Profit as Purpose – or Profit with Purpose?

Profit as Purpose

by Wanda Lopuch

Martin Shkreli, age 35, the former CEO of a startup Turing Pharmaceuticals, raised the price of an HIV/malaria medication Daraprim overnight from $13.5 to $750 a tablet, bringing the cost of therapy for some patients to hundreds of thousands of dollars. Outside the US, the product is available for less than $1.  Shkreli has argued that such a move was legal, and good for investors…. – but was it?

Turining Pharma has stated that it needs the profits from the drug to fund the research and development of new drugs. The need to generate profit to fund research and development has been a universally accepted business principle. In the case of Turning Pharma however, patients, doctors and the public alike strongly disagreed as to the source of profit and the amount customers were to pay, without being given other therapy options.  The subsequent public backlash and internet shaming of Shkreli was intense as all stakeholders became very vocal in communicating their concerns and moral outrage. In response, Turning Pharma reduced the price by half, and offered a number of programs for patients with financial needs. As a result of the immense public pressure and scrutiny, Martin Shkreli stepped down from his CEO post in 2016.

Although Daraprim is an extreme, 5000% price increase, it is hardly an isolated case.  And yes, such actions are legal and argued in the name of profit. Profit as the purpose.

Champions of unadulterated and remorseless capitalism, have long argued with undertones of greed, profit for profit’s sake:  from economist Milton Freedman to writer/philosopher Ayn Rand, to the business politicians in the current US Trump administration.  In her 1964 interview, Rand contended that “man exists for his own sake, that the pursuit of his own happiness is his highest moral purpose, that he must not sacrifice himself to others, nor sacrifice others to himself,”

Some 50 years after this interview, Rand’s books are still selling well, and her heroes keep influencing entrepreneurs and politicians alike, from Melbourne and Hollywood to Tel Aviv and Washington. Entrepreneurs like Michel Shkreli, the CEO of Turning Pharma, and James Kilts, former CEO of the Gillette Company in the US, Sonja Bernhart, Australia businesswomen,  Selvaraghavan Kasthuri Rajaan, an Indian film director, Ayelet Shaked, Israel’s Minister of Justice, are but a few of many others who subscribe to Rand’s brand of literal capitalism.  Yet more recently, the appeal of a determined and self-centered strongman type leader oblivious to environment and social realities, keeps losing its allure and legitimacy.  Recently, the revelation of Uber’s rampant culture of bullying and sexual harassment was followed by an abrupt departure of Uber’s CEO and Rand-devotee, Travis Kalanick. While on the leave of absence, Kalanick admits to soul-searching and reflection on the role of profit as a sole purpose.

 

Profit With Purpose- Business Perspective

The starting point for the discussion of profit with purpose, is that profit is the driver of any enterprise in a capitalistic system. Simply, it is profit that enables growth, creates wealth and defines the role of a business in society.

Ethics, economics, psychology, leadership, culture, business, religion,   philosophy … all of these perspectives provide unique angles to a debate on profit: its nature, its importance, its future.  For the purpose of this discussion, I narrow the focus to business drivers for profit.  We will not debate ethical justifications for Martin Shkreli and alikes’ views on profit. We will not ponder profit as a driver of the leadership styles of Travis Kalanick and his followers; and, we will not deliberate moral arguments for profit in the system of justice with Ayelet Shaked.

In the age of big data, we turn to empirical facts to uncover the broader trends. These data help us understand factors that contribute to the purchasing behaviors of consumers, explain employee behavior in the modern labor market place, and predict investors decisions.  With the help of technology, the behavior of consumers, employees, and investors is captured in its most unaltered form: real action beyond intentions. Data reveals more than ones intentions, which are often muddled, consciously or subconsciously, by one’s personal believes and worldview.  These empirical facts help to decode and understand underlying business forces that drive and inhibit profit, independently of one’s political, religious or philosophical views.

 

Sustainability is one of these mega forces.

Consumers and employees across the globe, in both developed and developing economies, increasingly expect businesses to integrate environmental and social accountability into their products and services.  And environmental and social accountability not solely as a charity or advocacy effort, but rather with intentions of stewardship and responsibility for the development of concrete outcomes as value-adds.

These attitudes are reflected by consumers voting with their wallets and by employees choosing companies with shared values.  They are especially pronounced in the behavior of millennial employees, generally not as loyal to organizations, yet attracted to meaningful jobs and companies, which they perceive as ethical.  Simultaneously, sustainability in the form of good governance is increasingly demanded by investors, who want to better understand and mitigate their investment risks, including climate-related risks, environmental risks, and social risks.

Sustainability is a business force that re-shapes all modern business functions, from design and production, to marketing and sales, to delivery and utilization.  The myth that sustainability-driven strategies are marginal and costly business undertakings aimed at luring the pockets of wealthy suburban consumers has been dismissed many times over by research and undeniable business results.  Global sales data and stock prices trajectories of a variety of business enterprises provide strong evidence that sustainability-driven strategies generate growth and drive profit.  Sustainable profit. Profit with purpose.

For example, Uniliver’s 2015 global sales results show growth of sustainable brands to be 30% faster than other brands on a global scale.

Further, 2016-2017 sales data for the global food and beverage sector offer another tangible example of sustainability driving growth.  According to a Nielsen report, sales for the entire sector declined by 0.1% while the brands with sustainable claims grew 2.5% to 11.4%. These numbers underscore the growing importance, if not out of survival, of incorporating sustainability as an integral part of business strategies.  In the words of one CEO, sustainability is business’s enlightened self-preservation.

Apple’s performance, coupled with recent statements by Apple CEO Tim Cook, offers another example of sustainability taking a central place in business strategy.  During the 2017 third quarter earning call (August 1st, 2017), Apple confirmed accelerating revenues and profits, while acknowledging that for a viable long run, the company needs more investment in people and in the planet.  Tim Cook makes a moral argument stating ““we have a moral responsibility to help grow the economy, to help grow jobs, to contribute to this country and to contribute to the other countries that we do business in. Meanwhile, investors reward Apple’s stock price, sending Apple stock on an upward trajectory.

It is now evident that the foundation for sustainable growth is based on embracing sustainability as a core business strategy.  In a recent address at the Global Forum of Consumer Good Products (June 2017 in Berlin), the CEO of Nielsen, Mitch Burns summarized three underlying consumer-behavior principles based on the data:

  1. Sustainability is a worldwide concern
  2. Consumers are putting dollars behind their values
  3. Social responsibility enhances corporate reputation and drives shareholder value

From consumer products and electronics to transportation and energy; all industries are beginning to follow this megatrend: sustainability sells, drives growth and generates profit.

Consumers Want It…

Consumers are actively seeking products with sustainable features, such as “Fair Trade”, “Organic”, and “Carbon Neutral.”  Point-of-purchase data show that consumers are paying 5%-20% more for sustainable products, a substantial premium in a crowded and competitive marketplace.  According to a Stanford study, not only are consumers willing to pay more, they will take it a step further and punish companies that are not responding to expectations of sustainable offerings, by simply withdrawing support and switching to brands they perceive are more aligned with their values. More and more frequently, consumers have been taking activist positions by disclosing dishonesty or greenwashing practices. They exercise the power of viral marketing on the internet, and they skillfully harness social media to disclose and shame such deceptive business practices (i.e. Martin Shkreli).  And smart businesses listen. Smart business adjusts and creates new offerings that better reflect the needs and values that customers are willing to pay for.

Year after year, more products with “green, clean and responsible” claims enter the global market.  In the profile of the “Future Consumer 2018” , WGSN describes consumers across all continents as expecting sustainability to be a main feature rather than just a value-add of any commercial offering.  Today, sustainability is mainstream going far beyond the buzzword of yesterdays’ marketing campaigns.  Sustainability has become a material feature, quantifiable by concrete sales figures and stock prices.

It has been well documented, that consumers put their money where their values are. According to a global consumer purchasing behavior survey by Nielsen in 2015, 66% of respondents were willing to pay premium for sustainable products; this is a trend that is expected to grow only stronger.

Therefore, it is only natural that for-profit enterprises are allocating their research and development resources towards “what sells”, which are sustainable products and services. These sustainable offerings have been incorporated independently of philosophical and social views of executives, independently of the political connections of Boards, and independently of leadership styles.  Such an approach of creating a portfolio of what consumers want, a sustainability-driven portfolio, is not a reflection of  a value statement of a business enterprise; it is simply a calculated business behavior geared towards increasing profits.

The best talents are inspired by visions of “green, clean and responsible”, and the best minds rush to design such products and services.  These designers and inventors are guided by principles of eco-efficiency, which includes conserving energy, water, and responsibly sourcing, using and reusing materials.  New product innovations, process innovations, and material innovations not only bring competitive products that are supported by customers, they are saving money and produce material gains for companies, increasing profit.  Profit with purpose.

Employees Choose It…

The war on talent, and specifically retaining young talent, is one of top challenges facing businesses, that CEOs lose sleep over.

While pay and benefits are still the strongest drivers attracting new employees, once hired, employees increasingly seek meaning and purpose in employment that goes beyond the paycheck.  Loyalty towards employers, or lack of such, is greatly shaped by the meaning and purpose employees experience first-hand through their work.

According to 2016 Deloitte Millennial Survey, 66% of millennial employees expect to leave their companies within the next 12 months.  Losing trained employees is costly for business, so retaining young talent within organizations is a priority for human capital strategies.  Retaining talent goes far beyond pay and benefits, underscored by the Deloitte Millennial Survey.  Corporate values that are aligned with personal values bring purpose and meaning to work, becoming powerful tools that cultivate loyalty and retain a motivated workforce.  This is a clear case of values directly impacting the bottom line by increasing or decreasing the cost of running business, ultimately decreasing or increasing profit.

Talented employees gravitate towards purpose-driven enterprises, towards employers that project strong values that are aligned with personal values of employees.  This trend has been consistently backed by research.  As in a Nielsen global survey of 30,000 households, 67% of respondents preferred to work for socially responsible companies. http://www.nielsen.com/us/en/insights/reports/2014/doing-well-by-doing-good.html.  In a Rutgers University survey, 50% of millennial employees were willing to accept a pay cut if allowed to work on a project that is more closely align with their values. https://netimpact.org/sites/default/files/documents/what-workers-want-2012.pdf

To help entice millennial employees to stay with a company, employers recognize that they must project corporate values and demonstrate ethics and responsibility in an authentic way, they must communicate a sincere commitment to broader goals including environment stewardship and responsible actions within communities they operate in.  Today employers are quickly learning how to effectively present a business strategy of embracing sustainability and  how to bring purpose and meaning to jobs.  If not done properly, employees will look for a better fit, starting from the alignment of values.  HR executives understand today that every millennial employee is only 12 months away from a new job with a new employer.  They know that unless meaning is incorporated into jobs, unless sustainability is embraced authentically throughout an enterprise, unless profit with purpose is clearly communicated, they will keep losing talent and consequently, incur turnover expenses.

Investors Demand It..

Investment decisions are based on understanding and mitigating risks, from operational, development, cyber risks to reputation risks, environmental risks, social and political risks.

Reputational risk is a complex factor, as Nike learned in the 80s.  At that time, Nike’s management and its investors had not fully comprehended the long-term impact of the “sweat shop riots”. They underestimated how this legacy will shape their current business and future brand image until they faced consumer backlash.  40 years later, Nike still cannot fully shake off its sweat shop legacy. Despite transparent labor practices rigorously instituted after the riots in addition to an aggressive marketing campaign, Nike’s investors took notice and their portfolio lost value.

Reputational risk challenges were faced by Apple and its investors in the 2000s.   Despite the fact that the company had imposed the highest global standards in contract manufacturing, Apple lost 5%, or half a billion dollars of its stock value after the 2008-2010 reports of suicides in one of its contract manufacturers, the HongKong-based Foxconn Corporation. Foxconn had manufactured iPhones for Apple, computers for Dell, HP and other consumer electronic devices for global electronic companies.  In late May 2010 WSJ reported that 10 employees of Foxconn working on the Apple phone assembly line committed suicide by jumping to their death at the Foxconn Shanghai facilities.

Apple was caught in the crossfire of quick media accusation followed by the outrage of even Apple-loyal consumers. Consequently, Steve Jobs had found himself  defending Apple from accusations of sweatshops instead of promoting a the then-revolutionary features of the iPhone 3.   “Steve, Apple can do better” – wrote “Jay” one of many bloggers on the MacStories Blog after the Foxconn suicides were reported, reflecting the views of many loyal Apple devotees.   “You should educate yourself”, responded Steve Jobs. “We do more than any other company on the planet”. While there was truth to that claim, it was still not enough for Apple followers. The market responded with Apple losing $500,000,000 dollars over the course of 2 years.   In the 2012 analysis “Did Foxconn bring Down Apple Stock”, StockRiters argued: “The Foxconn riots and suicides have illustrated something all American companies with factories in Asian countries should be strongly cautious about – that when American Consumers realize that behind the iPads they use, behind the bright LCDs and LEDs, the Nike shoes and the designer clothes they wear, that behind these there is an undernourished, underpaid, possibly underage laborer toiling away in some dank sweatshops in the foul underbelly of Southeast Asia – that understanding has an immediate effect on the stock of the responsible company. A company that resorts to, condones, or ignores such business practices from its contractors, will get hurt where it matters most, its bottom-line. Therefore it is sound financial astuteness to spend money on removing this sort of incidents from ever happening”.

Watching Apple’s stock performance during the Foxconn crisis, while also remembering Nike’s “sweatshop” legacy, shareholders of global corporations were pressured to re-evaluate the risks and benefits of the short-term cost savings of labor arbitrage, and long-term benefits of a responsible supply chains. Creating value by cutting the cost for profit as purpose became simply too risky and eventually too costly, and not sustainable in a long run.  Market punishment for profit as purpose was real, and painful.

It is not surprising that investors have been demanding transparency in corporate reporting in areas such as:  supply chain practices, labor practices,  company local reputation etc.   As a response, ESG reporting, or Environmental, Social, Governance reporting, both voluntary and compliance-driven, is becoming a standard disclosure practice in global business.  Business analytics powerhouses such as Bloomberg have incorporated these demands by offering an ESG reporting module on Bloomberg terminals.  Many others have followed by standardizing and simplifying ESG data to offer tangible and material risk assessment.

Shareholders activism, initially marginal, starts to play an important role in shaping investment strategies based on ESG factors.  Since 2011-2017, the New York City Pension Funds succeeded to implement various forms of ESG disclosure through shareholders’ resolutions at its 39 holdings, mostly technology and apparel companies. Where disclosure mandates do not exist, these resolutions require management of the companies to report on a material risk factors.  This strategy is being adopted broadly by investors community, starting from institutional investors and expending to other groups of investors including individual shareholders. In fact, number of companies start voluntary reporting, either defensively, to avoid blacklisting, or proactively, to appeal to the consumer base. This trend of applying ESG disclosures as a straightforward risk mitigation practice, has been evolving independently of investment philosophies, economic believes, or investors views on the social role of business. It is simply safe to invest in profit with purpose.

Profit with Purpose

As investors are demanding transparency in corporate reporting, they are finding allies in consumers, in employees, and in communities where their businesses operates.  These diverse groups of stakeholders are motivated by unique, sometimes opposing reasons, yet are unified by one common denominator: sustainability is the business driver for profits, and sustainable profits are driven by purpose.

Conversely, offering products and services without eco-efficiency considerations, practicing deceptive communication and greenwashing, chasing quick gains at the expense of communities or environment,  these practices are simply too risky and not profitable for business in a long run.   Independently of ones’ economic views, philosophical believes, political affiliations it pays to invest in profit with purpose because

  • consumers pay for it,
  • employees choose it,
  • investors demand it.

Maung

Maung’s article

As companies have started to internalise (and for that matter, practice) the triple bottom line concept of sustainability, the focus now has shifted to issues beyond their walls of operations and manufacturing. In the world of outsourcing, globalisation and interdependence of suppliers, companies must look into making their supply chains more sustainable.

UN Global Compact (UNGC) and Business for Social Responsibility (BSR) define Supply Chain Sustainability as “the management of environmental, social and economic impacts, and the encouragement of good governance practices, throughout the lifecycles of goods and services. The objective of supply chain sustainability is to create, protect, and grow long-term environmental, social and economic value for all stakeholders involved in bringing products and services to market.”

What’s in it for my organisation?

Whether a company leans towards Freeman’s stakeholder approach or Friedman’s camp to maximise profits for shareholders the choice is clear. No matter the route one takes, grudging or proactive, there are clear benefits to be had. Companies simply need to get on the bus and reap the benefits!

There are different ways to slice the benefits – one could categorise these in three ways.

Business Risk Management: Avoid risk to image associated with bad

social /environmental practices of suppliers. Manage business risks associated with climate change.

Unsound practices (e.g., non-compliance) of suppliers could result in major supply chain disruption and cause delays in production. Labour challenges could create havoc to on-time delivery; safety and poor environmental management practices could result in production stoppage and poor productivity. These issues are realistic especially with increased sourcing from low–cost countries. In addition, companies are now partnering with fewer suppliers than before. Having a close partnership with these suppliers, ensuring a robust management system and its governance can help parent company mitigate these risks.

The climate change debate better be over by now. Thailand, in 2011, was devastated by one of the worst floods in its history. The economic damages were estimated at over $45 billion. Most of the loss came from the manufacturing sector with floods inundating seven major industrial zones. This resulted in major supply chain disruptions. Regional automobile production was affected. Flooding also caused a global shortage of hard disk drives. Disruptions to manufacturing supply chains affected regional automobile production and caused a global shortage of hard disk drives which lasted throughout 2012. These risks have to be taken into consideration and redundancy built into supply chain strategy.

Operations Excellence: Reduce supply costs, environmental footprint of its supply chain.

Responsible management of operational inputs, such as energy, water, natural and synthetic materials can greatly reduce companies’ procurement costs. Using operations excellence tools, such as lean sigma, companies can reduce cost of these operational inputs. In many cases, the carbon footprint sustainability goals of companies are indeed achieved by employing these tools and teams. By becoming more efficient (e.g., using less electricity and water, and creating less waste) companies can lower their COPS (cost of products sold), thereby improving profit margins.

Leading companies have also extended their best practices to key supplier partners in helping them reduce their footprint through collaborative initiatives. A leading pharma company extended its energy management and reduction know-how by partnering with a key supplier and helped it reduce its carbon footprint. Financial savings form the initiative more than off-set the cost incurred by the pharma company expenses in supporting this initiative.

Innovative Products: Build successful businesses by developing differentiated products with sustainability attributes.

A sizable number of consumers prefer eco-friendly offerings, and even those that do not or are at best neutral would switch to these products if these products provide price advantage.

Under the Unilever Sustainable Living Plan the company has integrated sustainability aspects into a number of their products. These include Dove, Lifebuoy, Ben & Jerry’s and Comfort. These products have contributed to Unilever’s growth, while reducing waste, water use in manufacturing, and CO2 from energy use has created cost efficiencies. Unilever now sources more than 55% of its agricultural raw materials sustainably, which reduces risk to its supply chain while benefiting producers and the environment.

Dutch giant Philips established its green products line in 2004 with a goal to reach 50% of overall sales by 2015. The goals was met (and exceeded) in 2014, contributing to over €11bn in sales. These products have improved environmental performance often supported by a recognised eco-performance label, developed through their EcoDesign process.

In order to make supply chain sustainability stick senior management buy-in is an absolute must. Without their drive and accountability sustainability can become just another short-term corporate initiative, a “flavour of the month” that quickly fades into oblivion. Change happens quickly when the C-suite decides to focus on sustainability.

However, a company also needs the right people to embrace the sustainability journey. So, recruiting and retaining the right kind of people becomes very important. Various researches suggest in the US that a majority of not just millennials but employees of all ages regard social responsibility and environmental commitment as important criteria in selecting employers. Companies that try to become sustainable may well find it easier to hire, retain talent as well as “sustain” their sustainability programs and culture.

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About the Author

Dr. Maung K. Min is a Board Member of Global Sourcing Council. The GSC is a non-profit organisation focused on sustainable, socially responsible sourcing practices. Dr. Min is an experienced management executive with over 25 years of track record of leading functions and initiatives in the areas of Sustainability, EHS and Supplier Management, IM, Manufacturing, and Quality Systems (including Operations Excellence/Continuous Improvement). He has led initiatives in the Americas, Europe and Asia. Dr. Min has held roles in Italy as well as in Puerto Rico and is passionate working in a global and multi-cultural setting.

Karen

Karen’s Article

Almost twenty years ago, my son responded to the ubiquitous inquiry “What do you want to be when you grow up?” His interlocutor was his Italian godfather (the Milanese not the Sopranos variety). There were certain implicit cultural expectations about the response, the godfather being both a lawyer, an aristocrat and an exceptionally cultured Renaissance-man: doctor, lawyer at one end of the spectrum, bookended by painter, composer at the other with the (yes, stereotypical) accommodation to age and gender of train driver somewhere in-between.

Henry’s reply was immediate and authoritative. “Je deviendrai un fabricant de nuages.” (“I am going to be a cloud-maker.”)

We might have, literally, in that moment imputed to our progeny a prodigious early interest in the wonders of nephology, or at a minimum, Henri as the future TV meteorologist on France ‘s equivalent to CNN.

With anachronistic hindsight, we might have imagined a stellar career with Alphabet, Google or others as an innovator in externally sourcing data storage.

Our hypotheses would have been wrong. Our kindergartener was indeed fascinated by the process of using a remote network of servers. Impressed? I hope so. However, the servers in question, as Henry painstakingly elaborated at our prompting, comprised a cloud team of four ladies and two men. (No issue with diversity.) They wore white coats, gloves and hats (reassuringly clinical) and black wellington boots. (Safety-conscious). These cloud-servers toiled by night, gathering up the leftover white things from the day: tissues, paper, candyfloss, feathers, blossoms, meringues and such. They heaved this harvest into the Great Machine for transformation. (Enlightened cradle-to-cradle thinking.) While the Great Machine processed its inputs into nebulous outputs, the “team” hit the drawing board co-designing the cloud architecture. (That, in case you wondered, explains why clouds’ forms vary. Their shapes are inclusively and collaboratively crowd-sourced and then, once set free can change themselves. Because, and I quote in rough translation, “It is beautiful to make a thing that always changes.”)

When the auroral moment came, whoever’s turn it was (nice distribution of decision rights in this team) would press the release button and out they would float: “Rows and flows of angel hair, and ice-cream castles in the air, and feather canyons everywhere.” We can surmise Henry would have subscribed to a Joni Mitchellesque rather than a prescriptive World Meteorological Organisation (WMO) view of his cloud classifications. We might jettison the dire tired expression “thinking outside the box” if we were a little more thoughtful about choosing our boxes in the first place.

Self-evidently, this cloud-sourcing career, outside of my child’s imagination, did not exist but neither then did Chief Officers of Cloud, Data, Digital, Diversity, Customer Experience, and Innovation amongst others that now, and for now, do. Even CTOs and CIOs were barely emergent two decades ago in non-technology sectors. So before we smile with kindly condescension on the fertile fictions of the child’s mind, let’s be mindful that – recent, controversial studies on doomed professions notwithstanding – we can still only imagine what’s next. In business, innovation and imagination are not the same thing but they coalesce inevitably because innovating demands of us that we imagine that which does not exist yet.

Of course, in the context of innovation as a management science, “imagining” constitutes informed extrapolation from data, trends and, without doubt, some mind-expanding “what if?” intuitive thinking. Henry was not entirely wrong about the Big Machine and clouds, literally. Anthropogenic clouds, most of them noxious or malevolent, have been continuously created since the last Industrial Revolution. He could not have known that Russia began cloud-seeding the year his mother was conceived and I am guessing that even now he may be unaware that China created 55 billion tons of artificial rain last year. (His cloud phase passed as quickly as a SKUD in a thunderstorm). Henry’s methodology of making up the future will not translate unmodified into effective commercial innovation practice. But there is a lesson in it. What is and what might be are not bounded by what we know – a truth that our commonest management practices and our defensible but all too prevalent cult of expertise and experience-worship obscure to our cost.

“Dally” is not a word much used in business except by me. As an antidote to treacherous “Yes, but” thinking I often invite executives to dally, suspend disbelief, pause and play around with ridiculous ideas for a moment. Microsoft, Airbnb, Post-it Notes, Netflix were all at one point silly ideas measured against received knowledge. Until very recently, the notion of a proliferation of robots, autonomous vehicles and the likes of Siri resided in the realm of imagination. How quick is the leap from mind to market. Henry the four-year-old aspiring cloud-maker alighted presciently if inadvertently upon an insight now quite concrete for maturing Millennials. The “Great Machine” will indeed shape the future of work and remove an ever-increasing tranche of it from human hands. The partly flawed but frequently flung-around mantra of innovation’s purpose as “better, faster, cheaper” will irresistibly find fruition in the machine age of colossal computing power, big data, advanced analytics and AI.

A lot of us, over the last 30 years, have looked at sourcing, to borrow from Joni Mitchell again “from both sides now, from up and down” across a panoply of economic, social and political perspectives. A decade ago, I co-founded the Global Sourcing Council as a forum to debate and evaluate these myriad perspectives. Some of outsourcing’s promises in the global north and south have proved “life’s illusions”, others not. The debate on the seemingly binary question of exporting jobs or importing competitive advantage still obtains and is whipped into a violent tornado of rhetoric during cycles both electoral and economic. Contributors to this magazine have offered more informative and illuminating content on this multi-faceted dimension of our hyper-connected, globalised world than I ever could. But, the “Big Machine” will have a thunderous voice in this conversation as work moves inexorably not from continent to continent but from man to machine. In her cloud lyrics, Mitchell looks at life from “win and lose”. The adults in Henry’s story assumed almost two decades ago that jobs would exist that do not. Eventually, we resigned ourselves to the depletion of manufacturing and business process jobs but we did not see our jobs as underwriters, lawyers, analysts and writers going away. It seems that the future, like it or loath it, is becoming more evenly distributed (to remodel William Gibson’s aphorism).

My preoccupation in all this is innovation. Innovations got us here. Outsourcing qualifies as commercial innovation – at least in the narrow context of the 20th century notion of the firm organising its resources and processes to maximise shareholder return. Our 21st century challenges place a stratospheric level of importance on innovation. Every organisation, process and system is perfectly designed to do what it does, so if we want a different, better outcome it is a design question. Good design begins with questions – as all human progress does – and the process of invention requires us to percolate those questions through our imaginations. The exhortation to innovate in business is often as amorphous as a shifting cloud. It is remarkably childish to wish for what we want. We must deliberately and attentively build it as a corporate competence. Strategic innovation is the science and art of creating commercial value which did not exist before, sustainably and scaleably. Innovation as a management practice is a discipline that will be nourished or starved by organisational design.

I have researched and studied strategic and tactical innovation for a very long time.

One insight is that the celebrated 20th century management practices that we still retain utility for managing – counting, controlling and predicting things – are often the enemies of innovation. This is problematic since we promote good managers to leaders in whom then the innovation responsibility is concentrated. Similarly our race to answers vigorously instilled in us educationally, and by organisational norms, can dangerously propel us either to increasingly elegant answers to the wrong question or to receptivity only to those responses within our preconceptions: doctor, lawyer, train-driver. In corporate environments, consciously and unconsciously, we self-edit. We constrain the one competence that the machine, however big, has not: imagination. Creative thinking is a limitless resource and a vibrant source of competitive advantage squandered every day by conformist cultures where daring and difference are dangerous.

I compared an imaginative view of clouds with the strict and rigid taxonomy of the WMO. Its International Cloud Atlas serves a specific purpose for meteorologists and restricts itself to clouds of “operational significance” in disclosing atmospheric conditions. This is scientifically apposite for the WMO and what it needs to get done. Management, however, is both art and science. A company is more than incorporation documents and share certificates. The science of innovation is not fluffy stuff but does need to heed Thoreau’s “What kind of science …is that which enriches the understanding but robs the imagination?” Answer: not the right kind for what modern executives need to get done.

I could perhaps have avoided decades of study had I more carefully contemplated the organisational attributes implicit in little Henry’s business: diverse and inclusive, appropriately clinical, shared identity, safety conscious (i.e. impact aware), enlightened by cradle-to-cradle sustainability, team- centric not ego-centric, co-creative and collaborative, purposeful and finding beauty in change. Oh, and impossibly aspirational… But as the change master and consummate leader Nelson Mandela observed: “Everything is impossible until it is done.”

Those of us who have been children are, without exception, innovative. All we need is an environment in which to innovate. We need to imagine and make a workplace where the release button on our uniquely human qualities is pressed every morning and sets them free. I hear Wellington boots and white hats are a good start.

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About the Author

Karen A. Morris is a Board Member, a co-founder and director of The Global Sourcing Council, a not-for-profit committed to economic and sustainable best practice in global sourcing. She is a strategy consultant, specialising in innovation and growth, and has designed unique methodologies and metrics for all aspects of commercial innovation; these have benefited diverse organisations around the world. Karen was AIG’s first Chief Innovation Officer and has supported businesses, not-for-profits and governments with their innovation agenda. An English barrister, Karen has over 25 years’ experience in law, management, underwriting and multinational business. This diverse international background inspires her insight on product, service and business model innovation. She is a frequent speaker and writer on Innovation, Sustainability, Leadership, and Ethics. Karen has served as an adjunct professor on the MBA program at Fordham University in New York teaching Innovation and customer-centricity. She has been a visiting lecturer at universities in France and Spain. She served on the Advisory Board of The Howe School of Business at The Stevens Institute of Technology and of The World BPO Forum. She is also an advisory council member of The University of Colorado’s RMI School, and a Senior Fellow of The Institute for Innovation in Large Organisations.

Q&A with Bobby Varanasi

Q&A with Bobby Varanasi

Varanasi_Headshot100x100

A PUBLISHED author, sought-after-speaker and commentator, Bobby Varanasi (pic above), Matryzel Consulting Inc chairman and chief executive officer, is also one of the world’s leading consultants on global business services (GBS) as a business model.

He is also the latest speaker to join the stellar cast at Digital News Asia’s (DNA) What’s Next conference, where he will join a panel discussion on Disruptive Technology: What’s Going To Hit/Boost Your Business with Red Dot Ventures managing director Leslie Loh.

While he is familiar with the latest technologies adopted in business, describing the next wave of human labour substitution by machines and software as a “capital deepening,” Varanasi has always urged organisations to focus on revenue growth, building resilience, and strengthening their sustainability.

Technologies, whatever form and shape they take, however sexy or mundane they may be, must always play a supporting role and not lead the business goals of an organisation.

In the following Q&A, Varanasi shares what’s disruptive, including the shift from transactional to intelligent workflows with not just technology playing a role but governance as well.

DNA: You are an interesting mix for a panel that talks about disruptive technology, as the GBS space is all about the interlink between people, process and technology. What’s so disruptive in your space?

Varanasi: Well, the corporate world has come a long way over the past five decades, particularly in its quest to leverage competencies and practices.

While the outsourcing world itself morphed into the GBS world we see today, this increasing maturity has not been as much a function of input factors (people, process, technologies) as much as the inability to deal with uncertain futures and ever-changing marketplace conditions.

This ‘disruption,’ as one would like to term it, isn’t about or because of technology. Today’s complex relationships amongst organisations are typically built around collaboration, mutuality, and co-creation. End goals may be many and distinct between partnering entities.

However, the common thread binding them cohesively is an agreed objective to build value for the future.

Outcome-centric collaborative endeavours have, and continue to deliver, substantial (and at times unimaginable) value to customers, employees and shareholders.

To remain now at the forefront of such gains, organisations look continually toward enhancing their own view to the marketplace, while remaining cognisant of competition, changing consumer preferences, and inherent dependencies that may manifest as hidden opportunities from within their supply chains.

The principal disruption is happening with the entire premise of moving from being a ‘competitive organisation’ to a ‘cognitive organisation.’

Intelligence, information, workflows and integrated management of functions within and outside the organisation are the key pivots. Technologies may be seen as one key set of inputs to enable such fundamental shifts.

To that extent, the GBS industry is clear in its understanding of the applicability of such technologies.

DNA: The business model has moved from being described as Shared Services to Shared Services and Outsourcing (SSO) to now being called Global Business Services (GBS). Is this the sign of a sector still trying to find its niche and relevancy, or is there sound basis for the changing descriptions?

Varanasi: Twenty years of rigorous adoption of sourcing has seen progressive creation of new service lines and delivery models, alongside rigour and discipline across the entire life-cycle.

However the primary premise – of leveraging human resources as capital and inputs – remained unchanged.

Was value created or eroded? This is a question that is beginning to gain traction, both in terms of defining what value actually meant, and what it doesn’t.

Progressive pursuits, from discrete to integrated services, have opened up a plethora of opportunities for organisations to transform their rigid command-n-control models.

Consequently, many organisations that were at the cutting edge of adopting sourcing began to see the limitations the traditional models (SSO) continued to pose, particularly in the face of an increasingly complex marketplace where consumer needs changed quickly.

Three distinct trends (among many) are pivotal to appreciate the nature of the GBS world:

1) Aggressive commoditisation

Of (hitherto) innovative services allowed organisations to transcend borders and fuel growth in many nations. Of course, a price needed to be paid and that took the form of de-leverage. Control, ownership and predictability gave way to interoperability, open standards and ubiquity that transcended experience or size. The consequential discrete nature of provisioning imposed inherent limitations that providers couldn’t do much about, while customers saw through the limitations.

2) Replacing labour as key input

A resource revolution has been waiting to happen to satisfy the needs of over 2.5 billion new middle-class people worldwide. Meanwhile, smart machines have become increasingly able to perform advanced pattern-recognition tasks (that hitherto required human intelligence).

The evidence of ‘capital deepening’ is undeniable, where robots, computers and software (as capital) are increasingly substituting human labour. The contributing factors for such capital deepening have been increasingly cheap processing power, sophisticated software, cheap and ubiquitous sensors, and a much better understanding of human intelligence (in the form of cognitive sciences).

On the flip side, input factors have equalised to the point that any sophistication among them is nothing more than marginal value. This facet is precisely the reason for the increasing irrelevance of traditional sourcing models.

3) Pursuing cognition and predictability

Fundamental shifts are noticeable across all layers within organisations. The biggest shifts are observed in the operational and tactical layers.

The former is seeing a shift from transactional to intelligent workflows, where technologies and other innovations across data science, artificial intelligence and other trends with governance and collaborative partnering are influencing traditional resource-heavy delivery.

Intelligence is being created continuously instead of keeping the lights up. The fallouts are the irrelevance of job-centric and transactional models.

Meanwhile at the tactical layer, traditional service delivery that guaranteed efficiency-based endeavours within functions began to be replaced by an integrated multi-functional and cross-organisational view.

The endeavour isn’t as much about enhancing efficiencies of operational inputs through structure and rigour. Rather, the emphasis is co-creation and predictive approaches that aim to build resilience within the larger organisation.

DNA: Is there any single technology that you feel is disrupting large businesses? What can or is being done by early adopters to deal with its impact?

Varanasi: No, I firmly believe that there is no silver bullet. I don’t even subscribe to the fact that technologies are disrupting businesses.

Growing networks and globalisation have helped organisations build resilience through collaborative partnering, for a variety of reasons, spread across the entire gamut of activities within.

Today’s technologies continue to surprise many, not just because they are new, but because they are helping us – finally – find answers to vexing questions that have been around for too long.

I would therefore be quite sanguine in pronouncing adverse absolutes for companies which aren’t perceived as early adopters. Relevance and utility value supersede the modernity of any technology.

Hence ‘backcasting’ the business model, starting with outcomes in mind and then tracing back into the organization, would enable the identification of the right combination of input-factors (labour, capital, technologies, tools, systems, infrastructure, policies, operating models, workflows, etc.).

Eventually, the strategic pursuits of an organisation are about revenue growth, resilience and sustainability. To that end, any and all inputs have to pass the test in being able to contribute directly to these goals.

What’s Next

You can hear more from Varanasi and other speakers at What’s Next: The Business Impact of Disruptive Technology on July 28 at the Sime Darby Convention Centre in Kuala Lumpur.

Register directly at http://digitalnewsasia.com/whats-next-2016 or call Suraini Sarip at 6013 295-3498 for details.

Feb. 2013 Expert: Todd Yaney | CHRYSLER GROUP

[two_third]Todd Yaney is part of the Corporate Sustainability Core Team at Chrysler Group, headquartered in Auburn Hills, Michigan. He is responsible for the societal aspects of the organization’s corporate responsibility, which include Chrysler’s workforce and supply chain. Most of his career has been within Procurement and Supply in the U.S. and Europe, creating a strong understanding of the intricacies and real-life aspects facing the global manufacturing supply chain. In 2010 he helped with the development of Chrysler’s Sustainability Team, who published their first CR report in 2011. Todd has served as Chrysler’s Executive-on-loan to AIAG (the Automotive Industry Action Group), where his primary activity was supporting supply chain initiatives with an emphasis on corporate social responsibility and in particular the Global Working Conditions Initiative.[/two_third]

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[box type=”shadow” align=”alignleft” ]Question 1: How often does the Chrysler supplier sustainability panel meet and is this group facilitated by a third party, i.e. is it more formal than informal? And how big is this panel? (From: Kathrin Bohr; Intertek Sustainability Solutions)[/box]

Answer 1: Chrysler Group’s Supplier Sustainability Panel consists of 13 suppliers who represent a cross section of our supply base. There are suppliers from each of our commodity groups (Chemical, Electrical, Indirect, Logistics, etc.). Of that group, there are large suppliers and small ones, some who are quite mature in sustainability and some who are just starting out. All together, they represent the voice of our suppliers quite well. Our quarterly meetings are facilitated by us, and are hosted either here at Chrysler headquarters or at one of the suppliers’ locations. In all cases, the meetings can be virtually attended online. The meetings by now are very informal, which contributes to the very open dialog that takes place. Each company has a core member, but is always free to bring colleagues who can speak to the agenda topics of the day.

[box type=”shadow” align=”alignleft” ]Question 2: Todd, could you talk more about the auto industry’s collaboration on conflict minerals? (From: Christopher Matthews; WSJ/Dow Jones ; Reporter)[/box]

Answer 2: The best place to find out how the auto industry is collaborating on Conflict Minerals is to go to the AIAG (Automotive Industry Action Group) website. They have a special section for the latest information on industry activities at the Conflict Minerals Resource Page. It is frequently updated with the latest information on what we are doing and also contains several good contacts.

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[box type=”note” align=”alignleft” ]To publish an additional question for our expert please submit your question via e-mail to: luiza.gsc3sawards@gscouncil.org
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