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!