Thursday, 11 June 2015

No Ordinary Disruption - Labour Market Challenges in the Digital Age

I've been reflecting on the the 'new work order' in preparation for the Economist's Talent Management summit next week.  As part of this, I've been reading McKinsey's new book, No Ordinary Disruption, and today, got to talk to one of the book's authors, Richard Dobbs, Director of the McKinsey Global Institute (their research arm.)

MGI look at various long-term trends and you, like me, may have seen some of their previous reports on the labour market, social collaboration, technology and other areas.  However their clients wanted to know how these fit together.  And basically there are 4 forces, each one larger than what we’ve ever seen:
  • A shifting locus towards the East (taking HSBC with it of course)
  • The acceleration in the scope, scale and economic impact of technology
  • A dramatically aging global population, growing less fast than in the past
  • Flows of capital, people and information (increasingly South South.)

Sometimes the forces build together, sometimes they pull apart - leading to increased complexity and additional challenges.

Executives typically have a sense that the world is changing, but don't understand enough about how the change is working so we need to reset our intuition about the world going forward.  People don't reset enough.  The current changes are a bit like the British Industrial Revolution but ten times as fast, and 300 times the scale.

For example, Richard talks about Tianjin in China, which most Westerners have never heard of (I hadn't, despite spending 3 weeks in China last year) and compares its economy to that of Stockholm (but how will it compare by 2025?)

Resetting Intuition

I was pleased that even though McKinsey is well known for being very data based (and you can certainly see this focus in the book) the firm still sees a role for intuition.  To me, this is particularly important given the complex mix of forces suggested in the book.  I also think extrapolating data into the future is increasingly dangerous to do.  And in fact, the book notes that the 4 forces can "play havoc with forecasts and pro forma plans", but of course that's exactly what MGI has had to do.

Richard also described a balanced approach to using data and intuition:
"However data or analytically driven, many executives still reply on intuition.  And numbers never prove it 100%.  That can mean that executives leave a decision a bit or plan make it later.  The point is are they happy to make a decision on the basis of the data that they're getting?  It's a bit like what we think house prices are going to do.  Data underpins it in a way we're not even conscious of.  Over the last few years, asset prices have appreciated, driven by interest rates and global GDP.  We've got used to it.  So I won't make a good decision if I don't get a forecast, or by suppressing my intuition."

The idea of needing to rest this intuition recognises that our intuition which still underpins much of our decision making has been formed by "a set of experiences and ideas about how things worked and are supposed to work."

The difficulty is that this acts a bit like recency bias and the anchoring effect in psychology, or inertia in physics.  "However we identify it, there is a powerful human tendency to want the future to look much like the recent past."

So "if we look at the world through a rearview mirror and make decisions on the basis of intuition built on our experience we could well be wrong.  In the new world, executives, policy makers, and individuals all need to scrutinise their intuitions from first principles and boldly rest them if necessary."

I'm not quite sure about the suggestion that intuition anchors people to the current state - surely it depends on what people pay attention to?  And although I think Richard used the Tom Watson quote about there being room for 4 computers in his session at LSE this week, there are also plenty of examples of forecasts being well over the top, for example ones suggesting that we’d all be flying around with personal jet packs by now.  

However the book does provide a couple of good examples of anchoring, for example companies allocating the same resources that they had done in the previous year, even when things change drastically, for example in the global recession.

My remaining worry is that 'boldly resetting' is likely to be a bit harder to do than the words might suggest.  So I think the book is probably right in referring to executives needing to develop the capabilities to rest their own intuition.

Skills Challenges to meet the 4 Forces

Given that I've been blogging about digital, we focused mostly on the trend / force around technology:
"HRDs are seeing the impact of cloud systems like Workday.  They're not taking 5 to 10% out of their transaction costs but by a factor of 2 or 3 times as they move towards self service vs forms and people.  It's a strategic issue because it costs less and people get better service.   Employees find it more convenient. 
But as technology disrupts more jobs and people have to refocus.  How prepared is HR to help in that journey?"

That led us onto a conversation about employment and skills.  As noted earlier, global labour market growth is due to start falling, and finding talent in skilled positions will become yet harder.  However as robots and computers take on a growing role in performing activities, and undertaking knowledge work, less lower value roles will be needed.

This means that by 2020 "businesses could be short of 85 million workers with college degrees or vocational training; at the same time, 95 million lower-skilled workers could be unemployed."

Part of the solution to this problem is about better use of online talent platforms (see McKinsey's new research report on this.)

However there needs to be more action too, including better links between business and education.  I mentioned an earlier McKinsey labour market report I'd seen which described how South Korea (where Richard has just returned from) transformed their whole eduction approach to provide the skills that country needs.  But this is harder in a Western democracy like the UK.

Richard didn't have a complete solution to this but suggested that whilst the UK isn't as bad as other places, we need to do more to develop STEM skills, particularly in numeracy, computer programming and confidence in technology.
"I find it extraordinary that people can give up maths at 16 and go to university with just a maths GCSE.  But the coding in schools curriculum is great - every policy maker around the world I've mentioned it to has asked 'why aren't we doing that?'"

We talked about three other needs supporting this as well:
1.  Much more external focus.  Many execs are very internally focused.  That may have made sense during the last few years, to drive performance and productivity. But now they're still not spending enough time with customers, understanding the disruptions.  They need to go round Silcon Valley and meet the disruptors. 
2.   Ability to make companies agile.  It's difficult to get actions exactly right so you need to be able to respond.  It's amazing to see how some companies respond - for example long debates about cannibalisation. 
3.   Attitudes.  It's easy to see the four forces as a perfect storm where everything is negative.  but some of the changes will be very exciting, for example taking a billion people out of poverty, creating a consuming class of another billion people, creating a cancer drug that be tailored to your genome and so on.  We think the winners will be disproportionally the optimists.

I finished by asking about income inequality which I had noticed Richard had described in a session at LSE earlier in the week but didn't seem to come through that strongly in the book. 

Partly because of the impacts on employment that I described above, inequality is going to grow further too.  Some cohorts of the population have done badly from the changes.  In fact Richard suggested that because of automation, de-unionisation, immigration and trade or offshoring, male school leavers have seen salaries decline since 1995.

Well inequality isn't in the book because McKinsey are still working on their first research report on it but Richard agreed with me that the impact will be important to society and to businesses too.  If we're struggling for skills that last thing we want is more people with-holding their discretionary effort too.

I'll be posting on some of the additional challenges of operating in this complex, digital environment, over the next few days and weeks.

In the meantime, thanks to Richard for his time and insights - I do think the book presents a compelling outline of the need to reset.

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