Why Chinese over-investment is important

For some time now, Michael Pettis has been arguing that China has been over-investing and that this over-investment is unsustainable. His most  recent piece, How do we know that China is overinvesting?, provides a useful introduction to his arguments. In essence, there is a growing gap between real borrowing costs and the real economic returns on the investment. 

Along with exports, heavy Chinese domestic investment has been a key driver in that country's growth. To the degree that Michael Pettis is right, and I think that he is, then the investment and industrial demand that has underpinned Australian mineral exports is likely to slacken.

I must say that's been my feeling all along, but its interesting to see another perspective.

The importance of simple questions in assessing technology

A week or so back I watched You've Got Mail with eldest daughter. Released in 1998, the film centres on a couple who meet via email unaware that they are clashing in real life. 

Kathleen Kelly (Meg Ryan) runs a small independent bookstore, while Joe Fox (Tom Hanks) is a member of the Fox family that runs a chain of mega book stores and is planning to open a store near Kathleen's. It's quite fun, but what struck me re-watching was just how quickly business models date under the impact of technology.

In 1998, the big issue was the survival of the independent book stores in the face of the mega chains. Thirteen years later Borders collapsed under the impact of the internet. The online challenge is especially pronounced in publishing and book selling, but it is affecting all aspects of retailing. 

Here in Australia, the Sydney Morning Herald reported today on a new survey suggesting that internet spending in this country would exceed $A37 billion by 2013. A week back in the continuing patent wars between Samsung and Apple, a Federal Court preliminary injunction that prohibited the sale of Samsung's Galaxy Tab 10.1 in Australia saw a surge of Galaxy sales as Australian customers used the internet to buy in other jurisdictions.

In quite a bit of my writing I have tried to warn about the excessive hype attached to new technology. For every business that has succeeded in a big way, there are many more that have failed.

Further, many firms outside the new technology areas themselves have done considerable damage to their businesses through the misapplication of new technology. Costs may have been cut, but at the expense of customers and customer loyalty. The Australian banks that cut their branch networks to save money had then to invest heavily in rebuilding those same branch networks.

One of the key points in considering the application of new technology is that initial impacts are generally less than expected, the longer term effects greater than expected. Computing and communications technologies do create businesses on the supply side, but it is the enabling effects of those technologies that have the greatest long term impacts.

Borders collapsed in part because its customers were enabled to buy books in new ways independent of bricks and mortar and specific store visits. In Australia, Borders survives as a pale online shadow of its former glory.     

I am not sure that analysis of new technology needs to be all that complex in a general sense, although specific applications may be very complex. The single most important questions are actually quite simple:

• who will benefit from the new technology and how?
• who might lose from the new technology and how?

Take the Australian bank case.

The banks were expected to benefit from bank closures because it would reduce costs. The losers were customers who lost access to the closed branches. In certain cases, transactions and transfers, customers did benefit from greater personal flexibility. In other cases, customers simply drifted away from the bank. The banks ended by losing because they weakened their single greatest asset, direct contact with a previously loyal customer base.

The business cases put forward within the major banks to justify their actions centred on the expected gains to the banks. "Hard" number could be attached to the proposals. The "softer" questions about customer reaction in the longer term were not addressed.      

Postscript

On the Samsung/Apple issue, see Asher Moses' $30m tablet black hole: Harvey Norman hits out at Samsung ban. Apple blocks Samsung, consumers but elsewhere, Australian retailers suffer!

Postscript 2

Just recording two things:

• Group buying at consumer level
• Belshaw's World - caught between a tweet and a print place, a post of mine on newspapers & online. Recording this because I want use in in context of discussion of business models in an online world.
• Peter Dinham on cloud computing
   

Research in a total connect world?

I really wanted to record this one for later use.

I have now been involved at one way or another in the application of new technology for many decades. Now Orange has released a new research paper, What's left to Know, dealing with the impact of very large data sets. The report is subtitled research in a total connect world.

In writing the last sentence I almost made a major error. I wrote a total disconnect world instead of a total connect world. That was arguably a Freudian slip because it captured my reservations about some of the new approaches.

As I write, the Vice Chancellor of the University of New England (Professor James Barber) is continuing his campaign in favour of online learning. I quote: 

ONLINE education is revolutionising the way information is accessed to the point of redefining the roles of academic staff and casualising their employment - a trend of significant consequence to Armidale.

With the University of New England seeking to source internationally-based staff to direct its students over the internet, concerns of employment security in a casualised academic work environment have arisen on the Armidale campus.

UNE Vice-Chancellor, James Barber, would not rule out an increased casualisation of academic staff in Armidale, but wished to challenge the notion that permanent, full-time tenure was the only good mode of employment.

As I have argued in other posts, I have major reservations about the hype now attached to social media and the new communications technologies. I just don't believe the arguments. So far I have only scanned the Orange report, but it appears to contain some interesting material. I am interested as to how it might affect my present thinking.

Australia's continued economic disconnection

Note to readers: While short, this post took a little while to complete. I am bringing it up at the original scheduled publication date.

Interesting piece from Lorenzo, A misbegotten Union – Guest post by Lorenzo, on some current problems in the EU with a specific focus on the Euro.

From a purely management perspective, it illustrates the difficulties created for all of us when Governments' stuff up.

I don't think that any of us would argue that the creation of the EU and even the Euro has not made some aspects of doing business in Europe easier. It is easier to operate in a more harmonised environment. Yet, and this is something Australian business groups pushing for national uniformity should consider, common rules can come at a price.

I intend to do an update post on the latest developments in the Australian economy. The headline point is that Australia remains to some degree disconnected from developments expressed in terms of global or large regional unit data.

Today's Sydney Morning Herald story Indian coal rush heads Australia's way illustrates part of the reason, Australia's resource base. Demand will continue. The only issue really is price. However, there is a little more to it than that.

One of the wisest Australian Government decisions in recent decades was that taken in December 1983 to float the currency, allowing market demand to determine its value.  As I have discussed here before, the highly traded nature of the Australian currency creates its own problems since, as happened recently, the value of the currency can move in ways not directly connected to local economic conditions. However, the floating currency actually provides a very useful buffer, one that Greece would now find valuable.

In the lead up to the global financial crisis, the US dollar value of the Aussie declined sharply, providing one measure of protection to local demand. If, and on worst case scenarios, demand would continue if at a lower price for Australia's agricultural and resource exports. In this event, the currency would be likely to decline in value. However, this would of itself have some domestic stimulating effects.

A floating exchange rate combines with a good budgetary position and low Government debt.

To my mind, Government debt is too low. It is actually quite hard to deny that Australia has been under investing in public infrastructure. Further, the obsession with public-private partnerships has actually skewed public investment in a way that doesn't make a great deal of sense. Yet all this said, I cannot deny that Australia's budget and public debt position gives the country a great degree of flexibility in current circumstances.

How do we manage on-line technology?

Today I just wanted to look briefly at some changes in the internet and communications world.

Quite a bit of my time this year has been spent on ways of making on-line more effective from a work process and training perspective. I summarised some of my conclusions in one of my weekly columns in the Armidale Express, Belshaw's World - the online myth.

I mention this because Australia's IT Wire has reported on a study commissioned by Ericsson across 33 OECD economies, including Australia, that found that a doubling of broadband speed produced a 0.3 percent increase in the GDP of that economy - $A3.9b in the case of Australia. I don't actually doubt the results, they are what I would have expected, but they did remind me of the difference between the general and the particular.

There is no doubt that the new communications technologies and most recently the internet have been a tremendous aid to productivity improvement. They have also created entire new business sectors. And yet there have been real downsides.

To my mind, the most important ones fall into three classes:

• business activities have been damaged or even destroyed that are still of value to many
• business processes that should have been changed have survived because automation allows them to be carried out at a lower cost. Worse, the investment in the automation then makes them hard to change
• the new technology has facilitated a variety of controls and regulation at organisation and government level that greatly adds to overhead costs.

The message that I am trying to get across in a lot of my current writing is that we have yet to develop the best model for operating in the new environment. I have also tried to argue that if we don't do this, the incremental costs and problems associated with the new communications and computing technologies may ultimately impose risks and costs that will bring the whole system down.

This is quite hard to argue because it actually requires the adoption of a new and questioning mind set.

Take as a simple example, the way in which many firms are now trying to control or even limit email. Email is just so easy, is now so deeply embedded, that effective management is quite hard.

In some ways, on-line is like a drug, a quick hit with later problems.

I am not arguing that the technology should not be used. I am arguing that it should be managed.  

Using part time & contract staff effectively

Over the last decade, organisations have increasingly looked to the use of part time and contract staff to fill gaps. The reasons vary.

In some cases the move is designed to meet the needs of particular people who for personal reasons do not want to work on a full time basis. In other cases, the appointments may be intended to fill a short term need or to give the organisation greater flexibility in managing head count.

Given that over half the Australian workforce is now part time, contract or casual you would think that organisations would have learned how to manage part time and contract staff effectively. The reality is rather different. Most organisations don't manage part time or contract staff especially well.

To my mind, the core reason for this lies the continuing tendency to treat part time and contract staff as though they were long term full time employees. The organisation knows that they are not, but it and managers behave as though they were. I thought that the best way of illustrating this was by example.

The Case of the Part Time Employee

Let's start with someone working say three days per week. We can consider two cases, the first a stand-alone employee, the second a job share arrangement.

The distinguishing feature about a part time employee is just that, they are part time. Their time is limited. If you treat them like a full time employee and expect them to be involved in all work group activities, then the proportion of their available time involved in such activities is likely to be significantly higher than the full time workers. Conversely, the amount of time available for their main job is reduced.

The next problem is more subtle. Work flows on regardless of the attendance of the part time employee. Decisions are made that affect the work of that employee in their absence.  Supervisors and indeed work colleagues do not adjust for their colleague's part time work. The end result can be wasted time and great frustration on the part of the part time employee.

In theory, this problem is overcome where work sharing is involved, because one of the work share partners is always there. In practice, however, problems can arise where their is ineffective hand-over of tasks between the work sharers.

To manage this properly, a proportion of time must be explicitly devoted to first defining hand-over procedures and then ensuring that they actually work.

The Contractor

It may seem self-evident to say this, but contractors are not full time employees. They are there for a limited time and have to judge their performance against the results they achieve while there. However, serious problems can arise where this simple fact is forgotten.

To consider this further, consider the case of someone employed on a three month contact to complete a specific assignment.

In normal circumstances, the contractor should come into a defined assignment. Then the first part of the assignment is spent on task refinement and on acquisition of the necessary specific in-house knowledge required for the work, while the last part of the three months is devoted to finalisation and hand-over.

Too often, the task or tasks have not been properly defined. Too often as well, the contractor is expected to participate in work related activities actually designed for a long term employee.

The worst results come where the manager effectively forgets that the contractor is there for a defined time. Many managers are busy, making it difficult for them to allocate effective time for consultation. Long term staff are used to this and can adjust, but for contractors it can mean periods sitting waiting for decisions or guidance that simply chews up available time.

Many managers are also inconsistent, changing priorities or directions without thought in response to immediate needs. That's fine if the contractor is actually doing a defined staff role for a short period. However, problems arise if the contractor is meant to be on a specific defined task. In worst case, this may simply not get done, or not get done to the required standard because of the interruptions. 

The Need for Thought

Contractors and part time staff can be an effective way of fillings gaps or of meeting specific needs. However, and this is my key point, this requires a degree of thought and indeed discipline that is sometimes simply not there.   

National planning for global downturn

I concluded my last post, Global economic gloom, with the comment:

Like many, I have been mulling over what all this means (for Australia). I thought that it might be helpful, at least to me, if I did some of the same type of very basic economic analysis that I did during the GFC. You know, the simple stuff based on first principles. That's a better guide than the more complex analysis at a time of change.

As I write, the stock exchange and financial markets have been all over the place, with some of the type of breathless reporting that I have commented on before. One minute we are all ruined, the second everybody seems to breath a sigh of relief!

From a practical business perspective, what is important first is changes in the marketplace in which the business operates, rather than overall trends. I make this point simply because the two are not the same, but may diverge quite widely. Then there are the effects on funding of changing conditions in financial markets. This raises a different set of issues independent of individual market conditions. I make these points because there is a tendency to focus on general trends when some businesses may in fact be doing very well.

There is no doubt in my mind that the Australia economy has weakened, although the pattern is variable across the country. The latest Westpac-ACCI survey of Australian industry shows this quite clearly.

We have a number of effects working in combination here. One is the rise in the value of the Australian dollar relative to some other currencies. This has affected certain trade exposed industries in particular. Then, and as has happened before, anecdotal evidence suggests that business is cutting back on discretionary spend, creating flow on effects in related areas including legal services. Then, too, housing has been weak, as has retail spending,

Australia operates in a global marketplace and is affected by changes in that market. These flow through to Australia along four dimensions:

• Direct changes in demand for exports
• Financial affects associated with exchange rate movements and in the availability of funds to the banking system
• Psychological affects as people respond to global changes
• The impact on superannuation funds of global changes in an environment where a significant proportion of funds are invested in equity and off-shore. This one is insufficiently discussed for with compulsory superannuation it actually has major impacts on domestic behaviour.

Australia may be exposed to international conditions, but that exposure is more limited I think than most realise:

• Our main exports, minerals and primary products, have something of a natural buffer in that there is a stable base demand. Prices may fall - I have argued that present commodity prices are unsustainable -  but demand will continue
• Our floating exchange rate means that falling export income would (should) translate to a lower Australian dollar, with domestic stimulus effects. Quite a bit of Australian industry wouldn't mind in the slightest if all the hype about the mining boom #2 proved false!
• We are exposed to international financial markets, but the proportion of bank borrowings funded domestically has increased as local savings have increased
• We have strong institutional structures and relatively low Government debts, giving plenty of capacity to expand spending.

In the aftermath of the global financial crisis, one of the problems that I pointed too was the way in which many countries had lost their public infrastructure investment pipelines. This linked to changing approaches to public administration in many countries. I suggested that one practical result was that Government plans to expand infrastructure spending could not be realised in the proposed time limits.

Putting aside special pleading, there appears to be general agreement in this country that Australia has been under investing in public infrastructure for many years. We have also been under investing in housing, given population growth. Managed properly, there is scope for considerable expansion of public or even public private investment that is likely to yield considerable paybacks in economic terms.

The problem with the previous Rudd Government stimulus measures in this area is that, in the absence of a real investment pipeline and with a need for urgency, we arguably didn't get a long term return for our dollars.

This need not be the case if proper planning is put in place now.

If you accept conventional wisdom about mining boom mark two, then the place for such spend is limited. But who, now, would argue with certainty that that boom will occur? We really do need to have a fall-back position in the event that it doesn't.       

Global economic gloom

The release of the latest IMF global economic projections makes for gloomy reading.

In Australia, the latest minutes of the Reserve Bank's Monetary Policy Committee provides a useful summary of the overall domestic and global economic position as seen by the Bank.

It seems pretty clear that the IMF and others face considerable forecasting difficulties. That should not come as a surprise, for all the econometric models they use actually rely on a degree of stability that is presently lacking.

As it was during the GFC, Australia continues to be a lucky country. This is reflected in the Euromoney nomination of Treasurer Wayne Swan as the world's best finance minister. However, the country is still vulnerable at two levels.

The first is simply its reliance on certain markets and especially China and Japan. If they sneeze, Australia may catch a cold. The second is the high level of domestic household debt. This is manageable in a growing economy, but will become an increasing drag should economic conditions worse.

Like many, I have been mulling over what all this means. I thought that it might be helpful, at least to me, if I did some of the same type of very basic economic analysis that I did during the GFC. You know, the simple stuff based on first principles. That's a better guide than the more complex analysis at a time of change.     

Why multi-tasking is impossible

There is a fair bit of debate in Australia at the moment about multi-tasking. It's usually phrased in terms of kids who do their homework, watch TV, SMS and play a game.  it's sometimes expressed in terms of women having greater skills than men in doing multiple things at once.

My view is that multi-tasking, at least as normally expressed, is impossible.

To start with a simple example.

Say that I am cooking and listening to the radio. Normally, cooking is a routine task involving physical activity. The mind is not totally engaged, so that I can listen and work. Say, however, that I need to consult a recipe and actually make a decision. The mind is now engaged; the radio drops out.

Alternatively, say that the radio becomes very interesting. The mind is now engaged with it. Cooking will normally slow and even stop.

Another example still involving cooking. Normally in cooking, there are time breaks during which you can watch TV, hang out washing, sort something. At one level, you seem to be multi-tasking in the sense that you seem to be doing two activities or more at once. In practice, you are sequential tasking,

It may seem that those in very busy management roles are multi-tasking. In fact, they become skilled at task shifting and chunking, moving quickly from one task to another.

Leaving aside the tension involved in this, there is a cost where the move from one task to another reduces efficiency. That is why so much management advice centres on ways to increase time available for specific tasks - shut the door, turn off the emails, etc. If we could all multi-task in terms of doing two tasks at once, then this would not be necessary.

One of the difficulties with the discussion on multi-tasking is that is misleads. Not only does it imply that we should somehow be super human, it also confuses thinking about the organisation of work.     

Sustainability vs short term managerialism

As a professional adviser, I try to help firms improve business performance and to resolve problems. More and more, I have found a conflict between reality and aspirations. Reconciliation of that conflict comes back to one word, sustainability.

At a macro level, if the total business objectives set by all firms exceeds the possible growth rate in the economy, then some firms must fail to achieve objectives. If the gap between total firm targets and what is possible becomes large, then the shortfall between objectives and performance for most firms will also be large.

Since remuneration often depends upon achievement of immediate financial objectives, the incentive for managers to do whatever is required to get to immediate target is great. This leads to short termism. Cut now, with the costs coming later. In aggregate, this results in increasing economic instability.

Obviously, the position varies between firms.

If I am advising a start-up or a firm in a rapidly growing market place, then I provide one set of advice. If I am advising a firm that wants to increase market share and is prepared to pay the price, I provide a second type of advice. If the business is unprofitable, then that's another set of advice.

But what do I do if I am providing advice to an existing profitable business in a mature market that wants to improve performance to achieve new growth targets dictated by what is really managerial hubris? How do I say that you are doing the wrong thing? How do I say keep on going as you are, just improve at the margin?

If the reality is as it is that most businesses cannot achieve their targets, then shouldn't we be adopting a new approach? Isn't sustainability combined with incremental growth better?

Say you are a reasonably profitable law firm. What do your partners, your owners, really want?

They want to be able to get on with their professional work. They want a stable income with prospects of reasonable increase. Most don't want the prospect of big increases that risk the business.

Think how nice it would be as an adviser if your client said we want to improve what we do over time. Our focus is on business sustainability, not big targets. We want you to help make things better for clients, for partners and for our staff. We want you to give us practical suggestions to achieve this.

It would be nice, wouldn't it! 

Why do we underestimate the value of broad based skills?

I followed up China's foreign reserves - what they mean, what might happen with a post on my personal blog, Australia's economic fragmentation. Since then we have had the ending of the US debt crisis, new troubles in Europe, bad US economic data and something of a stock market crash. In the first minutes of trading this morning, falls slashed $A56 billion of the value of Australian stocks. There is a smell of panic in the air.

All this took my thoughts in a different direction, one that may seem a bit odd. One problem now is that many of those involved whether as commentators or traders, those trying to decide how to respond, actually lack the broad based experience required to respond sensibly. Further, they live in a wired twenty four hour world where initial responses feed on each other, where reporting heightens nervous excitement.

My original qualifications were in history and economics. Then I worked for twenty years as a professional economist and economic adviser before moving into the private sector as a strategic consultant and manager of professional services firms. I no longer claim to be a professional economist - the profession has moved on. In a way, the economics of finance has replaced the economics of economics, financial modelling has replaced a focus on economic principles.

I was in Shanghai when the Global Financial crisis struck. I watched it unfold on the television screens. Upon my return to Australia, I was struck by the fevered nature of reporting. Australian reactions just did not seem to match what I understood of the fundamentals affecting the Australian economic performance. I was actually drawn back into my past world as an economist.

The analysis that I did then suggested that, so far as Australia was concerned, the GFC was highly unlikely to have the type of catastrophic results forecast. It just wasn't going to happen. I said so, and I was right.

One thing that I have learned from my experience is the importance of time. There is a fundamental disconnect between most current analysis on the economy and the actual lengths of time involved in economic processes. For example, just as it takes time for economic imbalances to emerge, so it takes time for them to unwind. In similar vein, it takes time for new policy initiatives to work, especially where capital investment is involved.

In 1929, the effective closure of the London capital markets to Australian borrowings plunged Australian Governments into effective depression. In similar vein, the GFC had very real world affects. Yet it pays to stand back and look. You do not need complicated models to understand what is happening, nor do ideological positions help.

Economics is about relationships. If you are going to understand what is happening, you have to look at the relationships in general and as they affect your sector. One of the reasons why I have such a high opinion of Australia's Reserve Bank lies in the standard of their analysis of relationships. I may not agree with their analysis, but I can understand it and therefore respond to it. That is not true for a lot of the other analysis I have seen.

I am not sure why we have come to so distrust general skills and broad based experience, why we now place so much weight on narrow specialisation and very task specific requirements. You see, the problem is that narrow specialisations with task specific requirements are very good at getting things done within defined parameters, but hopeless at coping if those parameters change. Then everybody is at sea, lost without a paddle or, sometimes, even the boat.

I know that I sound jaundiced, but today we have managers who have never managed, economists who know a lot about a little but very little about a lot, lawyers whose knowledge is largely limited to a narrow specialisation, policy advisers who see their key roles in terms of narrowly defined statistical outputs. It's all very odd.

While I have been writing this post, share prices have continued to decline. Time, I think, to stand back and look at what is really going on.   

China's foreign reserves - what they mean, what might happen

A post on my personal blog, Saturday Morning Musings - fall of the US dollar, pointed to the growing mismatch between the pattern of currencies traded and the evolving structures of the world economy. There I said in part

All I am saying is that I feel that, in the longer term, traded currencies are likely to better reflect real patterns of economic activity. In the past, the reserve currencies (gold, sterling, the US dollar) facilitated global transactions by providing a measurable store of value in circumstances where other currencies were either not traded or were of uncertain value. The position today is different. Who can really say that the US dollar is a secure currency?    

The types of changes that I am talking about will take time. However, that time may be less than we all expect.

This led a colleague (Denis Wright, an historian) to ask if I could write a simple non-technical explanation of the significance of China's foreign exchange reserves. It's actually quite an important topic, so here goes.

Important identities

In the comments that follow, there are just two economic identities that you need to bear in mind.

The first is that if one country has a surplus on its balance of payments, another country or countries must be running an equivalent deficit or deficits. The reason for this is that one country's exports are other countries' imports. Globally, imports and exports must balance. If one country is selling more than it is buying, it acquires foreign exchange reserves. However, since imports and exports must balance in total, that means that other countries are buying more than they are selling. They must be running deficits that exactly match others' surpluses.

The second is that if you are going to buy more than you sell, then you have to fund the gap through borrowings or capital flows of some type. Otherwise, you can't buy.

Growth in China's foreign reserves

Initially China's foreign exchange reserves were relatively small, then they started to accelerate. The following gives an indication of scale:

Year	Reserves $US billion
1980	2.5
1990	29.6
2000	165.6
2010	2,847.3
today	c3,200

The increase has obviously been quite dramatic, an increase of over $US 3 trillion in 20 years. To put this in perspective, Australia's total GDP is something over $US1,200 billion! 

Why did China's foreign reserves increase?

There is a lot of argument on this one, but I think that we can simplify.

On the Chinese side:

• The country had a high domestic savings rate meaning that local cash was available for investment.
• The country had a large industrious underemployed workforce, meaning that low cost labour was available for new activities.
• The Chinese currency, the yuan or renminbi, was largely non-traded. The Government was able to keep the value of the currency low, facilitating export growth.

It takes two to tango. Elsewhere:

• Reducing trade barriers facilitated China's export growth.
• Savings rates in many developed countries dropped. With rising asset prices, consumers felt able to increase consumption by more than income, thus providing a growing base for Chinese exports. This was aided by tax cuts, placing more income in individual hands.

Increasing Chinese reserves necessarily flowed back into into developed countries. In a very real way, the Chinese themselves were funding their own exports.

China's reserve conundrum

The accumulation of large quantities of investable funds by a country is not unique. The British Empire, the economic superpower of the nineteenth century, accumulated such investment wealth that it took the rise of the US, a great depression and two world wars to wipe it out. However, China is in a different position.

One difference lies in the then power of the City of London. This marshaled surplus funds and channeled them round the world from mining companies to railroad investments, from the Russian Empire to Argentina. China has no domestic equivalent.

A second and critical difference is simply time. China's accumulation has happened very quickly. China has looked for ways of redeploying reserves via things such as a $US 300 billion sovereign wealth fund and direct overseas investment, but all these take time to build up. In the meantime, China has to put its money in deposits or some form of financial investment. Here it faces a problem

To illustrate this, have a look at the attached graph. This was included in my original posts and comes from one of my favourite bloggers, Stubborn Mule.

The graph simply shows the most important currencies in the world in trading terms. The Chinese authorities simply cannot invest their reserves willy nilly, but have to put them where they can be realised as required. This means they have very few short term choices.

To illustrate their problem further, consider the Australian dollar, the world's fifth largest traded currency.

According to newspaper reports (I don't have the links), China has decide to place 1.6% of its foreign reserves in Ozzie dollars or Ozzie dollar denominated securities.  That sounds a tiny proportion, but it actually amounts to over $US51 billion. That's quite a large amount relative to the size of the Australian economy. You see their problem?

The immediate practical effect is that China is locked into holding US and especially US Treasury securities, something like $US2,000 billion. This makes what happens in the US kind of important to China in financial terms.  

The longer term

In both the short and longer term, economic changes in China and its trading partners will affect the equation. I will discuss these in another post. For the moment, I just want to focus on what might happen to the Chinese reserves on the assumption that they continue to be significant. This links to the point that I made in my original post, about likely changes so that traded currencies better reflects the pattern of trade.

Here I want to point to just three things:

1. As China globalises, its capacity to invest effectively in other countries will increase , thus shifting Chinese assets from financial to real investments.
2. As more trade and investment is written in Chinese currency, the Chinese will be able to invest more in assets denominated in their own currency.
3. The number of significant traded currencies will rise, making it easier for China to invest in a bundle of currencies, not just the US dollar.

If I'm right, these changes will have quite profound influences on the distribution of economic power and activity.        

Professional services management - reader interests July 11

At the end of each month I look at the most popular posts on this blog to get a feel for reader interests. The most popular posts on this blog and for Management Perspectives (I merged that blog into this one in February) in July were:

• Designing a simple performance appraisal system - sample policy statement - 81 page views
• The Importance of Demography and Demographic Change - update - 40 page views
• Problems with Performance Pay - 31 page views
• Allen & Overy's profit conundrum - 28 page views
• On financial metrics - professional services - 24 page views
• Ships, knowledge & management short term ism - 23 page views
• Common Management Problems Series 1 - managing up - 21 page views
• Changes in Public Administration and their Impact on the Development of Public Policy 1 - Introduction - 18 page views
• People Management in Professional Services - Effective Delegation - 14 page views
• Guidelines for Effective Negotiation - 13 page views
• Performance Measurement - Profit Per Equity Partner (PEP) - 12 page views
• Recession and the importance of fixed costs - 11 page views
• Corporatisation, Corporate Structures and the Law - The Case For - 10 page views

Australian Reserve Bank views on the economy

I really wanted to record this one for later use.

Measured by the official statistics, the Australian economy has been all over the place. We still have a looming boom, yet many aspects of the local economy are soft. Australia may not be in as bad a position as some other countries, but it's still confusing!

The Australian Reserve Bank has released two relevant papers that set out its views.

The first is the Minutes of the July 2011 Monetary Policy Meeting of the Reserve Bank Board released on 19 July. The second is The Cautious Consumer, a speech given by the Reserve Bank Governor.

I mention them now because I thought that it might be of interest to do a review of the bank's official thinking.  

People management dominates blog traffic

While I have been very slow in posting for some time, search engines have continued to draw some traffic to this blog.

It's interesting that eight in the top ten posts in the last month have been concerned with people managements issues. A similar pattern holds if I extend the time horizon to six months.

This has not always been the case. There was a time when business management issues dominated.

  What I don't get much traffic on, something that I find a bit disappointing, are my discipline of professional practice posts. This is an area I really care about as something that we all share across fields.

It may just be that search engine algorithms have changed. Still, it is disappointing.  

Problems with technologists

The Internet is important to all of because of the way if affects our profession and business. For that reason, I have written a fair bit about it over time.

On Friday 22 July I wrote Academic journals, the shuttle & the internet on my personal blog. It's there because it was triggered by my personal reactions. I said in part:

I am a very heavy internet use. Further, the way I use the net extends well beyond transactions or the discovery of immediate current information. To the ordinary user, the problems that I experience may be of limited relevance. Yet I think that they are quite important.

My thinking to this point has really focused on my own responses, essentially taking the net as a given. I am now wondering just how the net has to change if it is really to meet the needs of that minority group, Belshaw and his ilk.

A lot of the technologists and net enthusiasts I know are not much help. I have been meaning to write on this one for a while. The difficulty from my perspective is that I am expected to fit into their solutions and enthusiasms, whereas I want them to fit into mine! I am, after all, the user!

In Australia, the main law publishing firms are all in the process of releasing their publications as e-books. However, they are also trying to maintain their current charge structures. It's not going to work - the simple addition of a search facility is not enough to justify the cash cost.

When I said in my post that I wanted the technologists to fit into my solutions and enthusiasms I wasn't joking. The problem with technologists is that they won't do this and it's frustrating.

Technology is a means to an end, not an end in itself.

Recently I have been working on some internet based projects designed to streamline aspects of professional practice. I think that the thing that stands out most clearly in my mind is just how hard it is to get the interface right between the technology and the business or professional process.

One of the kickers is the hidden cost that lies in simple things like support and training.

I think that there are solutions, but they are going to come from the business, not technology side.     

Ships, knowledge & management short term ism

Back in February in Problems with maintenance I reported briefly on the problems that the Australian Defence Force was having with maintenance. Maintenance on its main transport ships was so neglected that it was now too expensive to fix them, so that they had to be taken out of service.

The report of the Rizzo review into support ship repair and maintenance has now been released. It recommends, among other things, that Navy rebuilds its engineering capability from the ground up. Now Australian Defence Minister Smith has announced a review into the availability of the Collins class submarines, another major problem area.

One of the big problems with the constant obsession with productivity improvement through cost cutting, one that I referred to in my February post, lies in the trade-off between the short and long term. It's usually possible to get apparent immediate gains by, for example, deferring maintenance or by outsourcing particular activities. However, this can then lead to later problems of the type that Defence has been experiencing.

Over recent years I have noticed what I have come to call the demise of experience, the loss of in-house knowledge and skills that can, as in the Defence case, mean that the organisation actually lacks the capability to carry out key elements of its core mission.

The problem is quite pervasive. Let me give a small and apparently trivial example.

A few years ago, I was asked to develop a training course for an organisation. Because of the nature of the training (objectives, content, timing, audience) the course was not suitable for on-line delivery. It required face to face delivery through a workshop format.  

The organisation had a variety of rules about public documents. The first thing I therefore did was to look for other course examples within the organisation that might provide a template. There were none.

Needing to design from scratch, I went in search of help on some issues with Microsoft Word. There were some things I wanted to do that I had forgotten because of the length of time since I had last done them. I found that there were no Word manuals, nor were there any people within the organisation who had the skills required to help me. In the end, I solved the problem by borrowing and then modifying a template used in another organisation. The whole process added about three days to course preparation time.

I said that this was a small and apparently trivial example, yet it is one that I have seen replicated time after time.

In thinking through this problem, the loss of experience, I ended by breaking it into two parts.

The first is the loss of what we might call background experience, the knowledge of how to do things in a general sense. As organisations have slimmed down, as people have become more narrowly focused,  organisations have lost the broader knowledge base that once could be drawn on for problem solving. At the simplest level, this leads to costs and inefficiencies in handling new challenges. More broadly, it increases the organisation's general vulnerability; more mistakes occur.

The second is the loss of mission specific experience of the Defence engineering type. In slimming down, in out sourcing, organisations reduce the number of people with the direct knowledge and skills required to carry out tasks.

The two problems interlink. When I was working in the aerospace and defence environment, the key delivery people were the commercial and project managers who combined broad based knowledge and skills with engineering and technical know how. They knew what to do because they had done it many times before. As new problems arose, they would automatically draw from experience to develop at least first pass solutions for further test.

Many of these people have gone. Initially their loss was not seen. But once things get to the point that they seem to have done in the Australian Navy, suddenly disaster occurs. When you have to scrap ships because of poor maintenance, when you cannot deliver on key tasks, then you are in trouble.

The Rizzo report recommends that Navy rebuild its engineering capability, adding some twenty positions. But where are these people to come from? How many years will it take for them to acquire the experience that Navy once had? And what happens if another emergency occurs in the meantime?

The focus on current problems in the Australian Defence Materiel Organisation ignores, it seems to me, the fact that the genesis of the problems lies in changing management approaches that began to come into effect two decades ago.

I find that as a manager and consultant I have become less tolerant of what I see as short term ism. This is not a good thing because in a professional sense I have to deal with what is now. Yet so often I can see problems coming, I can see steps that might fix or at least improve things, but it requires management to change what they do now. And that can be hard to get across!    

Allen & Overy's profit conundrum

Back in February 2010 I recorded UK law firm Allen & Overy's Australian opening. Then in February this year Clifford Chance entered the Australian marketplace. Both moves were part of a shift east towards new growth markets.

Wednesday 6 July Allen & Overy announced their results for the year ending 30 April 2011, effectively the end of the firm's first full year in Australia. The results were headlined "Robust growth and investment" with the key features summarised as:

• Turnover up 7% to GBP1.12bn (USD1.87bn; EUR1.26bn)
• Profit per equity partner stable at GBP1.1m (USD1.8m; EUR1.2m)
• Distributable profit up 6% to GBP455.8m (USD759.8m; EUR512.6m)

On the surface, not bad. However, I was curious to know more, so downloaded the accounts. These showed a considerable increase in the number of partners and an actual decline in operating profit, as well as a small decline in the firm's net assets. How, then, did A&O achieve an increase in distributable profit so that profit per equity partner remained stable?

The answer lies in the treatment of Canary Wharf costs. I quote:

The Board decided that as the cost of exiting the Canary Wharf office is only payable in the future and benefits the partners in the future, for the purpose of determining the distributable profit for the current year, the charge would not be taken into account.

This may be fair enough, but it does suggest that the quoted key figures on firm performance may be a little misleading when it comes to assessing the firm's actual results.

So far as Australia is concerned, an article by Samantha Bowers in Friday's Australian Financial Review noted that A&O in Australia has grown from 17 to 21 partners with about 100 lawyers. She quotes Finance Director Jason Haines as saying that Australia had produced high revenue growth but not much profit growth since A&O in Australia were still in an investment phase.  

If you have a hammer, everything looks like a nail

Back in May in Clients are their own worst enemies, I returned to one of my recurrent themes on this blog, the need for professionals to educate clients. In the period since, there has been an interesting discussion in other fora on issues associated with cognitive dissonance and the law.

The latest post in this discussion is Legal Eagle's The Art of Law. The post includes links to earlier posts, including two I wrote. In the comments Jacques Chester made a very interesting comment @4. It begins: Here in software-land we often quote the old saying that “if all you have is a hammer, everything looks like a nail”.

Jacques' comment drives to the heart of the point that own professional backgrounds dictate the way we see and respond to client problems even if that way is not in fact appropriate. I mention this now because I want to come back to Jacques' points in the context of improving professional practice in a general sense.

 

Asia-Pacific IT services growth projections

I see from IT Wire that IT service revenue in the Asia-Pacific region have finally rebounded from the global economic downturn and are expected to hit $US205 billion over the next four years. Ovum forecasts an annual compound growth rate of 6.6 per cent over the period to 2015.

Fujitsu retained the number one slot in IT services revenue in 2010, with a market share of 13.9 percent.

I was actually a little surprised at the projected growth rate. It seems a little low. 

 

Australian March 11 capex figures surprise

The Australian Bureau of Statistics capital expenditure figures for March were higher than some expected. You can clearly see the upwards trend.

The expectations data  on future capital expenditure also continues strong.

The multiple speed nature of the Australian economy continues, with some data very soft indeed.   

Postscript

In this morning's Australian (27 May), Sarah-Jane Tasker reports that the Australian Bureau of Agricultural & Resource Economics & Sciences planned investment in Australia's resources sector has hit a record $173.5 billion.

Some care must be exercised in interpreting these major project figures. I know from my own experience, my then area was responsible for similar monitoring back in the early 1980s, that the numbers can bounce around. If prices fall, projects can be deferred or re-scheduled.   

Australian annual CPI increase reaches 3.3%

The Australian dollar has soured through the US 108 cents mark, while the Australian CPI figures are up. The two have been connected in some commentary, as though the markets have interpreted the CPI increase as a reason for buying the Ozzie. I must say that this strikes me as a bit odd.

I will comment on the currency in a later post. Looking at the trade figures, I am cautious about the sustainability of the increase, accepting that the market does as the market does. In this post, I want to look at the CPI numbers. Those who are interested can find the Australian Bureau of Statistics release here.

The headline number was a CPI increase in the March quarter of 1.6% bringing the annual inflation rate to 3.3%. The largest group increases for the quarter were education (5.7%), health (3.9%), food (2.9%) and transportation (2.7%). Food was influenced by the floods, transportation by global oil price increases.

  The rising Australian dollar is keeping downward price pressure on imports of fuel and final goods. However, because Australia imports so many intermediate goods, the high dollar is also increasing producer prices, increases that feed through into final goods prices.

At the moment, the concept of a patchwork economy is popular in this country, reflecting the fact that the combination of mining boom and consequent high dollar is having differential effects across the country. Some parts of the economy are effectively in recession, others booming. The on-ground impacts vary greatly depending on the locale economic mix.      

Proposed NSW data centres strike trouble

I see from IT Wire that the NSW Government's proposal to build two mega data centres in Sydney and Wollongong to replace existing centres has struck yet more trouble. IT Wire uses the word "farce"; that's not unreasonable.

Just at the moment I'm working on an assignment that has a connection with cloud computing. The NSW problems do raise the question as to whether thus type of mega centralised solution is still appropriate.  

Clients are their own worst enemies

In December in The importance of a discipline of professional practice I said:

Bluntly, we professionals are letting down our clients. Worse, we are sometimes doing it through our narrow definition of what constitutes professionalism.

I have no truck with approaches that guarantee clients higher costs and worse results, even accepting that clients are their own worst enemy!

While I did not follow up on that remark in the way I said would because of other pressures, the same pressures that forced me to merge my two professional blogs, the issues have been much on my mind.

At the moment I am working on a web based project for Sydney law firm Dilanchian Lawyers & Consultants. I normally don't mention specific clients, but in this case I know that Noric won't mind because we share common concerns.

I won't go into the details of the project. However, it does focus on ways of assisting lawyers and others concerned with law to improve performance. Not performance measured by billable hours, but performance in the actual delivery of, or management of, legal services.  

As part of the project I have returned to the mapping of the service delivery process. I am focusing on legal services. However, the processes involved are common across all professional services. By service delivery processes I am not talking matter management, although I recently saw some rather good workflow software here that makes matter management much easier. My focus is broader.

I have written before about the importance of the diagnostic (Role of the Diagnostic in Professional Services - medicine vs law, Professional services - the importance of the diagnostic). My focus here was on the professional. However, we also need to focus on the client.

Simply put, my argument is that we need to educate clients in the approach that they should follow in seeking professional advice.

Let me illustrate with an example that all lawyers and many other professionals will understand. A client needs a contract or agreement to do x. The client comes to the lawyer and says draw up a contract. This is where the diagnostic comes in because it helps the lawyer better define client needs. Often, the lawyer will find or feel that there are some underlying problems.

Before going on, remember that a contract is no more than the legal wrapping around something that the client wants to do.   

Now what the gun slingers do, they used to be called cowboys in the computer industry, is to give the client just what they asked for regardless of any underlying issues and then move on to the next billing. Others ask questions and try to identify problems.

A difficulty now arises.

Say the case involves an intellectual property matter. Definition of the IP involved is usually central to such matters. This may seem self-evident, but you would be surprised at just how often the IP is ill or even wrongly defined. Then there are the questions of the relationships between the parties - these involve multiple flows (money, management, IP creation) - as well as the various protection and reporting clauses. Again, you would be surprised at just how often these are ill-defined.

The lawyer faces a choice. How much effort should be put into assisting the client to identify and solve what are, after all, commercial or business issues? 

We live in a just in time world, a world of see problem, fix problem in which scrappy emails or even SMS instructions have come to replace proper instructions. This adds to costs. We also live in a world where the thinning out of management, something that I have written about, means that in-house knowledge is less than it used to be. This means that people have become more reliant on external sources of advice.

To the gun slinger lawyer, all this is an opportunity.

If the client has cash and is prepared to pay, then you follow through. Give the client the contract, but ask passive information questions. This process can be strung out. If the client has no money, just give them what they ask and move on. After all, you know that further legal fees will come should things fall over. The more conscientious lawyer will try to help, but also knows that the time costs involved may never be recovered.

All this is not an academic argument. Real money is involved. I have seen cases where large legal sums were paid that were not only unnecessary, but could actually have been seen to be unnecessary early on. 

This is not an attack on lawyers as a profession. Rather, it is an argument that says that performance improvement in the delivery of legal services is a two way street.

Lawyers can improve their performance through things such as better diagnostics. But we also need to educate clients as well.       

Boeing, outsourcing & Ayn Rand

A brief follow up to Problems with outsourcing. There I mentioned Ben Sandiland's blog as a good source on Boeing's outsourcing problems. The 787 runs out of time and lies extends Ben's reporting.

In an apparently unconnected post on my personal blog, Ayn Rand, selfishness and reciprocity, I looked at one element of the philosophy of Ayn Rand. The link is the way in which disconnects between a short term focus on both personal rewards and key performance indicators can distort behaviour.

We management consultants are meant to be practical people. Yet the biggest problem and I have found, and the cause of some of my biggest professional failures, lie in the disconnect between apparently practical solutions and underlying values, processes and assumptions.

In general, it's pretty easy as an outsider to identify ways in which a firm can improve performance. Sometimes its impossible to get that across when the client's world view is diametrically opposed to what has to be done.

I still haven't worked out how to solve that one!  

Sir Roger Douglas to leave politics

My thanks to Catallaxy Files for drawing my attention to this post by Eric Crampton, Farewell Sir Roger,  on the decision by New Zealand's Sir Roger Douglas to leave politics. 

Sir Roger was a key figure in major changes that took place in public administration that extended well beyond New Zealand. I wrote two earlier posts that first set a context and then talk specifically about some of his work:  

• Changes in Public Administration - Notes sets a broader context

• Changes in Public Administration - the New Zealand Model looks at some of the specifics

Problems with outsourcing

A post on Management Perspectives, Problems with maintenance, I spoke of the problems that could arise through through deferral of maintenance in order to meet immediate targets. I suggested that this had become something of a pattern.

The post was triggered by problems experienced by the Australian Navy. Now an article in the Australian, 'Cancerous' morale risks our navy fleet, fleshes out a related element. Reading this and related material, the argument goes that in out sourcing key maintenance functions, the Navy has lost in-house engineering capability to the point that it now threatens the very capacity to properly manage the maintenance function.

The problems Boeing faces with the 787 Dreamliner have been well documented and especially on Ben Sandiland's blog Plane Talking. Something of the same issues seem to have arisen here. Boeing outsourced to the point that it lost effective control of the whole project.

New airliners are always a complex, bet your business, project. Success depends upon strong internal management and engineering competence. Boeing appears to have got the balance wrong.         

UK's Clifford Chance to open in Australia

In February 2010 I reported on plans by Allen & Overy to open in Australia - Allen & Overy to open in Australia, More on Allen & Overy in Australia.

The British law firm Clifford Chance has 3,200 lawyers working across 20 countries. According to a story in yesterday's Australian Financial Review - it's behind the pay wall -  Clifford Chance will merge with Sydney's Chang, Pistill & Simmons and and Perth's Cochrane Lisherman Carson Luscombe from 1 May.

The official press release states:    

"The importance of Asia to the global economy and to our major clients has already resulted in substantial growth for our market-leading Asia operations," said Peter Charlton, Clifford Chance's Head of Asia. "Any credible growth strategy for the Asian legal market can no longer ignore the importance of the Australian market to the region, both as a destination for, and a source of, investment. I'm pleased that in CP&S and CLCL we have found such a good solution for our clients, and I'm looking forward to welcoming the partners and staff of both firms to Clifford Chance."

In December, Lawyer's Weekly carried an interview with Ian Cochrane. This has nothing directly to do with the merger. I just found it interesting.   

Management Perspectives merges with Managing the Professional Services Firm

After a far bit of thought and soul-searching, I have decided to merge Management Perspectives with this blog.

Originally, the two blogs were intended to serve very different purposes. However, I found that limits on my professional time meant that neither blog was getting proper attention. You can see that from the posts or lack thereof.

The merger means that this blog will carry a broader range of material without, hopefully, losing its original focus.

24/7 and the professional

Just because I haven't been posting here because of other pressures doesn't mean that I have forgotten this blog, nor the connected interests. I think about them all the time.

The title of We need a management revolution is pretty self-explanatory. In part of the post I talk about the problems a 24/7 world creates for we professionals.

I don't have a proper answer, just frustrations. I have dealt with elements in my discussions on the need for a discipline of professional practice, one that crosses the professional silos. Yet it's hard.

How do you deal with a just in time clients who asks for an instant response when they haven't thought the issues out?