Professor Kevin Fox

When it comes to lifting productivity, best management practices can bring significant results.

Stanford economist Nicholas Bloom and his collaborators put this to the test in an Indian study where they offered free consulting on management practices to randomly chosen textile plants and compared their performance to a set of control plants.

They found that adopting these management practices raised productivity by 17% in the first year through improved quality, efficiency and reduced inventory, and within three years led to the opening of more production plants.

In the Indian case, the management consultants started from a low base. So there are unlikely to be those sorts of dramatic productivity gains to be achieved in Australia. But it does provide evidence that good management practices are effective and that business education does matter.

There’s a famous line among economists that says productivity growth is an index of our ignorance – the leftover bit of output growth that we haven’t been able to explain by the input growth. In fact, there are many factors that we struggle to understand in pin-pointing the drivers of productivity. We have an information shortfall.

How can we address this? Better data to analyse would be a good starting point.

The Australian Bureau of Statistics (ABS) should be strongly supported in its productivity program but the detailed data it collects needs to be made more accessible to Australian academic researchers. Unfortunately, the legislation under which the ABS presently operates prohibits this.

It’s a wasteful situation. Our researchers are partly funded by taxpayers yet they regularly have to use data from other countries and try to infer what it might mean in terms of Australian policy.

We are able to get big-picture aggregate numbers for industry sectors but we need to know more about what’s happening at the level of individual firms because it’s from here that productivity springs. This will involve an understanding of how firms are responding to incentives, what talent they have, their approach to innovation and what they understand about best managerial practice.

If we get a clearer view of what’s going on at a firm level, we should be able to design more effective policies, such as how to develop the talent, innovation and firm organisation that will better facilitate the diffusion of best practice in management.

Which brings us back to education. Institutions such as the Australian School of Business can provide an essential foundation in core business skills along with an understanding of the modern business context through research-led teaching.

Such training facilitates the capacity to foresee and react appropriately to changes in the operating environment, including financial crises, making the most of scarce resources and using incentives to effectively manage the workforce.

In the same way that technological breakthroughs can raise productivity and hence welfare, raising the level of management practice in Australia can assist in securing Australia’s future.

Professor Kevin Fox is the Head of School at the School of Economics at the Australian School of Business and Director of Centre for Applied Economic Research (CAER) at UNSW.

From the Knowledge@Wharton today blog.

It was a story so compelling that even Hollywood couldn’t resist it. The rise and fall of Kozmo.com in many ways epitomized the dot-com boom era. The New York-based company was founded on a seemingly genius idea – same-day delivery of goods of all kinds in some of America’s densest urban centers – which, in the end, proved to be completely impractical. After its founding in 1998, Kozmo generated enormous buzz and expanded from New York to Chicago, San Francisco, Boston and other markets. However, it quickly burned through cash and, by 2001, had completely gone under. The company’s story was captured in the hit documentary, E-Dreams.

Kozmo’s high-profile failure has for years been held up as proof that the concept of same-day delivery isn’t feasible – that the costs inherent to the service are just too high to ever work in practice. But now, more than a decade after Kozmo’s failure, same-day delivery is back, and in a big way.

With the holidays closing in, retail giants such as eBay and Walmart are following the lead of Amazon by offering same-day delivery service in select markets, including New York, San Francisco and Seattle. And though comparisons are already being made between these new initiatives and the failure at Kozmo, Wharton marketing professor David R. Bell predicts that, this time, same-day delivery might be here to stay. The larger question, he notes, is what that success could mean in the long term for the rest of the retail industry.

“Because of the high fixed costs to do this – the building of logistics or warehouses and the rest – once you go down that path, it’s either going to work or it’s going to be a massive failure,” Bell says. “Given what a savvy operation Amazon is, for instance, I think they will be able to get it right.”

At the very least, Bell notes, Amazon, Walmart and eBay stand to benefit from the key lesson learned from Kozmo’s failure – specifically, that when it comes to same-day delivery, volume is essential. “It was a combination of things that hurt Kozmo, but the biggest was that they failed to ever achieve ‘density.’” In other words, Kozmo never made enough deliveries to generate sufficient revenue to cover its massive infrastructure costs – everything from high courier fees to warehouse space. WebVan, the San Francisco-based company that offered a grocery delivery service, suffered the same fate.

But the new same-day delivery services are slightly different. In an effort to avoid Kozmo’s fate, for example, eBay is circumventing the warehousing issue by having its couriers pick up orders directly from partner retailers, while Walmart already has the storage capacity and is shipping directly from its stores. Other smaller retailers have experimented with a somewhat different strategy: Rather than delivering goods to a consumer’s home, they instead send them to a central location – for example, a temporary setup in a parking lot or at a specified retail outlet – where they can be picked up.

“What this approach does is give you that density you need,” Bell says. “That’s because the retailer can just throw everything onto one truck instead of having to make 500 different deliveries.”

In the end, Bell predicts that at least one of these retailers, and possibly many of them, will make same-day delivery work in some form. And while that certainly will be a good thing for consumers, it would undoubtedly pose serious challenges for the rest of the retail industry. “It’s going to raise the bar for everyone. If you start training customers that they can expect to get anything they want that same day, they’ll start to demand it. And that could end up putting the pressure on companies like UPS and FedEx, too.”

This post was previously posted in Knowledge@Wharton Today Blog: Same-day Delivery: This Time, It Might Actually Work

From the Knowledge@Wharton today blog.

While optimism among companies in the U.S. and Europe seems to be growing, the big question for Indian offshore information technology (IT) vendors is whether this positive sentiment will convert to actual IT spends. A recent study by Offshore Insights, a Pune-based IT research and advisory firm, notes: “[The] mood looks positive compared to the past two years … [and] many clients intend to spend more in the coming year.” The study suggests that while around 14% of those surveyed plan to increase their budgets by 5% to 10% over last year, around 43% will increase it up to 5%. At the same time, around 27% expect to see no change and 12% expect a drop in their IT budgets.

According to Sudin Apte, CEO and research director of Offshore Insights, the survey indicates that while 49% of the firms continue to see the coming year as being challenging, 41% are optimistic regarding their business outlook. (The rest say that it is too soon to take a stand.) Apte, who was earlier with Forrester Research, notes: “A couple of years ago, we saw that the majority of clients were not taking decisions and were even cancelling projects. Decisions that were being delayed will now be taken in the coming year, but budget increases are going to trail sentiments.”

Apte points out that enterprise applications, applications integration and modernization are emerging as high-growth areas. “Our survey also shows that while the adoption of emerging technologies is maturing, we are not seeing big deals happening in this space,” he adds. “Big data projects and mobility deals are small and sporadic.”

More importantly, the survey indicates that compared to large on-shore services firms like IBM and Accenture, Indian offshore providers lack adequate client centricity. “Clients do not find Indian providers genuinely client centric. And they feel that while MNC services firms are catching up in cost saving, quality and software process, Indian firms are not moving up fast enough regarding domain knowledge and consulting expertise,” says Apte. The study also points out that clients clearly want vendors to deliver business benefits “far more than ever in the past.” Their top priorities include improving IT’s impact on business performance, increasing IT resources to drive business innovations and improving business processes by using IT.

Companies, meanwhile, are fine tuning strategies – in geographies, verticals and billing models. Infosys is increasing its focus on Europe. As a first step, it plans to shift its listing from Nasdaq to the New York Stock Exchange (NYSE). This will make it easier for European investors to trade through the NYSE Euronext platform. The company expects this to improve its branding in Europe and, therefore, its business.

The Bangalore-based Mphasis has taken another step in its strategy to focus on select micro verticals. It has announced the takeover of U.S.-based analytics firm Digital Risk in an all-cash deal for US$175 million. Last year, it had taken over U.S.-based insurance software vendor Wyse Corporation. Mphasis, a mid-tier company, likely realizes that the big players will always have an edge in the undifferentiated BFSI (banking-financial services-insurance) space.

In a radical departure, iGate Corp., a Nasdaq-listed firm which has the bulk of its delivery team in India, has recently launched a high-decibel multi-million dollar marketing campaign in North America promoting an outcome-based business model instead of the traditional time and material (T&M) model adopted by most Indian IT firms. (Under the T&M model, vendors charge their clients based on the number of people and hours spent on a project, irrespective of the final business benefits to the client.) Industry observers note that while some other Indian vendors also have started on the outcome-based route, they still have a long way to go.

Meanwhile, despite sceptics in the IT industry, the National Association of Software and Services Companies (Nasscom) has stuck to its earlier growth projections, only it will be closer to the bottom end of its range. As against its earlier forecast of 11% to 14% growth for financial year 2012–2013, a few weeks ago Nasscom pegged it at 11%. In a statement, Nasscom said: “For FY2013, a year marked by significantly varied trends, the industry is expected to meet the lower-end of its growth guidance and at least achieve a double-digit growth.”

This post was previously posted in Knowledge@Wharton Today Blog: Spending on IT Services Increases – but Demands Grow, Too

From the Knowledge@Wharton today blog.

For a wide range of legal, political and pragmatic reasons, anti-corruption prosecution is being used to isolate threats to global security and encourage popular support for regime change. In the effort to rein in rogue nations and organizations without resorting to war, officials are increasingly relying on innovative uses of anti-corruption laws not only against terrorists and tyrants, but also against companies that have assisted them.

Terrorists and criminal organizations rely on corruption, coupled with violence, to gain and maintain state sponsorship and protection – if not full control over nations. Officials are now responding by supplementing the traditional tools of diplomacy, economic sanctions and export controls with far-reaching anti-corruption prosecution targeting companies and individuals profiting through bribery with such regimes and organizations.

The effectiveness of this strategy enables authorities to publicize the results of their anti-corruption efforts through international media outlets, digital networks and smart devices, fomenting domestic dissent in the hopes of leading to political and legal reforms. The immediacy and magnitude of the threats posed by rogue nations, terrorist organizations and global criminal enterprises – and the necessary resourcefulness of regulators – now more than ever require corporations engaged in international commerce to continue to ensure that their controls are adequate, say David N. Lawrence, Jeremy Maltby, Stephen Labaton, Ronak D. Desai and Matthew H. Lawrence in this opinion piece.

Enforcement of anti-corruption laws is rapidly emerging as an important weapon against transnational threats to global security. With increasing frequency, officials are catching parties and conduct that otherwise have evaded the more traditional efforts of diplomacy, economic sanctions and export controls. To sustain regulatory pressure and inspire popular support for regime change, authorities will strategically leverage their efforts through traditional and online media sources, social networks and smart devices. For corporations engaged in international commerce, regulators appear to be issuing a new but familiar warning in the high-stakes arenas of compliance and risk management – caveat emptor.

Around the world, there is a clear nexus between corruption and rogue regimes. Increasingly, terrorism and organized criminal activity have deployed corruption and violence to secure state sponsorship and, in growing instances, outright control of nations. Necessity is driving Western allies to search for innovative, non-military means to combat threats such as terrorism, nuclear proliferation, money laundering, organized crime, narcotics and arms trafficking, illicit transference of military technology, cyber-attacks and human rights violations. These dangers pose formidable challenges to traditional avenues for enforcement and diplomacy.

Risks and Responses

Right now the world confronts a host of risks. Iran is apparently developing nuclear weapons, while sponsoring terrorism and engaging in cyber-attacks against Western institutions. Syria is plagued by a violent civil war with unpredictable political outcomes. An opaque nuclear North Korea continues to pose regional threats. The current range of official responses reflects the magnitude of the stakes involved. These measures – diplomacy, trade restrictions, legal prosecutions, espionage, sabotage, drone attacks, cyber-warfare and support of dissident activities – seek the necessary political, economic and personal pressures to effect change without war. The “clear and present” nature of these continuing threats, however, has now forced authorities to think creatively about enhancing the customary options.

Traditionally, economic and political isolation through expansive sanctions and export controls has constituted one of the United States’ most effective tools of statecraft. The rationale underlying these efforts against targeted regimes is straightforward – force behavioural and political change by shutting down the flow of capital, trade, resources and expertise; deny political elites the fruits of their positions; and foment domestic political opposition by imposing broad economic hardship. Recent high profile enforcement actions against corporations conducting business with Iran have underscored the potency of these regulations and the resolve of U.S. and foreign authorities to proceed forcefully. Officials have also demonstrated their creativity by using the media, social networks and political hearings to increase the pressure on the international business community to comply with these trade restrictions. These efforts appear to be having an acute economic impact on Iran. One can hope this will result in meaningful negotiations.

Yet even when sanctions and export controls are comprehensively implemented (as with Iran), their long-term sustainability poses challenges. Like all laws, the effectiveness of sanctions and export controls has been undermined, at times, by intentional evasion, jurisdictional limitations and competing policy objectives. Historically, sanctions against South Africa and Iraq, for example, were repeatedly circumvented, often through corruption. Longstanding U.S. sanctions against Cuba unfortunately have not achieved broad international support, and have generated tensions and legal disputes with allies. Russia and China have refused to fully support efforts against Iran, Syria and North Korea. Some observers even contend that the imposition of sanctions and trade controls can actually strengthen – rather than weaken – political resolve within targeted nations.

Other tools face similar difficulties. The United Nations and international diplomatic efforts have failed to successfully engage with Iran, Syria, North Korea and other transnational threats. There are continuing questions about the efficacy, legality, and morality of covert actions such as assassinations, drone attacks, and cyber-warfare – all of which create risks of backlash and other recriminations.

A race is on. Every day it becomes clearer that, if direct military action is to be avoided, the traditional range of foreign policy, enforcement and political options may need to be re-examined. (To read the full opinion piece, click here.)

This post was previously posted in Knowledge@Wharton Today Blog: Can Anti-Corruption Laws Help Combat Terrorists, Tyrants and Their Corporate Supporters?

From the Knowledge@Wharton today blog.

As probably the whole word knows by now, Pope Benedict XVI plans next week to start tweeting in eight languages. His Twitter handle is @Pontifex, and he has already generated several hundred thousand followers even before his first official tweet, scheduled for December 12.

The pope’s decision to open a Twitter account raises a number of questions, including: Is this a good marketing strategy? Will it help the Catholic Church reach out to younger generations, and will those younger generations tweet back? What kinds of messages should the pope tweet? Finally, does the pope seem a little late to the game, since, as FastCompany.com noted today, he joins “an impressive, highly retweeted group of religious leaders,” including such names as the Dalai Lama, Joel Osteen, Rick Warren, the Rev. Jesse Jackson, Sr. and Rabbi Shmuley Boteach.

Wharton marketing professor Jonah Berger suggests that the pope’s new communication strategy is a good marketing decision for the Vatican. “As technology advances, religion often gets less attention. This raises the church’s profile and reminds people it is relevant to [our] day and age.” As to whether this strategy will help the church reach the coveted younger generation, Berger predicts that most of this age group won’t respond, “but some will. Churches have a target market just like Pepsi does. And this is another channel to reach that market.”

What kinds of messages should the pope tweet – and what kinds should he avoid? Berger’s advice: “Be authentic. A formal ministry in Japan started tweeting using slang, but people found it incongruous. No one wants to hear the pope talking about YOLO [you only live once] or using phrases like OMG. Tweeting useful information about faith or inspiring stories will spread their ideas while staying true to the [church’s] core message.”

Wharton marketing professor Peter Fader says the pope’s foray into Twitter “seems entirely sensible and natural to me. Twitter is nothing more than a personalized broadcasting channel. No one would think twice if the pope had his own radio station or cable channel. Perhaps he already does.” It makes sense for him, “and any other highly visible person/organization, to have a way to share information, perspectives and other relevant content with followers.”

In that respect, Fader sees Twitter as “very different from Facebook. I actively use the former, multiple times a day, but very rarely use the latter. I find it very valuable to be able to offer one-way broadcasting about my work, and find it equally valuable to read the broadcasts from other people/organizations that interest me. I’m not interested in having conversations.”

Fader laments what he describes as Twitter’s “cutesy name. If it were just called ‘micro-blogging,’ no one would think twice or raise eyebrows that the pope is doing it.”

According to an article in The Wall Street Journal, the Vatican already uses other social media tools such as Facebook and YouTube. In addition, the pope’s “first tweets will be in response to questions put to [him] via Twitter about faith; the pope isn’t likely answer queries unrelated to religion.” The Vatican’s media advisor adds that the pope “won’t physically write each tweet, [but] will be personally involved in what it says,” the Journal reports.

Given that other religious leaders are already tweeting, does Pope Benedict XVI seem a little late to the game? “So maybe he’s a little late, but better late than never.” Fader says. “And as long as [Twitter] is used in an appropriate manner – and I’m sure that will be the case – then I don’t see any downsides to it at all.”

Adds Berger: “No one is counting. Or expecting the pope to be on technology’s bleeding edge.”

This post was previously posted in Knowledge@Wharton Today Blog: The Pope on Twitter: 140-character Sermons?