The New Normal: Managing through an era of tranformational change

Phil Sorgen

Policy Options - June, 2009 issue

What a difference a year makes. Twelve months ago, we were uncertain of whether we were even in a recession. Today we know. Last year, we didn't know if it was going to be long term, or just a short term adjustment. Now we know.

While there is a tendency to focus on how bad things are or could be, I think we need to be positive and optimistic about what's around the corner.

To do so, first we need to put context on exactly where Canada finds itself today. It's not all bad news, however there are some challenges we face that have been overshadowed by the immediate economic crisis.

Once we know where we stand we can then identify the opportunities that challenges present. Some of the most successful companies and brands in history were launched or came to prominence in the aftermath of previous economic disruptions.

Unfortunately, there is no simple way for Canada to benchmark itself.

One day we read about how Canada is one of the best places to live, and how we have an enviable standard of living. Then a few days, weeks or months later, we read about our poor productivity, our weak purchasing power. It's hard to tell where we stand.

Starting with the positive, Canada is a very good place to live and work. According to the United Nations' Human Development Index, we rank third out of 179 countries. This index looks beyond GDP to a broader definition of wellbeing that includes life expectancy, education, and standard of living. The United States is 15^th, also a very good ranking.

But when you dig deeper into the economic data, the picture for Canada becomes a little more  disparate.

According to research published annually by OECD - the Organization for Economic Cooperation and Development - we are doing poorly when it comes to improving labour productivity - in fact, we are falling further and further behind.

This is a drum that I - and many others - have been beating for a long time and, it's concerning, that we see this issue falling off the radar during this economic downturn. Labour productivity growth - which is measured by relating changes in output to changes in labour input - is a key economic indicator that closely aligns with standard of living.

In 2007, Canada's labour productivity grew by only 0.5 per cent. The G7 countries averaged 1.2 per cent growth and the United States had productivity growth of 1.3 per cent. Of the 28 countries measured, only Italy, Mexico, Denmark and Spain had lower productivity growth than Canada.

What is more concerning is the downward trend. From 1995 to 2000, our productivity growth was about equal to the U.S. In the past decade, we have fallen behind.

This has a direct correlation to another key indicator: net national income or NNI. Today, per capita, Canada's income and productivity levels are 15 per cent lower than the U.S.

In the U.S., the per capita NNI is $34,700. In Canada, our NNI is $26,900. Quite a gap.

So how do you explain these gaps?

Simply put, Canada and Canadian businesses do not invest in our economic prosperity as much as other countries, especially the United States.

I'll start with the good news. With education, we are doing well. We are about average in our spending for primary and secondary education among OECD countries, and we trail only the United States in spending on post-secondary education.

In terms of producing post-secondary graduates, we also do well. We produce one of the highest percentages of graduates  and over half our population, in the 25-34 year age range, has achieved a post-secondary degree or diploma. That's good news for our next generation of business leaders. Where we are not keeping pace is in the areas of R&D, knowledge investment, and information and communications technology investment.

Canadian governments and businesses spend far less than our U.S. counterparts on R&D, and we are below the average for OECD countries. In fact, our R&D spend as a percentage of GDP has been trending downward for about five years.

Our investment in Information and Communications Technology - or ICT - also severely lags the United States and other economies like Great Britain and Sweden. And as with R&D, we are trending downward.

Investment in ICT is considered to be at the heart of economic change because the ICT-producing sectors play an important role, contributing to more rapid progress and productivity growth. Our lack of investment in this area means less ICT value is being added to our business sectors, compared to other jurisdictions.

So that's a snapshot. And it's a mixed bag.

But even with all this mixed data, there are clearly huge opportunities for us. Evolution is not a steady, incremental process that edges up at a perfect 45 degree angle. In fact, evolution often results in dramatic changes or upheavals, followed by long periods of relative stability, where very little changes. From a socio-economic perspective, think of the agricultural revolution or the industrial revolution. These were periods where dramatic change occurred in relatively short periods of time. Once it occurred things became stable again for long periods of time, but the world looked very different than it did just a few short months or years before.

I believe we are in the midst of a period of rapid and profound change - economically, technologically, socially, perhaps even politically and environmentally.

In times like these, success depends on your ability to understand what the "new normal" will look like. How will things be different when the economy stabilizes? And will you be prepared to take advantage of that new reality? Or will you be trying to compete in a world that has been relegated to the history books?

At Microsoft, our "new normal" focuses on three key pillars that we believe will have a direct impact on the success of our business. They are: the importance of innovation; the changing workforce; and the role of technology and information and communications technology.

Innovation

History teaches that there is no uniform path to economic recovery. However, businesses that take advantage of trends, that focus on just a few big bets, that are agile enough to take the next step to define the future, will thrive as the economy corrects. 

Indeed, many of today's most prominent companies got their start during tough economic times. 

• Procter and Gamble was founded during the Panic of 1837.
• IBM and General Electric came into existence during the long depression of the last quarter of the 19th Century.
• And, of course, Microsoft was started in 1975 when unemployment was around 10 per cent.

Other companies solidified their market position for decades by investing prudently during downturns. RCA invested in television R&D during the depression and dominated their industry for decades. Also during the depression, Sears transformed from a catalogue mail order company to one with stores in every community. They transformed retail shopping by being innovative and remain a fixture today in malls across North America.

Doubters will tell you that there won't be enough venture capital money to drive innovation spending. Wrong. Good startups are going to continue to get funded. Smart new technologies are going to continue to get funded at big companies like ours.

At Microsoft, we've had to make some adjustments in our business and in our cost structure during this recession too. But we also decided to increase our investments in innovation; we will spend more than $9 billion this financial year and next in R&D because we believe in the power of innovation and we believe that investing now will lay the groundwork for success in the future.

So good things can come out of tough times. Again, the key is that there is no silver bullet for righting our economy - it is what it is - but one staple recovery tool throughout history has been innovation that leads to improvement in productivity.

The workforce is changing - dramatically

It may seem odd to be talking about labour shortages when unemployment is at its highest point in almost 20 years, but there is no doubt that Canada has a shortage of skilled workers. And this shortage is having a profound impact on our ability to compete.

This is an important distinction. It is quite possible to have a surplus of labour and a shortage of talent.

The numbers are clear. A study from the Conference Board of Canada determined that in just one generation - by 2025 - we will have a skills gap of 1.2 million people, which could  cripple our economy. This gap is not likely to be closed even with high unemployment or with increased immigration of skilled workers. It's just too big.

The challenge is especially pressing in the IT industry. The Information Technology Association of Canada (ITAC) evaluated Canadian IT job demands over the next two years and determined that approximately 35,000 IT jobs would need to be filled even though we're graduating only about 7,000 computer science, math and engineering students per year.

Declining enrolment in highly skilled professions is one part of the problem, but so too is basic demographic trends.

Here are the facts. Over the next 25 years, 80 million boomers will retire in North America. There are only 46 million in the Gen X generation following in their footsteps - that's a 34-million person gap.

However, there are another 75 million young workers, often called the Gen Y or "net" generation following in the wake of the Gen X'rs. These young workers were born in the early 1990s and they are profoundly different from generations that came before them. They will transform the workplace in ways we can't yet imagine. Thinking about them - and how they work and think differently - should be considered in almost every business decision. We need to be ready for them and we need to embrace the change that they will bring.

What makes them different?

To start, they have a natural affinity for technology. Texting, social networking, instant messaging are all simply vehicles for communications. Email is archaic and a land line is almost inconceivable to them.

Working collaboratively is intuitive to them. They see the Internet only from the perspective of Web 2.0, where participation is the norm and sharing information through wikis, RSS feeds, tagging, filtering and more are commonplace.

They demand speed and constant change. They will demand learning opportunities, they'll want frequent feedback, and will insist on a work-life balance that may make older managers bristle.

Successful organizations will learn to alter their culture and management approaches, while continuing to respect the needs of older employees. These same organizations must also accept that their young employees have as much to teach them about success as do the organizations themselves.

We're in the midst of a technological transformation

To those who claim that technology has reached some sort of zenith, where no more game changing innovation is likely I simply say - you're wrong and you will be left behind.

Consider how far we've come in just the last decade. The Internet has gone from completely rudimentary to essential in our lives. Today's mobile phones are now as powerful as PCs. Social networking has entered education, and is now entering the workforce.  Alternative user interfaces, including tablet PCs, touch phones, and voice-driven search have become more commonplace.

Despite much advancement, we still have a long, long way to go. We are presented with tremendous opportunities to improve how we interact with technology, and how we do business.

Some of these opportunities are immediate and do provide relief in tough economic times.

Unified communications technologies bring voice communications, e-mail and instant messaging together to allow organizations to replace traditional phone systems with integrated software solutions that reduce hardware and maintenance costs, resulting in immediate bottom line relief.

Online conferencing lets companies cut back on travel to save money. Today, video conferencing and new collaboration tools are making virtual meetings much more like face-to-face interaction and enabling people to share and work together more effectively.

Reducing computer energy usage is one of the most effective ways to lower costs without hampering organizational capabilities. Windows Vista PCs automatically go into sleep mode after 60 minutes of inactivity. If your organization has 1,000 PCs, the annual cost savings from this feature amounts to $9,400 per year and 21 tonnes of carbon per year.

Another way to lower costs and energy consumption is through virtualization, which uses more of the computing power you already own. We're doing it at Microsoft. In 2007, our internal IT department moved 25 per cent of its servers into a virtualized environment. This resulted in savings of US$10-million and today, it takes just four people to manage the group's 3,500 servers.

Cost cutting makes sense in this environment, but these are not the ways technology is going to transform the workplace. At Microsoft, we envision a future where interacting with technology will be more like interacting with people. Voice recognition will supplant keyboards. Displays and screens will show up everywhere on every wall, every tabletop, any large surface will become an extension of your mobile device, capable of displaying information so that you can make the best use of your physical environment. These environments will make technology even more accessible, and they will unlock the potential of computing to enable individuals and communities to solve their toughest problems.

One of the best ways to articulate this vision is to imagine what the world could look like 5, 10, 15 years from now when taking into account the economic, demographic, and technological trends.

This vision should include three key elements.

The first is expression as it relates to how people create, interact and work with content.

Content will be created and communicated in simple yet expressive ways, enhancing understanding and shared experiences across cultural and skill divides. 

The second is seamless and secure connections. It relates to connections across people, content and processes. All will be semantically connected. Tools and services will be dynamically assembled, and access will be implicitly authenticated across teams, organizations, and networks.

Finally, contextual and anticipative insight relates to how people will leverage information. Information will be contextually relevant, enabling search, discovery, and analysis based on user profiles and intent.

Like it or not, we are in the midst of unprecedented change, the kind of change that is not linear, is not incremental. The kind of change that creates a "new normal" seemingly overnight.

These forces of change are having dramatic impacts across our society. These forces of change do not operate in isolation. Tomorrow's workforce is demanding technological innovation in the workplace and the innovative leaders who do this will be the ones to emerge strongest from this economic downturn.

Given the economic uncertainty, it would be very easy to hunker down and wait for the storms to pass. But history tells us that those who hunker down risk being left behind. We all face this choice. For those of us who choose to lead, we will emerge from this difficult period having earned the right to define the next chapters in our history. 

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