Tuesday, November 20, 2012

Why Insourcing IT will fail in Malaysia’s top GLCs

The rather controversial sensationalist title will hopefully create sufficient traction in readership, but before you pass judgement that this will be another negativity riddled diatribe; I promise you that I shall provide the answers to the problem statement alongside the issues, so here goes.

1) The CIO does not exist or sits 3 to 4 levels below the CEO, sometimes even below the CFO. Ultimately, the unit exists as a cost centre. Pretty much a death knell to any business unit, I’ve also heard of statements that IT should be used like “utility” and it’s a “commodity” – double ouch. Talk about watering down any semblance of pride that the CIO could have. He's no better than the cleaner's boss - that's commodity for you.

It also means that the KPIs are skewed towards punishing mistakes versus celebrating “value” that IT brings to the company.

The solution:-
Making the CIO pit boss will not change anything. Ultimately, you need dynamism, boldness and the aptitude to make IT relevant to the business. Being top dog means you get to call the shots, but if you’re shooting blanks you’ll be down the totem pole before you could yell "pull!".

Get to know the business, learn debit from credit and understand how business impact analysis is not meant to figure out Recovery Time Objective; but Business Loss/Value Outcomes (BLO).

2) There’s no means (or political will) to measure BUSINESS VALUE from IT
You’ve heard it, seen it and some of you have experienced it, the Enterprise Architecture folks have probably spent the last 2 years producing box filled diagrams with multipoint arrows and squiggly shaped outcomes that must abide by some “Principle”.

But in all honesty, nobody took the time to “measure” absolute dollar value returns from IT. I snuck in “political will” because in reality Malaysians are a shy bunch. We don’t like to call attention to ourselves, and most of all, we do not like to declare success until success is achieved. Part superstition (“my wife needs to be 3 months pregnant before I tell the world”) part playing it safe (“I might get fired if I over promise, best aim low shoot high”).

But ultimately, with power comes great responsibility. The CIO needs to put down figures “before” the IT investment, and show numbers “after” the investment. It does not take rocket science to work out productivity improvements versus hardware and software spent.

The biggest farce I’ve heard from IT thus far is -> “I’m not finance, I do not know how to count” versus the biggest farce I’ve heard from finance “I’m not IT, I do not understand IT… so I can’t count it”

The Solution:-
Mr. CEO, you know what to do; it’s about time you find replacements for both the CFO and the CIO. You’re paying big bucks for folks to run your business, not rule the playground like a bunch of kids.

3) There’s no means (or political will) period
Heard this argument enough … “IT is not our core business”. OK. I hear you.
But when I ask them “What IS your core business?”, you’ll soon realize that there’s 5 different answers from 5 different board of directors and C level executives.

When the business is schizophrenic you can bet your bottom dollar that IT will be locked up in a mental institute soon enough.

The Solution:-
Read the definition of IT -> “Information” Technology!

Business thrives on information, and decisions are made based on accurate and timely information processing. Stop spending money on data centre expansion and LAN upgrades and start focusing on the kinds of data that you need in order for you to sieve them into information; cogitate those rough nuggets and turn them into intelligence, better yet; knowledge for business consumption. All the underlying infrastructure upgrades are a by product -> NOT THE END GOAL.

If you need tacit knowledge, convert them into videos and scenario roll play sessions, if you need real time data; plunk in visualization tools with real time sensors and hire decent programmers to put the vision together.

In summary, CIOs and CTOs need to be at the driving wheel -> provided that they know what to do; more importantly, stop treating them like cost centres or like the proverbial saying – you are what you’re expected to be. Secondly, businesses need to “get real” with IT, when money is spent, return is expected, stop counting pennies and focus on business value. Lastly, the business needs to get their acts together, yes; easier said than done but there has to be an overarching leadership to drive the objectives through.

Sacred cows are meant to be slaughtered. They make good steak.


You’ve probably noticed by now that the same reasons also contribute to why Outsourcing IT fails in Malaysia… if you did, there’s hope after all for IT in Malaysia J  

Saturday, November 17, 2012

Connecting the Dots within the Business

We’ve played it before while growing up, connecting the dots. Searching for direct value for the organization applies the same principles, the business has to work out which business activity directly impacts another activity whilst being enhanced or weakened by the ones prior.
Figure 1 - Simple Connect the Dot

Unfortunately, the realities of most organizations are highly complex interchanging inputs and outputs which can only be described by the figure below.
Figure 2 - Reality of Connecting the Dot within the Organization

Like all puzzles, one needs to begin, well, from the beginning and identify the end in sight. This is where business philosophy takes several stands.
  • The Vision first
  • The People and Values first
  • Customer first

These are all well and good, but businesses by its very nature is a production engine, to create either products or services. So I take an extremely practical approach of working out how the organization’s value chain works from production to ultimately customer consumption. Porter (1985) worked it out as Value Chain, and it was soon focused towards the left -> supply side, where we have a series of findings under Supply Chain Management. More focus also occurred on the right of the Value Chain and we have Customer Demand Management and Customer Relationship Management. In the middle, there’s a litany of literature on operations efficiency, management and quality principles.

Needless to say, because of the vast array of knowledge, the company or rather the people within the organization struggle to avoid reinventing the tacit knowledge of running a great company.

Therefore, like all manner of problems that are too large, we have to break them out into chunks. But more importantly, create an immediate feedback loop to understand how one department’s actions create positive or negative karma throughout the organization. Especially those sowed by individualized performance indicators that result in a zero sum outcome. 

An overarching intelligence needs to exist in order to coalesce the corporation’s tacit knowledge and ensure its perpetuity, and this lies within the organization’s leadership and the efficiency in cascading and reinforcing findings. 

Thursday, November 15, 2012

Searching for the city's “Value Flow"

We’ve established earlier that the primordial city latches onto an elementary level of energy, i.e. food through the agriculture, the rivers, oceans as well as valuable metals in mining towns.  Initially there would be a swarm of smaller companies leeching off the primary flow of resources into manufacturing engines; unfortunately, not all of these companies will survive and oligopolies quickly take form when weaker competitors die off, leaving a few primary players to completely dominate the source.

Take away the source of “energy” and we have a stark reminder through the island of Hashima, Japan (HQ to Bond’s nemesis in Skyfall), once the most densely populated area per sq/km with 5,000 people living within a 150m x 450m area due to its coal mining operations; Hashima was soon abandoned when coal ran out in the 1970s.

Island of Hashima, Japan

Inside the abandoned city
For more on the city, checkout this blog by messynessychic.

In the modern city, the whole notion of living off a single “source” of value will lose relevance. Manufacturers can buy raw materials from other cities, and food as well as supplies can be shipped from locations where it is cheaper to grow and produce.

The following are crucial criterion in order for a city to succeed and grow.

A) The final products and services need to be exported (internal demand is insufficient)
Arbitrage has to happen – where revenue and margins returned outweighs the cost of production and manufacturing of the product. We use the term product interchangeably with services; and the raw material for services comes from people of a certain skill set to deliver the service at the quality required to succeed.
Only then can ancillary services survive to support these larger production and manufacturing businesses because they live off the excesses of the manufacturing process. More importantly, it is crucial for the ancillary services to make the primary businesses successful.

B) Decision nerve centres generates gravity between businesses
Modern cities continue to exist sans natural resources because they are headquarters, regional centres and/or country representative branches. The city then becomes an aggregation of decision making nerve centres of various productions and manufacturing organizations; and the interplay of communications and consumption between the businesses then sustains value within the city.
This is essential as the economics of logistics and communications allows cross selling of services to occur more easily. The analogy of nerve centres are used because nerve cells are clustered and strengthened the more the brains computes and uses a particular area of the brain.  
In short, people come together because everyone is there!

C) Achieving the Critical Mass of Flow
Which brings us to a conundrum, how do we achieve critical mass; within the context of artificially created cities when nothing is there in the first place; taxation policies, cheap office buildings, great logistical and communications infrastructure comes to mind including the required people power to manned the fancy empty buildings. But having all this secret sauce does not make a good restaurant without good marketing; not to mention the key to any real estate investment – location, location, location.

So city buildings have several options:-
  • Create one as an extension to the existing city, allowing the flow of value from the current city to be enhanced with the new. The Iskandar region in Johor, Malaysia is a good example as Singapore can become the staging ground to international customers. Assuming again, that the macroeconomics of Singapore can survive the tribulations of the recent economic crisis. More importantly, the satellite city needs to add symbiotic value instead of existing as a parasitic leech.
  • Stands independently and hopefully becomes a beacon to businesses and consumers. For the consumer we see entertainment and retail centres, and for businesses, the traditional attraction of the nation’s natural resources comes to light.
Regardless of the options, the global economy needs to be growing before value can flow into a new location, naturally immediate economic energy needs to start from the nation of the city. Otherwise it begets an even crucial question, would a multinational choose to relocate their business from an existing mecca to a new one considering that there are no surpluses to spill over.

D) Supplying the Soul of the City
As we strip away all the outward fittings of high tech building infrastructure and logistics, what remains are the people. The city needs to be cognizant on the type of talents that needs to populate the new environment. Are we creating and aggregating low end factory workers or are we producing planners, managers, technologists, engineers and innovators. If that cannot be sourced from the locale, the city has no choice but to lower immigration laws and allow influx of foreigners that exhibit the qualities required for the city to succeed.

It is the soul that allows value to be created, and foremost, value that are generated without resorting to siphoning the natural resources are the most admired. This can be seen from the fields of biotechnology, medicine, electronics and information technology. If the country is still stuck in the rut of manufacturing, then it must persist to continuously shave off waste and innovate to produce products that are more efficient, enduring and better than the competitors whilst being economically more competitive. The whole notion of productivity, discipline and anti-corruption is fundamental to the issue.

E) Working against the tide of technology
We have seen hints of the surging technological tidal wave in the form of teleworkers. Organizations that outsource work to individuals versus corporations; this creates a negative flow that pushes against the aggregation of people into city centres as organizations no longer require an army of individuals to be physically location together for productive work to occur. Payables processing happens offshore while receivables are directly debited from customer accounts. Payroll and tax administration gets reduced down to mere mouse clicks while legal firm from 5,000 km away tightens up the contracts.

The city of tomorrow may be smaller and stretched out versus sky scraping monoliths that extend the corporate ego. Organizations will migrate to building campuses and research centres as the focus shifts towards innovation versus processing administrative work. We’ve seen this happened successfully to give birth to the Toyota Prius as they crammed substantial workforce within a wide open space – “Obeya” to heighten communication and productivity.

To end, we covered 5 criterions for success, the ability to export products and services generated from the city, creation of a nexus for trade to happen through establishment of decision centres i.e. headquarters, attaining critical mass, supplying talents and lastly working with technology and shifting the paradigm of tall skinny buildings. The table below underscores the evolution of tomorrow’s city.

City of Today
City of Tomorrow
Manufacturer Plant
Processes and Produces Products
Outsourced to cheaper nations, with clear build and quality specifications
Head quarters
Processes Administration
Showcase for customers, vision of the company’s potential and future. A mecca for business to occur.
Research Centres
Small cramped underfunded facilities that double as a warehouse
Campus wide facilities that co-exist with top management to allow seamless communication and flow of ideas

Thursday, November 8, 2012

City Building and the Outsourcer

 After spending some time with folks from Iskandar Region, Malaysia’s effort to create a booming and global Southern region through planned city development; my thoughts ruminate around how exactly one catalyses a parcel of land into a great city. More importantly, what role does the outsourcer play in realizing this vision?

Rummaging through the annals of history, city states seem to arrive rather serendipitously, and once created perpetuates almost indefinitely unless there’s a cataclysmic natural event which decimates the entire population.  Even war couldn’t smite the likes of London and Paris. So why the allusion to serendipity; primarily because it all began rather logically but then magically takes a life of its own within a short course of 20 to 50 years after several hundred years of relative organic growth.

To begin, the primordial city was chosen due to the wealth of the land. Usually where the river meets the ocean and massive alluvial lands for farming and domesticating animals exists or to some extent mining towns. Population grew and they develop ever refined niches of value throughout the chain of raw materials from production to consumption; continuously turning natural resources into goods and secondary supplementary/augmentative activities that allow the producers and consumers to exist in relative comfort.
If one would zoom out and see the big picture, we are nothing more but ants attracted to sugar; sugar being available natural resources for sustenance. I call this the Genesis period. Life was simple and the dots which connect the value chain of respective land dwellers are close together. A tanner lives beside an animal farm and he’s a stone throw away from the market because logistics and infrastructure were rudimentary.

The second evolution of the city is the trading ports; a natural extension considering as the city grows, goods need to be sourced from farther away as local resources and land slowly depletes, as well as the benefits of comparative advantage mooted by David Ricardo in 1817. Interestingly, trading ports have a notorious nature of flourishing as an outcome of black markets and crime; goods were seized en-route or simply went missing during offloading. So it becomes a natural order for businesses to setup shops that ply these goods and factories as close as possible to the ports as black market items sold many fold more expensive than legalize goods.

Within the 20th century, we see governments across many nations attempt city building on steroids; artificially sprouting mushrooms of steel and concrete with words like “hubs” plied, typically surrounding manufacturing, financial services, education and entertainment. These “artificial” cities have a certain set pattern of growth and stagnation. More importantly, it attempts to attract the “ant” in us with monetary wealth; the sugar of today.

I ask myself, can a city generate wealth without natural resources? So here’s what I’ve observed from these city building endeavours

a) Manufacturing
The hallmark of the industrial age and humbly, one of the most crucial pillar of nation building for any country; is the ability to harness natural resources and refine them into goods that fulfils needs and desires.  Policies like tax breaks for more advanced foreign companies can catalyse initial growth, but it does not necessarily create value for the populace other than salaries and services to support factory workers, managers and the factory itself. The flow of money is obvious but are mere droplets compared to the torrents of wealth should one owns the intellectual property of the product. Primarily because foreign companies repatriates the bulk of profits back home. Every nation hits a manufacturing ceiling once natural resources runs out and salaries increased to the point where it is no longer economical for the manufacturing centre to function.

b) Gambling and Entertainment
Names like Monaca, Macau and Las Vegas comes to mind, and recently we could also add Singapore into the category.  A certain level of romanticism is latched onto these cities, and we all love the back story of how it came to be. Ultimately though; despite its seedy origins, people arrive time and again because of the lure of gambling pay outs.  With a country like Malaysia, where the image of an Islamic state is crucial for political survival, it has little choice but to focus towards the family spectrum with the likes of Legoland and other theme parks in the works. Quaint, but does it directly tug at your soul’s yearning for money generating potential – likely not. Would it be the primary wealth generator for the city – likely not again.

You may be arguing that Disney generates USD11 billion in their parks globally (2011); but the fact of the matter is, Malaysia does not own the Disney brand so we’re back at repatriating profits.

c) Purpose built Government Centres
Grandiosity comes to mind, huge swaths of lands and artificial lakes carved out with the hope that beauty shall make bureaucracy more palatable – I digress. Herein lies the rub with government centres, they only grow as fast as the country’s ability to collect taxes. The city will largely be manned by government workers and the ministries are also fuelled by government budgets so we will not see explosive growth, but rather half empty government buildings waiting to be “repurposed” once the budget hits a deficit too large to politicize away.

d) Financial Centres
Financial centres are strange creatures to me, especially the whole idea of plunking a bunch of bankers in one location and voila you have a financial centre. Global financial centres like Amsterdam began as an offshoot of trading. You need bank guarantees, loans, trading notes and insurance i.e. means to “facilitate” monetary and business transaction for traders - simple.
So sans the organic way of supplying services for traders (which must exist first), you’re left with exchanges that trade financial products and centres with the objective of “generating capital” for local and foreign businesses as well as profit for investors. For example, countries with trade surpluses tend to have low cost of funds for international financing (Although today, it’s more likely monetary policies that artificially lowers the cost of funds e.g. Japan). 

Financial centres require strong legal systems to solemnize contracts, reduced or zero government taxation to move money in and out of country as well as a bonus, an exchange to allow trading of financial products with hopefully low rates and easy means of transaction. Sadly, the way governments outbid each other in this regard is not unique; once you get rid of taxes, governments are left with relaxing regulatory controls as well as allowing for some level of transactional opacity.

This in turn creates room for “financial innovation”; i.e. financial products that can be illegal in one country but clearly acceptable at the location of trade. Post Global Depression 2008, it’s an approach that most regulators will cringe at. 

Having said that, not all forms of financial innovation are bad, Malaysia for example has one of the largest placement of Sukuk or Islamic bonds; and offer services for generating capital that are permissible through Syariah (Islamic law), appealing to investors from the Middle East. Alas, the question arises again, is this enough to catalyse a great city? You tell me. Is there a great Islamic financial district in existence today?

To summarize and break down the thought process, a great city is a series of cascading outcomes; you cannot proverbially place the cart in front of the horse.
1)       A city lives off consistent sources of massive wealth that not only sustains its denizens but compounds growth. It is only as strong and vibrant as its largest income generator.
2)       Once that is established, people will come, more importantly; entrepreneurs -> business owners that create and catalyses even more value through the initial source of wealth must exist.
3)       To assist no. 2; there needs to be proven and consistent rule of law, easy means of funding and establishing the business as well as the ability to connect business owners with customers -> Productivity from Day 0
4)       Abundance of economically viable “people resources” with the skills to execute the business
5)       Cheap if not free telecommunications to rapidly accelerate the flow of business
6)       To a smaller extent, some might say negligible, a low cost base for establishing the business foot print -> logistics, electricity and rental costs etc.

Element no. 1 is humbly the hardest to envision, create and nurture. The same old strategic thinking cap applies; what’s the differentiator of one city hub versus the next? What’s the barrier to entry? Etc.

You may be wondering about the Outsourcer by now, well; outsourcing at its core augments one or more pieces of a business. Simply, the outsourcer’s value is derived from being cheaper and better or enhances business value (brings better ROI) compared to having the entrepreneur build the function from scratch.
We’ve also established that each city needs to have the means to generate sustained wealth, be it new or old. So by extension the outsourcer’s best bet at being successful, is the ability to augment the business that feeds off as well as generate the main arterial sources of income.

I’d like to think of it as being the cybernetic implant augmenting the “arm” of the business.
In developing cities overnight, ala Iskandar Malaysia, Dubai, Pudong in China, the plan often begins with extensive capital investment on office space and public infrastructure. That is all well and good but the point that is missing is the secret sauce -> the miracle making cities great are entrepreneurs!

The individual who saw the opportunity to open a tannery beside the cattle farm; and the banker who discovers the populace’s latent innovative potential and unleash it through venture capitalism.

The entrepreneur connects the dots of value within the city, the entrepreneur then innovates to produce products and services that not only make these connections stronger but uncovers arbitrage to profit from. Every instance where business value is generated, it gets ploughed back into the city and the city grows!
The outsourcer must become a business cybernetic scientist that makes the entrepreneur better; hence, the outsourcer’s destiny is intertwined with that of the entrepreneur.

In order for a plot of land to leap the chasm of backwater subsistence and transform itself into great city therefore requires great entrepreneurs and great entrepreneurs require even better outsourcers.