated by a party that suffers a loss or damage as a result of data disclosure.

Google is perhaps the most obvious public example. In 2009 and 2010, Google sought worldwide attention announcing that they and several other US IT firms had been attacked by Chinese hackers. The impact of that public disclosure was very significant. It has recently been suggested by a Microsoft employee that those very same attacks were actually targeted at the technology mechanisms used by the NSA to directly access Google and Microsoft customer data.

It is worth remembering that the directors of a number of US based telecommunications companies demanded and received retroactive immunity from prosecution for their participation in NSA surveillance programs. Given Snowden’s revelations of Australia’s deep and active participation in these US NSA surveillance programs, it will be interesting to see whether Australian company directors will ever be extended the same immunity to legal prosecution.

ITIF_US_cloud_losses
ITIF – How much will PRISM cost US cloud services providers Aug 2013

The “war on terror” is a political reality for both Australia and the US, and business leaders clearly need to more broadly consider the risks involved in working with cloud service providers. Cloud services and offshoring style outsourcing arrangements can be a contractual minefield. They are made more complex when the provider is a multinational that operates infrastructure located in multiple legal jurisdictions. Contractual and legal complexities can clearly be simplified when services and infrastructure are located entirely in Australia, and provided by an Australian company.

US based cloud services providers are already seeing some backlash against the use of their products, with German government ministers advising citizens to stop accessing US based websites and cloud services if they don’t wish to be spied upon. The US based Information Technology & Innovation Foundation has projected that US cloud services firms will lose $22 to $35b USD worth of services revenues over the next few years, as businesses place greater focus on data security concerns and risk management.

There is no current end in sight for the “war on terror”. Many organisations have built workflows and asset protection strategies based upon incorrect assumptions surrounding the privacy and confidentiality of their corporate communications and data. Business leaders should carefully re-evaluate risks, and the clear and present danger to their confidential data and customer privacy.

The double bind of sexism

Sexism is a cultural challenge that is entrenched in many Australian businesses. It is completely counterproductive, as many businesses are currently struggling to attract and retain talented people in a very competitive market.

Women outnumber men in Australia and have high workforce participation rates. The Australian Bureau of Statistics regularly calculates the sex ratio – which measures how many males there are per 100 females. In the most recent reporting period, Sydney and Melbourne’s wealthiest urban areas were shown to have some of the country’s highest proportions of women – with 94 men for every 100 women in North Sydney and Melbourne’s inner south.

Sexism can be overt behaviour by individuals, or embedded in the cultural assumptions and work practices of a business. Whether or not you directly spot it occurring in a workplace, you can certainly measure the outcomes it produces.

2012 Australian Census of Women in Leadership
2012 Australian Census of Women in Leadership
Female Executives within ASX 500 companies

The 2012 Australian Census of Women in Leadership report shows that a mere 9.2% of key management executives at ASX500 companies are women. This compares with 14% for US Fortune 500 companies, and 19% for companies in the New Zealand NZSX100. The ASX500 companies with the highest proportions of female executives are in pharmaceuticals, telecommunications, retail, and transport.

The disparity in achievement within the public sector is striking, with women comprising 35% of all directors across government boards at a federal level. 56% of ASX500 companies have no women at all on their board of directors, and 63% of ASX500 companies do not have any women in key executive roles.

It is quite clear that few Australian businesses are seriously addressing the sexism embedded in their workplace cultures.

One of the most interesting recent academic reports into the underlying factors causing the gender “glass ceiling” was published by Terrance Fitzsimmons from the University of Queensland Business School, titled “Do Australia’s top male and female CEOs differ in how they made it to the top?”. Drawing upon the results of a large number of previous academic studies, Fitzsimmons outlines the “double bind”, a core dilemma faced by female leaders who make it to a position of power.

In a nutshell, female leaders are viewed negatively by their direct reports when they are consultative, and also when they are assertive. In contrast, male leaders are perceived as more competent when exhibiting exactly the same behaviours. These perceptions can be seen played out in the daily media reporting of the federal election battle between Julia Gillard and Tony Abbott.

In response to the failure of the business community to improve female participation at leadership levels, some commentators have started openly demanding legally enforceable gender quotas for businesses. While binding targets are not likely to be introduced by any Australian government in the short term, the federal government have introduced several measures to combat workplace sexism and gender discrimination, with the most noticeable being the Workplace Gender Equality Act 2012. The main thrust of this federal legislation is to promote transparency, equal opportunity and equal pay in the workplace.

Workplace culture has a very significant effect on employee productivity, innovation, and retention. The entire organisation can greatly benefit from a culture that is more cohesive, flexible, and diverse. It is also crucial to remember that women are not the only people facing discrimination when applying for promotions within a business. People with disabilities, members of the LGBTI and Indigenous communities, and even older workers face very serious prejudice in recruitment processes.

Workforce recruitment and retention programs within many ASX500 companies are clearly failing. Business leaders need to lead by example, immediately speak out against sexism when it occurs, and take personal steps to ensure they hire, mentor, and promote a diverse range of people within their teams.

Homeless multinationals and taxing decisions

The digital economy has generated many changes in how we shop, stay in touch with friends, and manage our daily routines. Despite this, it seems that politicians around the world are only just starting to realise that the digital world has truly changed the economy.

The recent Australian federal budget was the usual mix of promises and projections. One of the more interesting facts presented was the Treasury estimate that since the 2008/2009 budget, federal government revenues from tax receipts have fallen by $170 billion dollars.

When it comes to tax revenue and government budgets, there will always be some level of political debate. It is now pretty obvious that traditional sources of government revenue are now insufficient, even when the Australian economy is powering ahead strongly. Particularly when you look at the backlog of infrastructure investments needed to keep the economy productive.

Painting by Carl Barks
Painting by Carl Barks

Whichever politicians end up running the country after the September federal election, there will be some very tough decisions to make on taxation.

In an interesting coincidence, the announcement of the shortfall in tax revenue has coincided with Treasury bureaucrats kicking off consultations regarding the tax treatment of multinationals doing business with Australians.

At first blush, the multinational taxation consultation process seems to be a rather belated reaction to major political rumblings aired in the G20 and OECD. The issue that is generating the angst is “base erosion and profit shifting” (BEPS), a rather dull way of saying tax avoidance.

BEPS is seen as a global issue worthy of the attention of the G20 for one simple reason – it is entirely legal, and can be used to avoid almost all corporate income taxes.

Businesses that are able to transact with clients online across international borders are the most likely to be able to profit from BEPS, but it is certainly not the only way corporate leaders minimise tax bills.

The UK parliament has recently been examining in minute detail how Google’s internal employee workflows have been structured to shift the legal location of a business transaction. The inquiry heard that despite employees, clients, and work occurring in the UK, Google has successfully claimed that business transactions are legally based in a foreign country.

Amazon has also recently received a huge amount of negative media attention for their UK tax affairs, which seem at face value to be far less adventurous than Google’s. Amazon is reported to have paid just £2.4m in UK corporate taxes last year on sales of £4.3b, while also receiving £2.5m in UK government grants.

But the biggest revelations to date have been thrown up by the US Senate, which recently grilled Apple CEO Tim Cook. The inquiry heard claims that a single Apple owned entity reported profits of USD $30 billion between 2009 and 2012, with no country receiving any tax on that income. Another separate Apple entity managed to pay a tax rate of 0.05% on $22 billion in revenue for 2011.

Perhaps the most important revelation has been that major entities used by Apple to conduct their worldwide business were described as “homeless” for tax purposes, with no country able to collect tax on their corporate income. This “homeless” status undermines some of the most fundamental principles underpinning the international tax and trade treaties relied upon by OECD and G20 nations.

Now business leaders are of course supposed to focus their attention on generating profits and pleasing shareholders. Minimising corporate tax bills can be an effective way to boost cash flows, profits and shareholder returns.

CEO bonuses usually depend entirely on achieving profitability targets and increasing shareholder returns. So it should be obvious that corporate leaders will structure business workflows and organisational design to maximise their bonus.

The result can be bizarre workflows spanning multiple international corporate entities and legal jurisdictions. When tax considerations trump customer service in decision making, it can make high quality customer service very difficult to deliver, and consumer rights unclear. In this digital age, corporate reputations can be quickly tarnished, and very expensive to repair. It has never been easier for the public to learn the financial affairs of large corporations.

Multinationals usually base major operational centres in locations which offer high quality infrastructure and workforces, all of which depend on a stable social environment with sophisticated government services.

If there is no government funding for infrastructure, crime prevention, education, or healthcare, then someone else will end up paying the price. There is a very good reason why there are so few successful multinationals headquartered in third world countries.

While BEPS is currently attracting media scrutiny, it remains to be seen how much impact that attention will have on actual corporate behaviour. While executive KPIs reward elaborate tax avoidance strategies, there will be little chance of corporate driven change.

On the other hand, politicians can always change the rules of the tax game. The international scale of the BEPS problem is already monumental, and politicians of all stripes are going to need corporate scapegoats to deflect inevitable community anger. Now is the time for corporate leaders to rebalance the risks they are taking with their tax affairs.

Big Data, Little Innovation

IT infrastructure spending has experienced a rough patch over the last few years, with many large Australian businesses slowing down their investments in new technologies. Cloud services have made inroads into many enterprise and government organisations precisely because of this drying up of internal investment in both skills and infrastructure.

Big Data is one of the latest technology bandwagons. The Australian federal government has even recently issued a round of consultation around the potential use of Big Data within Federal agencies. Big Data is essentially a philosophy, where an organisation systematically performs widespread continuous data collection and analysis, measuring and examining actions across an organisation.

Bendix G15 - 1955
Big Data marketing in 1955

Many technology firms and analysts are spruiking Big Data as a wonder technology that will make or break business fortunes. To describe Big Data as overhyped is certainly understating the situation.

A media frenzy has already emerged, as it is easy for journalists to draw links between the use of Big Data within businesses, the now widespread collection and sharing of sensitive personal information on websites like Facebook, and the proliferation of smartphones that can surreptitiously measure and report almost every aspect of our lives.

So it should hardly be surprising that the Australian federal government feels the need to consult on this topic. There are existing legal protections for the privacy of individual citizens, and restrictions covering the sharing of information between government departments. The timing is however quite ironic, coming within days of technology consulting firm Gartner finally proclaiming that the Big Data technology emperor has no clothes.

Big Data marketing in 1966
Big Data marketing in 1966

While there are clearly some elements of new technology to be found amongst the latest Big Data hype, even the most casual look back through archives of computer marketing material from the 1950s and 1960s reveals a simple truth. Large scale data analysis (Big Data) has always been one of the primary selling points used to justify investment in  business computers. Even the ill fated high profile release of the Apple III in 1980 used data analysis as a primary selling point.

At many large businesses, the board and senior executive teams started investing heavily in these visionary “Big Data” style analysis capabilities in the 1980s. A particularly interesting example of Big Data hype repeating itself is this 1986 marketing brochure for a pattern recognition computer that “scans whole databases” and “handles words and pictures as easily as numbers”. The specific technologies being spruiked may differ, but the claims are extremely similar to those being touted for the latest Big Data technologies in 2013 by vendors such as IBM, Oracle, and EMC.

These strategic concepts are not new at an executive level, and the business outcomes being touted by today’s Big Data spruikers promise little more than the technology visions of the 80s. At a board level, every time a CIO goes back to the piggy bank for a new investment to solve the same old problem, the focus immediately shifts to the CIOs credibility.

Big Data marketing in 1986
Big Data marketing in 1986

At a very fundamental level, all Big Data initiatives are supposed to uncover a stream of fact based insights to inspire new efficiencies, improved business processes, or product innovations. In their most recent research into Australian business innovation, the Australian Bureau of Statistics found that only 16.4% of Australian businesses introduced new operational processes compared to the year before.

In the same period, 17.3% of businesses introduced new products, and a total of 39.1% of all Australian businesses claimed to have made an innovation or process change of any type.

The report found that the top Australian industries carrying out innovation were Wholesale Trade (51%), Retail (42%), and Professional Services (40%). This should not be surprising, as these industries are all facing intense competitive pressures caused by the widespread adoption of e-commerce, and changes in the Australian dollar exchange rate.

Research and development is of course a separate issue, with the ABS reporting that private sector R&D is currently 1.3% of GDP. While the mining industry gets a lot of media attention, the largest sector for R&D investment has actually been manufacturing. 80% of all private sector R&D dollars spent in Australia came from businesses in manufacturing, mining, financial services, and professional services. The government also spends very significantly on direct R&D, with most of that R&D spend going directly to universities.

ABS - Proportion of Innovation Active Businesses reporting lack of funds as an impediment to innovation 2010-2011
ABS – Proportion of Innovation Active Businesses reporting lack of funds as an impediment to innovation 2010-2011

By dealing with Big Data as a technology issue, CIOs and the organisations they work for are setting themselves up for failure.

When examining impediments to innovation, the most recent ABS report found that amongst companies that actively innovated, lack of funds was the primary roadblock to innovation, followed by lack of skilled labour.

Data insights need to be translated into actionable change that is implemented, resulting in modified behaviour and improved operations.

In an idealised scenario it becomes a continuous process of iterative innovation, sparked by data based insights and experimentation. The differences between the 1950s and 2013 simply boil down to the sources of the data points, the level of automation, and the amount of information that can be realistically stored and analysed.

In my experience, most large organisations struggle to build and maintain a culture of innovation. Primarily because they have complex supply chains, well defined business processes, and a large hierarchy of stakeholders. Put bluntly, change usually takes a lot of time and leadership attention.

For an insight to be useful, it must be rapidly turned into change. Large organisations that successfully innovate often chose to focus on small discrete projects, which are limited within a single division, or focused on a vertical slice of workflow. By limiting the scope, risks can be better understood, more focus placed on customer needs, and decision making processes sped up.

This is precisely why decades of data analytics projects have been focused in narrow areas of interest within organisations. It was not a technical limitation, but a consequence of the way people interact within large organisations.

Leaders need to consider how much capacity there is for innovation within their organisations. While the internal workplace culture of the organisation can have a huge impact on innovation, supplier contracts and technology infrastructure may also limit the ability to rapidly make meaningful changes.

The returns from Big Data projects can be expected to flow from the innovations and minor changes that are actually implemented. Fostering a culture of innovation within an organisation is a complex long term project. If there is little opportunity to quickly adapt products, change workflows, or respond to a weekly flow of insights, then there will be little return from a Big Data investment.

The demographic disaster facing public sector budgets

By and large, we expect to pay taxes, elect politicians, and abide by the laws of the day. In return we expect governments to deliver the services we want. Things like easy access to good quality education, inexpensive medical services, reliable water, transport, and help when floods or fires affect our communities.

Which are all made more challenging by a simple fact – many Australians have chosen to live in places which are difficult and expensive to service.

Photo: AFP
Photo: AFP

Areas of incredibly low population density cover huge portions of Queensland, the Northern Territory, Western Australia and South Australia. Providing any level of service to citizens living in these low density areas can be disastrous for government budgets, and private businesses have little incentive to operate in these areas without government intervention.

So while geography poses many challenges today, understanding the future cost of delivering government services requires public sector leaders to project where Australia is heading demographically.

Today roughly 64% of our entire population live in the state capital cities, and that proportion has been stable since 1976. The working age population of 15-64 year olds makes up a roughly stable 67.0% of the total population.

The official population projections put together by the Australian Bureau of Statistics show an expanding population which is aging rapidly. The age group projected to grow fastest is the one for people over 85 years of age. The projections are based on assumptions of significant immigration and birth rates, and there is no reason yet to believe the projections are flawed.

Life expectancy is the reason public sector budgets will face disaster, as Australian life expectancy is projected to be 85 years for men and 88 years for women by 2056.

ABS Projections for population changes by 2056.
ABS Projections for population changes by 2056.

So without a massive increase in immigration levels, our available workforce will shrink significantly as a proportion of the population, and the elderly will start to dominate the economy.

The ABS is effectively projecting that Australia will soon be facing the same disastrous stagnation that has crippled Japan for the last 10 years. An economy faced with a shrinking workforce, rising demand for government assistance, and shrinking consumer spending.

European economies are currently projected to face even worse demographic shifts over the same timeframes.

Queensland is effectively ground zero for the demographic disaster facing the Australian public sector. Queensland not only has a very rapidly aging population, it already has very high concentrations of the elderly in the regional areas surrounding  Brisbane.

Economist - European Demographic Projections 2050
Economist – European Demographic Projections 2050

The median age in Queensland has jumped significantly in the last 10 years, and is now 36.6 years. To put that into context, New South Wales has a median age of 37.7 years, and agribusiness dominated Tasmania now has the highest median age of 40.4 years.

While Queensland has for many years benefitted significantly from net migration from other states, the bulk of those interstate migrants have been settling in the south east corner of the state. Within Queensland itself, a large proportion of young people already relocate to find work and education opportunities, with many migrating to the greater Brisbane area. These workforce age people could just as easily relocate interstate.

This clustering of the elderly will of course help the Queensland government to achieve some economies of scale, and offer the potential for significant private sector participation in service delivery. It will be counterbalanced by the need to also deliver services to communities located in sparsely populated areas, where in many cases the elderly could soon make up the largest group in the electorate.

While the adoption of shared services models and one-stop shops is quite fashionable at the moment amongst public sector leaders, they are just the tip of the iceberg of the changes needed to cope with the demographic challenges of the future.

New technologies will clearly help, with high speed Internet services offering the possibility of long term reductions in service delivery costs in regional and remote areas. The potential for savings does however depend on a willingness to invest substantially, shutting down large parts of the “branch office” network, and for consumers to adopt “self-service” models and online service delivery.

Government needs to go through the same transition that banking did in the 80s and 90s, which saw the large scale closure of branches, and the shift to ATMs and online transactions.

QLD Public Sector EmploymentPercentage of workforce 2011
QLD Public Administration and Safety Employment
Percentage of workforce 2011

I think it is a very safe bet that politicians in regional areas and the usual cast of lobbyists will ensure that these changes will not happen quickly, or easily – regardless of the political stripes of the governments involved.

This map of employment demographics illustrates why Queensland will face intense challenges. There are many regional electorates where direct  government employment makes up a huge proportion of the total workforce, and government wages and welfare are the basis for much of the economic activity in an electorate’s economy.

Poorly implemented public sector efficiency measures could potentially remove an enormous segment of economic activity from those regional economies. Queensland is not the only state with these issues, but will be likely to suffer badly compared to other parts of the country.

Public sector leaders have to work within the constraints placed on them by politicians. Politics is supposed to be the art of compromise. It will be interesting to see whether politicians compromise their desire to improve public sector efficiency, when faced with the prospect of government job cuts within their own electorates.