From the Knowledge@Wharton today blog.

A strong wave of investments has flowed into Europe over the last couple of months, offering some observers hope that it’s a precursor of a sustained economic recovery and an end to the long-standing euro crisis. On the surface, it appears to be good news, particularly given that the eurozone recently slipped back into recession. But despite the injection of more than $135 billion in private investment towards the end of 2012, the latest economic indicators offer more cause for pessimism than optimism.

The split between what financial markets and the economic fundamentals are telegraphing about the future is confusing many observers. On the financial side, equity and bond markets, buttressed by the moves of the European Central Bank (ECB) in the fall to support government debt markets, have seen two very positive developments. One development is falling government bond interest rates, which is key because that makes it easier for some of the more desperately strapped governments to finance their large debts. The second development is rising equity markets. That suggests some companies may become more optimistic and could start to hire new workers in countries that have devastating unemployment rates.

As for why the stock markets are doing so well while real economies are doing so badly: “I think that quantitative easing is a big part of the explanation,” says Wharton finance professor Franklin Allen. “[Central banks] are buying up huge amounts of debt securities globally, and at least part of the money is going into equities and driving their prices up.”

Wharton management professor Mauro Guillen notes that bond markets have improved significantly in the eurozone because Spain and Italy have had de facto bailouts. “A bailout is needed if there is a problem with selling government bonds at an affordable interest rate. From this point of view, the ECB’s action in the summer to support the euro at all costs has made a difference. The risk premiums have come down – the ECB has been buying Italian and Spanish debt. So, in a way, they have already been rescuing Italy and Spain without going through a formal bailout.”

Last July, Mario Draghi, the ECB president, said his institution would do “whatever it takes” to avoid countries leaving the eurozone. Some countries wanted to exit in order to be able to create their own home currency, which they could then devalue to spark exports and get out from under crushing debt. The bank said it would ensure with financial underwriting that Italy and Spain could issue as much new debt as needed in order to finance the strict deficit-reduction programs now underway.

Ordinarily, the positive developments seen recently in financial markets might be viewed as leading indicators pointing to better days ahead. But these are not ordinary times. The problem is that these developments come against a worsening economic performance and not a stabilizing outlook. The best recent example is Italy, which takes on outsized importance given that it is probably too big for the eurozone to bail out if that were required, particularly after the huge bailout measures directed at Greece, Portugal, Spain and Ireland. Here are some notable recent economic indicators for Italy:

• The Bank of Italy now forecasts a continuation, through much of this year, of the recession that started late in 2011. This month it cut its GDP growth forecast for 2013 from -0.2% to -1.0%.
• Industrial production dropped by 7.6% in November compared with a year earlier, and was down 1% from the previous month.
• In the first 11 months of 2012, production declined 6.6% below the 11-month period in 2011.
• Demand for fuel fell for the January-November 2012 period by 12% compared with 2011.
• This year will mark the 15th year in a row that Italy has recorded a decline in industrial production.

For Spain, Europe’s fourth-largest economy, the story is similarly grim. Unemployment hit a new record at 26%, and youth unemployment – which is decimating an entire generation of workers’ chances at securing good careers – is now above 55%. Industrial production slumped 1.8% in the final quarter of 2012 from the same 2011 period. The economic contraction in Spain (as in Italy) is a direct result of strict austerity policies. The Spanish government is slashing government spending in order to reach eurozone-imposed, deficit-reduction goals. Spain’s budget deficit ratio, which was 9.4% of GDP in 2011, dropped to 6.3% in 2012, and the aim is to hit 4.5% this year and 2.8% in 2014.

The data for Spain and Italy highlight the problems. “The financial markets are signalling a bright outlook, but the reality in terms of growth currently is far from that,” says Allen. Eurozone growth forecasts call for recession for the next six months to a year, then a switch over to growth. “The problem is that these growth forecasts have been drastically wrong. Greece is the classic example. When they started with the bailout program, the projections were that there would be a similar trajectory. That, of course, is not what happened, and we have had five years of contraction.”

Italy could “well get into a downward spiral like Greece,” Allen says. The ECB’s Fiscal Compact Treaty, as in the case with Spain, will be a long-term drag on growth because it requires Italy to slash its debt by more than 3% of GDP for many years. As the country’s economy and thus revenues shrink, it then has to cut even more, “and this will be problematic. The recent problems and the bailout of Monte di Pascua di Siena [an Italian bank] illustrate there are a lot pitfalls along the way as the economy starts shrinking. Italy hasn’t grown significantly for a long time. It’s not clear what policies will create growth.”

The austerity policies being vigorously pursued in much of the eurozone increasingly are being questioned, including by the International Monetary Fund (IMF), which recently acknowledged in this Working, titled “Growth Forecast Errors and Fiscal Multipliers,” that too much austerity can damage GDP growth during a debt-deflation recession such as we have now by a factor of two or three times more than previously thought.

This is a huge concession and suggests that the current approach of using austerity for debt reduction may be self-defeating. In its most recent update of its World Economic Outlook, released January 23, the IMF forecast that while the world economy overall was likely to grow by about 2% this year, the “euro area continues to pose a large downside risk to the global outlook,” as does “excessive near-term fiscal consolidation in the United States.”

Guillen agrees that austerity policies have outlived their usefulness. “Germany seems fixated on this idea [of austerity]. They are balancing their own budget, although the markets are not demanding that. In the periphery, austerity means a prolonged recession and high unemployment for a longer period of time. I’ve said many times there is a middle-of-the-road solution that doesn’t negate the need for fiscal rebalancing while avoiding a long slump.” Germany should raise wages, which would stimulate troubled euro economies; the ECB should raise its inflation target, which would help to alleviate debt burdens more generally; and the surplus economies should engage in fiscal stimulus.

Italy’s current economic indicators, which help clarify what is happening in the eurozone more generally, are “very worrying,” says Allen. “It’s not clear they are on a sustainable path. They may well follow Greece. If that happens … the EU can’t bail them out.” So while it is possible that the ECB “may start monetizing the debt, this will require a large increase in their balance sheet. Not only will they effectively need to finance the Italian government but also the Italian banks. The other options will be to default or to leave the eurozone or both. None of these outcomes is good. ”

Many observers now think the ECB ultimately will weaken the euro considerably in order to stimulate the economy, Allen says. But such measures involve big risks. “We don’t know the possible long-term effects of these kinds of policies. My own view is still that the eurozone needs an exit mechanism for extreme problems. They avoided setting it up with Greece because they could fudge the numbers. But this was a mistake because if Italy has to leave, there will probably be significant contagion.”

If it is true, as more and more observers believe, that austerity now is causing more problems in Europe than it is solving, why can’t Europe’s leaders see that?

Politics and pride are preventing a clear view, says Allen. “The systems they have put in place haven’t worked, and they don’t want to admit this. They may muddle through. But the human cost is tremendous. Unemployment will probably go up significantly in Italy going forward. It is already unacceptably high in Spain and Greece, particularly youth unemployment.”

These societies are already undergoing tremendous social unrest under today’s stark economic conditions. How long can Europe go before there is a major political or economic breakdown, something far worse than we’ve observed so far? “We will see how much people will take,” Allen says. “The extreme parties are losing votes at the moment. But if growth doesn’t happen soon, this could change quickly.”

This post was previously posted in Knowledge@Wharton Today Blog: Europe’s Fundamentals Sink Despite Investment Surge

From the Knowledge@Wharton today blog.

“Men have become more egalitarian, but women are more realistic.” That’s how Stew Friedman, Wharton practice professor of management, describes some of the preliminary results of a 20-year study on careers and family life based on data collected from Wharton undergraduates in both 1992 and 2012.

As part of his work with Wharton’s Work/Life Integration Project, Friedman surveyed members of the graduating classes from both years and then compared the results. He also checked back in with the 1992 graduates to see how their attitudes had changed after 20 years in the working world.

Among his findings: In 1992, nearly 80% of men and women responded “yes” to a question about whether or not they planned to have children. That number dropped to 42% for men and women in the graduating class of 2012. “This result speaks to a number of important trends, one of which surely is the challenges today’s young people anticipate in raising children and having productive work about which they feel good, proud, and successful,” Friedman says. While the survey did not ask for all of the reasons that students responded in the ways that they did, Friedman notes that one of the study’s other findings was that while graduates in 1992 expected to work an average of 53 hours per week, the class of 2012 anticipated spending about 70 hours a week on the clock — nearly two work days more than their peers from 20 years earlier.

“Think about … that perception of work demands just in terms of raw time,” Friedman says. “I’m not surprised that people are thinking, ‘I’m not going to be able to have children, or I will have fewer children.’ And the reduced likelihood of having children held true for men and women, which speaks to how the attitudes of men and women have evolved over the last two decades.”

The survey also asked the graduates to weigh in on whether two-career relationships are better able to thrive when one partner is less involved with his or her career. Men in 2012 were less likely to agree with that statement than men in 1992. But women were actually more likely to agree with this view. Two-career relationships are much more prevalent today than they were 20 years ago, when male survey respondents likely expected that they would advance while their female partners slowed down to accommodate a family, Friedman notes. “Men’s attitudes now are increasingly more like women’s,” he adds. “It reflects that more male graduates now expect to be in dual-career relationships, and they want their partners to be pursuing their careers. Over the last couple of decades, we have set the cultural norm more clearly that women’s careers matter, and the advancement of women in society is something we can all expect and should support.”

But what about the reactions from women in 2012? Were they simply more realistic about the realities of integrating work and family than female graduates in 1992 — or more pessimistic? “Twenty years ago, Wharton women graduates were thinking they wouldn’t have to sacrifice career for family, but given the experience of the last two decades, the models they’ve seen and the education they’ve gotten about what they will have to do to be successful, today’s 22-year-old women are more likely to see that someone is going to have to make some sacrifices,” Friedman says.

While there’s no way to know just yet how the 2012 graduates’ attitudes will change, Friedman notes that the definition of career success did evolve for a group of survey participants from 1992 who were queried again last year. “Flexibility was a lot more important to them as 42 year-olds than it was at 22. Where they lived mattered more, but prestige, power and influence, and even enjoyment in work didn’t matter as much as it did when they first started out.”

As attitudes toward work continue to evolve, Friedman says there are numerous possibilities for progress in the area of fully integrating career with family and personal life. “The combination of radical changes in technology and the changing values of men and women with respect to the place of work in their lives indicate that we’re going to see a lot more experimentation and creative alternatives for what work looks like and what families look like and how the two look together,” he notes. “I’m hopeful as a result that there will be new models and solutions that make it possible for people to have more of what they think is ‘having it all.’”

From 1 p.m. to 2 p.m. ET on Tuesday, January 29, Knowledge@Wharton and Friedman will host a Twitter chat to further discuss the changing nature of work/life integration:

Q1 How has your definition of “having it all” changed over the course of your career?

Q2 What life- or work-related factor most influences how you define “having it all”?

Q3 How is the changing nature of work affected your ability to integrate career and the rest of life?

Q4 If you could change one thing about your work that would make life easier, what would it be?

Q5 For whom is “having it all” easier – men or women?

To read the chat, follow @knowledgwharton and @StewFriedman on Twitter and the hashtag #kwchat.

This post was previously posted in Knowledge@Wharton Today Blog: The Changing Nature of ‘Having It All’

From the Knowledge@Wharton today blog.

The IT-BPO industry in India, which established the country firmly on the global map with its outsourcing and offshoring capabilities, is also the largest employer of women in the corporate sector in the country. Of its total pool of around three million direct employees, 30% are women. Pointing this out at the recent Diversity and Inclusion Summit 2013 organized in Bangalore by the National Association of Software and Services Companies (Nasscom), industry leaders and other speakers stressed the business imperative for companies to ensure a fair and equitable environment for their women employees.

At the same time, they were also emphatic that the concept of diversity needs to be all-inclusive and move beyond gender to aspects like differences in physical capabilities, culture, lifestyle, age, religion, economic status and sexual orientation. “We started with a focus on gender inclusion in a formal way in 2007, and much of our attention is still on gender diversity because a lot more still needs to be done on this front. But we are now also focusing on the many other aspects of inclusivity because we realize that a diverse customer base cannot possibly be served well by homogenous organizations,” said Som Mittal, president of Nasscom.

According to Therace Risch, vice president, delivery services technology at Target Corporation, there are two key reasons to drive diversity and inclusiveness in any organization. “One, when an organization has a diverse workforce, it understands the needs of its customers better and makes better decisions for them. Two, when people feel included in their organizations, they produce better results.”

Avinash Vashistha, chairman and manager of Accenture India, pointed out that it is important that organizations put in specific metrics to measure the outcomes of various inclusivity initiatives. “Measurements,” he suggested, “are important because they help us to know what is working.” Target’s Risch, however, added a note of caution. She pointed out that mindset and cultural changes take many years to create a visible impact, and sometimes leaders are disappointed if the results are not quick enough. “There is then a danger that the initiative may get neglected.”

N. Krishnakumar, co-founder, CEO and managing director of consulting firm MindTree, noted: “Organizations must take care that they don’t end up recruiting certain candidates only to meet their diversity targets. At the end of the day, what is important is to assess the potential of every employee and create an enabling environment for them to deliver their best.” Padmaja Alaganandan, executive director, people and change at PricewaterhouseCoopers, added another perspective. She pointed out that it was critical that any measures towards inclusivity should not be misunderstood as preferential treatment. “It is important for [a] business to get the most suitable person for a specific job. What is needed is a performance-based inclusive workplace.”

This post was previously posted in Knowledge@Wharton Today Blog: Indian IT Firms Focus on the Business Case for Diversity

From the Knowledge@Wharton today blog.

A lower-end iPhone could prove to be a smart move for Apple, Wharton experts say, but the company has to proceed carefully.

Following reports that Apple is at work on a lower-priced iPhone expected to be in stores by the end of the year, Wharton operations and information management professor Eric Clemons notes that versioning is nothing new for tech products: Adobe Photoshop has a lower-end “kid sister” in Photoshop Elements, for example, and many database software programs offer scaled-down applications intended for student use.

“Luxury goods manufacturers often need to protect their image: A cheap Bentley or a cheap Mercedes would be a bad idea — the original G20 Infiniti sedan was an awful idea,” for example, Clemons says. “But, if done properly, a lower-end version can work well — the new Infiniti G37 is a wonderful car. So Apple needs to make sure that a starter iPhone increases sales, does not cannibalize sales excessively from the full iPhone and does not damage the exclusive image of the iPhone.”

While Apple is known for developing cutting-edge devices, “sometimes it also makes sense to fill the lower end of the product line as well,” according to Wharton marketing professor Peter Fader. Although some critics suggest that news of a lower-priced iPhone indicates that the company is no longer focusing on product innovation as it once did, Fader takes an opposing view. “Developing a low-end device doesn’t necessarily prevent or distract them from simultaneously pushing ahead at the high end,” Fader notes. “Furthermore, there are a lot of valuable commercial opportunities to be gained at the low end.”

Apple has long been known to stick to its guns about charging a premium price for its products and, for the most part, a critical mass of customers has been more than willing to pay it. Kendall Whitehouse, Knowledge@Wharton’s technology and media editor, recalls that back in the 1970s, the company’s Apple II personal computer was competing for market share with products from Atari and Commodore. While the latter two became embroiled in a price war that dropped their respective systems’ price to a fraction of the Apple II, “Apple remained above the fray, held onto its high price — and large margin — and did very well,” Whitehouse notes. “In the next decade, Apple continued to charge a premium for their Macintosh systems when confronted with competition from lower-priced PC clones, even if it hurt their market share.”

After launching the iPod in 2001, however, Apple gradually introduced a line of lower-priced models. “But this was driven largely by the falling prices of flash memory and Apple’s desire to drive revenue through iTunes,” says Whitehouse, noting that while Amazon.com has based its strategy for the Kindle around selling the device at cost — or even at a loss — and making its primary revenue through content for the tablets and e-readers, Apple has done the opposite.

“While songs and apps sold through iTunes generate a strong revenue stream, iTunes’ main function is to drive sales of Apple hardware: iPods, iPhones and Macs,” Whitehouse points out. “Of course, getting iPhones and iPods into people’s hands produces a halo effect for their laptop and desktop computers, so [a lower-end iPhone] may make sense if they see greater revenue through these upselling opportunities.”

This post was previously posted in Knowledge@Wharton Today Blog: Advice for Apple: Strategizing a Lower-end iPhone

Dale Boccabella

The essence of the legal relationship known as a trust is the separation of legal ownership of assets from beneficial ownership of those assets. The trustee is the legal owner and beneficiaries are beneficial owners. Because of this separation, the law imposes strict obligations on trustees: for instance, the trustee must act in good faith and for the benefit of beneficiaries.

However, for many families, the discretionary trust largely owes its existence to suspicion of — and mistrust of — those associated with the trust creator’s family and/or parties dealing with the trust. Structuring the discretionary trust to deal with these suspicions and mistrust is a major pre-occupation of financial planners, accountants and lawyers that advise on and arrange for the creation of discretionary trusts.

A discretionary trust is a trust, much like a fixed trust. However, unlike a fixed trust, no beneficiary (or potential beneficiary) obtains an income or capital distribution/allocation unless the trustee exercises the discretion they have in favour of a beneficiary. And generally, the size of the distribution is also at the complete discretion of the trustee. This means that even if a beneficiary has been assured of income and capital distributions by the promoter or controller of a trust, or has a legitimate expectation of getting a distribution, that assurance or expectation is worth little should the trustee not make a distribution to them. In legal terms, a potential beneficiary of a discretionary trust only has a right to be considered for distributions.

And while it sounds strange, assets and property held in a discretionary trust are not beneficially owned by anyone. While discretionary trust assets are legally owned by the trustee, the trustee does not beneficially own the assets. The trustee must, however, manage and safeguard the assets for the general body of potential beneficiaries, but no beneficiary can demand an asset or income from the trustee.

Suspicion and mistrust can be manifested in a number of ways and at various levels.

Resentment or suspicion can flourish when the trustee makes “unequal allocations” of income between beneficiaries and/or the allocations made do not meet expectations of all beneficiaries. The same point can be made in regard to capital distributions from the trust fund, although capital distributions are usually deferred towards the end of the life of the trust.

The seeds of mistrust (or the need for protection) are also manifest in the area of the office of “appointer”. Most modern discretionary trusts will have an appointer or even joint appointers. An appointer will have the power to remove a trustee and appoint a new trustee. Appointers are usually the promoter or the controller of the trust. While it is prudent to have an appointer who can deal quickly with a trustee who is breaching their obligations, the appointer can also use their power to remove a trustee should the trustee make “unsatisfactory” allocations of income (or capital) where there is no breach of trust.

Mistrust can also fester in a more recent addition to the actors associated with the modern discretionary trust: the so-called “guardian” or “protector”. The role of this person is to provide an extra check on the otherwise wide powers of the trustee. This person can be given the power to veto certain trustee distribution decisions. This is important because the removal of a trustee by an appointer after the trustee has made an unsatisfactory allocation of income (or capital) will not prevent the allocation from being valid. In other words, the guardian or protector can provide protection against a circumstance that an appointer may not be able to protect against.

Mistrust also stems from the nature of potential beneficiaries’ interests. As noted earlier, beneficiaries of a discretionary trust do not beneficially (or legally) own the trust’s assets before the trustee makes an allocation to them. This means that a creditor of the potential beneficiary cannot get access to the assets in the discretionary trust to help satisfy a debt owed to them by the beneficiary. This also means the trustee in bankruptcy of a beneficiary usually cannot access assets in a discretionary trust.

Another concern is relationship breakdown. The assets held in a discretionary trust will not automatically be included in the property of the potential beneficiary. However, family law legislation also does not automatically rule out the property held in a discretionary trust from being counted as “property of the marriage” for the purpose of the property division on relationship breakdown. Whether or not the trust’s assets form part of property of the marriage will largely depend on whether the trust is the alter ego of the beneficiary. In spite of these contentious, case-by-case rules, there appears to be a perception that housing assets in a discretionary trust provides a safeguard against “gold-diggers”.

Furthermore, the legal principle that permits creditors of a trust (lenders, suppliers of goods on credit) to access the assets of beneficiaries of the trust in certain circumstances does not apply in a discretionary trust situation. This means that those providing credit to a discretionary trust are very likely to want guarantees for repayment of their debt.

Another area of mistrust is the “spendthrift children”. In short, if instead of “housing” or “parking” assets in a discretionary trust, the assets were distributed immediately to children, there is always the risk that some of the children may spend the funds on “wasteful things”.

Furthermore, by housing assets in a discretionary trust, there is a much greater safeguard (virtually guaranteed) that the children will not realise the assets to switch to another investment or another asset class. Apparently, this is one of the attractions of the discretionary trust to farming families as it provides greater assurance that the farm will not be transferred outside the family.

Even from this brief outline, it is clear that distrust is not a stranger to a discretionary trust.

Dale Boccabella is an Associate Professor of Taxation Law at the Australian School of Business. This opinion piece was previously published on The Conversation under “Beware the pitfalls of the discretionary family trust“.

Martin Bliemel

Australia Post has survived more than a hundred years of shipping information and goods. Then came the internet, which massively shrunk hard copy mail, bills, brochures and so on.

But with the rise of the internet also came the boom in sourcing “stuff” from almost anyone, anywhere, at anytime – and have it delivered to your doorstep. Australians are now globally ranked 2nd for online shopping and want the convenience of the process to end with a parcel, not a fake delivery notice.

Depending on where you live, the fake delivery notice may be a familiar story: using an online parcel tracking code, you see your parcel has arrived at a shop. You then dash off to pick it up. A day or two later, you receive the delivery attempt notice regarding the parcel you already picked up, demonstrating that they are not even trying to deliver parcels to your door. Can you blame them? Not at all. Parcels do not fit mailboxes, people are often away during delivery times, and no postal worker wants to drag around heaps of heavy parcels that probably only end up being returned to the shop. Delivering is just not as efficient as faking delivery.

To address this problem, Australia Post is experimenting with 24 hour smart lockers. One aspect Australia Post can intentionally experiment with is the location. However, the first generation lockers are co-located with Australia Post outlets. Why not place some smart lockers in between shops and closer to you? After all, Australia Post is in the business of delivery, not storage. Placing lockers closer to final destinations would also mean they are emptied faster.

Given their aversion to experimenting with location, my bet is that Australia Post sees unexpected outcomes as risks that need to be systematically avoided. They have probably already devised contingency plans in case parcels contain perishable items that are not picked up until the recipient comes home from holidays. Hopefully they will also have considered that many people (such as the elderly) may not want to be required to own a smart phone and GPS enabled app to pick up their parcels.

Perhaps a Christmas season in Vancouver, Canada best illustrates the dilemma of completing the delivery process. Within one evening, a few centimetres of snow caused chaos. Because of the snow, parcels (and delivery notices) could not be delivered beyond main streets, and instantly piled up from floor to ceiling at many shops. Those who knew (via the internet) that their parcel had arrived had to line up outside while postal workers dug through the mountain of parcels.

In Sydney, the experience is not quite as extreme, but I routinely see long lines of people waiting to do nothing else than pick up their parcel from one of five very busy staff. Clearly, there is more room to innovate the process of final delivery.

Well, Australia Post isn’t the only one who knows customers want more. Mark Bouris and James Packer have just teamed up to challenge Australia Post with their own smart lockers. The image in the report suggest the lockers will be indoors, so those Christmas chocolates from your gran won’t melt away, too.

The expected outcome of this competition is convenience from order to delivery: order your items anytime online, pick them up anytime, too.

What interests me more are the unexpected outcomes of smart lockers. Unexpected outcomes are seen as lucky and can lead to entirely new business opportunities. For example, instead of being seen as too impersonal, smart lockers may be appreciated for their anonymity and cause a surge in ordering potentially embarrassing parcels.

If Australia Post were open to cultivating lucky outcomes, they might intentionally vary how the smart lockers at each location work, and treat each location as a separate experiment. For example, they might enable some lockers to entirely replace the shop by letting individuals pay at the locker to place their own parcels in the locker for a specified recipient to pick the parcel up.

Such an experiment may work for many Gumtree or eBay users, to avoid having to coordinate schedules around each other or the post office.

Managing for unexpected outcomes, including having the right location, technology or business model is a topic I discuss in an upcoming conference paper on the role of luck in innovation.

I completely understand if Australia Post is avoiding unexpected outcomes with most of their billion-dollar infrastructure upgrade. As for the smart lockers, I hope Australia Post and Bouris get a little creative, experiment a bit, and are receptive to unexpected outcomes. For now, I’m hoping the timing and outcome of the smart lockers means we’ll all get our prezzies under our trees, not fake delivery notices.

Martin Bliemel is a Lecturer in Innovation and Entrepreneurship with the School of Strategy and Entrepreneurship at the Australian School of Business. He is also the Director of the Centre for Innovation and Entrepreneurship (CIE), which administers the Diploma in Innovation Management, a multi-disciplinary undergraduate diploma, unique to UNSW. This opinion piece was previously published on The Conversation under “Smart locker competition may also deliver unexpected outcomes“.

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?