I'm excited to report that our new book, 'Threats in the Age of Obama' is now available for purchase -- from Amazon, as well as directly from our publisher, Nimble Books (same price; take your pick). Here's the cover:
I contributed a chapter entitled "Preparing One's Mind to See" expanding on this post last fall by about an order of magnitude (writing for publication is far more exacting than blogging!) Here's the brief blurb on Amazon:
If you are on a mission to change the way government works, particularly in the national security arena, this is one place where some independent and intellectually diverse thinking is to be found. In these essays, we offer our view of some of the more pressing threats the Obama administration will have to deal with in these early days of
the 21st century.
The title should not be taken as implying that this is a political book or that its insights are for the short term. Just the opposite. My esteemed co-authors make up a fascinating and insightful bunch of long-term thinkers who come at this from a wide array of perspectives.
Whatever you may have thought the next decade may bring before reading this, I guarantee you will be challenged to think about it differently, more holistically and in more depth afterward.
But before you get distracted reading everyone's bio or blog... BUY THE BOOK! :)
Side note: It's been quite a thrill just to get this far. The team is spread across eight different time zones. Most of us know one another's writings but only some of us have ever spoken live, much less met face-to-face. Welcome to the future of publishing.
It is actually possible not so see something that is really there... We can’t see patterns that our brains have filtered out... But although the risk hunters saw no danger as they stared into the seemingly benign financial jungle, in retrospect, there were certain signs — whose significance was not realized then — that should have sounded the alarm about the crisis that is now upon us...
The signs were there, but they couldn’t interpret them, even when strange and unusual things were happening. Part of the problem with grasping the significance of the anomalies was that the risk hunters were prisoners of their analytic models. What cues they picked up were interpreted in the context of their mental frameworks. They “saw” through the prism of their models. And their models did not account for the existence of the monster that was now closing in on them...
The scenario work I've done with clients for years is rooted in precisely the precept Fernandez begins with: that the mental models or frameworks that people build up over a lifetime, a career and/or a role strongly color what they believe is possible and therefore the kinds of potential problems and opportunities they are willing to consider. I mean literally color. Fernandez' analogies to invisible spectra are apt. It's not that the spectra aren't there. It's just that I'm not equipped to see ultraviolet, infrared or to hear a dog whistle.
I should note that, while the Economist article is about 'seeing' risk, the concept applies equally well to innovation. More on that in future posts. It's where I've been spending most of my time and energy recently.
Mental models are seldom examined. You and I may talk
about our views on particular future events, but it takes a lot of time
and effort (plus a common 'language' for discussing it) to talk in
terms of entire models. And mental models that are not examined and
described -- at any level -- tend to lead to decisions that don't fit
reality. (Think blindfolded child attempting to hit the party pinata
and hitting grandma instead).
Mental models are also fractal. My own colors the decisions I make, but
I also go about my day constrained, to a greater or lesser degree by
the mental models of the groups to which I belong (family, company,
church, country, etc.)
I'm reluctant to conclude that individuals' mental models are always able to change faster than those of groups. (We all know some stubborn stick-in-the-mud; perhaps he's the one staring at us in the mirror). Anecdotally, however, I know of more individuals who have had a 'Damascus-road' 180-degree 'a-ha!', 'boy I've been stupid, haven't I?' moment in some part of their lives than I do larger groups or companies that have done the same. (When that does happen, e.g., Bill Gates' famous 'Internet' memo ten or so years ago, it tends to be just a powerful individual who changed his mind, not evidence of the group turning quickly together.)
Finally, mental models not challenged systematically and fundamentally on a pro-active basis (e.g., with scenarios) tend to change only defensively and slowly (in response to hard, external truths; often at great cost). That's painful. As Fernandez writes:
I wonder to what extent the policy reaction to the current financial crisis is still colored by the limitations of received wisdom — the financial models — and the need to keep the music playing. The interventionary mechanisms of the last few weeks are designed to fix problems as we understand them. If you’re convinced we understand things now. At any rate we are firing into the last known position of the monster. Nothing can withstand that firepower. The crowds are being told not to worry because the monster will soon be dead. True, there are few doubting souls who are worried that the creature may actually be feeding off our weapons, but their fears are dismissed as nonsense. The important thing, we are told, is to keep things going, which was just the advice the traders gave the risk managers.
is remarkable how the advent of the current financial crisis
structurally resembles the intelligence failures leading up to 9/11:
the same misinterpretation of warning signs, the same blindness to
threats now evident in retrospect. The same belief in a rapid
resolution and a belief that the normal would soon be back.
In other words, we all sense that things have changed fundamentally (in financial markets and geopolitics) but we probably won't be able to develop our new mental models (at least collectively, agreeing on which ones are 'real') for many years -- not without a lot of deliberate thought-work, that is. Nor will we be able to perceive ongoing change properly (assessing both direction and magnitude) or develop said models in a way that enables us to act with precision, resolve and clarity. For years. That's a bit scary. It's also humbling (at least it should be).
Here's another thought that I should probably 'unpack' more fully in another post. Mental models are reflected in, but
less often challenged by analytical tools. Oh sure, insights can most definitely be had with them, but I'm talking about much bigger constructs. Sophisticated computer models, for the most part, tend to only amplify the force and reach of our brains.
They do not, as a general rule, make them better able to 'think
different' (ly) and develop new mental models for seeing the world -- for assessing the big risks in truly complex adaptive systems or for finding innovations.
The English language has, arguably speaking, been one of Great Britain's most prolific and resilient exports. Now it has become the basis for a new kind of international trade. That, along with cost pressures and reliable networks made the following virtually inevitable.
An Indian company will take over copy editing duties for some stories published in The Orange County Register and will handle page layout for a community newspaper at the company that owns the Pulitzer Prize-winning daily, the newspaper confirmed Tuesday.
Orange County Register Communications Inc. will begin a one-month trial with Mindworks Global Media at the end of June, said John Fabris, a deputy editor at the Register.
Mindworks' Web site says the company is based outside New Delhi and provides "high-quality editorial and design services to global media firms ... using top-end journalistic and design talent in India."
Substituting 'z's for the new copy editors' instinctual 's's in words
like 'institutionalized' won't be enough. As the saying goes: Britain and America are two countries separated by a common language. Perhaps more so with the other former colonies.
It will be interesting to see how they separate pure copy editing from tasks like fact-checking, local context, style and cultural nuance -- a lesson Dell and others learned the hard way, as faraway call center personnel (perfectly nice and perfectly competent) just didn't 'click' with their U.S. callers for a host of subtle reasons.
One demographic irony: in the not-so-distant future, the Indians may lose out to the Mexicans for the OC's outsourcing contract.
Working deep inside Wall Street these past eight months or so, I've had a privileged vantage point from which to observe some of the most tumultuous quakes in the industry in a generation -- and arguably in a century. (Given the near-catastrophic, and still potentially catastrophic nature of those changes, one might legitimately argue with whether 'privileged' or 'punitive' would be the right word to describe my seat in the proverbial bleachers on this one. Since I'm still being paid -- for now -- I'll stick with the former, if only because it has been quite an education.)
The market perceives the rating agencies to be doing much more than they actually do. The agencies themselves don't directly misinform the market, but they don't disabuse the market of misperceptions -- often spread by the rated entities -- that the agencies do more than they actually do. This creates a false sense of security and in times of stress this actually makes the problem worse...
It is hard for me to see how the rating agencies survive this debacle with their franchises intact.
On the failure of Bear Stearns and how the SEC has enabled the entire mess:
Rather than looking at its own rules which permitted increased leverage, lower liquidity, greater concentrations of credit risk and holdings of no ready market securities, the SEC is conducting an investigation to see if any short-sellers caused the demise of Bear by spreading rumors.
Of course, Bear didn't fail because of market rumors. It fell because it was too levered and had too many illiquid assets of questionable value and at the same time depended on short-term funding.
On how none of us are really spectators in this
...before Bear Stearns failed... I [had] planned to speculate that regulators believe all of these [major investment banks] are too big to fail and would bail them out, if necessary. The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails, you lose. It is a reverse-Robin Hood system...
As night follows day, it is certain that in the absence of tremendous
government regulation, this bailout [of Bear] will lead to a new and
potentially bigger round of excessive risk-taking...
On the counter-party credit system
In effect, [with Bear] the government appears to have guaranteed virtually the entire counter-party system. The message is that if you are dealing with a major player -- anyone in the "too big to fail" group -- you don't have to worry about that player's creditworthiness. In effect, your risk is with the U.S. Treasury...
...regulators should consider dismantling the counter-party system... require the posting of all derivative trades, clearing them through a central system and regulating margin requirements...
Sobering stuff, with a few funny bits (check out his water-vs-Coke analogy), along with some interesting long- and short- stock picks near the end. I urge you to read it all. The reason I post it here (a scenario- and big-picture-oriented blog) is that it will eventually touch pretty much everything in the global economy. Ignore it at your peril. Understand it and you'll at least be able to tell the difference between a two-by-four and a rock when it hits you (and all of us) in the back of the head.
I don't agree with everything in this piece by Thomas Homer-Dixon that appeared last week in the Toronto Globe and Mail, but this quote is an absolute gem (emphasis added):
Our global financial system has become so staggeringly complex and opaque that we’ve moved
from a world of risk to a world of uncertainty. In a world of risk, we can judge dangers and opportunities
by using the best evidence at hand to estimate the probability of a particular outcome. But in a world of
uncertainty, we can’t estimate probabilities, because we don’t have any clear basis for making such a
judgment. In fact, we might not even know what the possible outcomes are. Surprises keep coming out of the blue, because we’re fundamentally ignorant of our own ignorance. We’re surrounded by unknown unknowns.
It's something I've said for a long time:
It's tempting to think that all things are predictable given enough information, enough minds, enough time and enough computing power. It's just not true. (Which is not to say that some things are not predictable... and with incredible precision... a phenomenon that leads to overestimating the scope of problems and questions that lend themselves to such methods.)
Telling which is which is the trick...
I would go even further to say that really smart people who, by life experience know that some things are fundamentally unpredictable still draw an unvoiced sense of emotional comfort in their business life from the idea that some wise expert somewhere has been to the future (for all intents and purposes) and if we could just find him or her things would be OK... and/or that a really sophisticated computer model or prediction market (the 'collective mind') can provide crystal ball-level insights.
Sometimes yes. Often, no.
I liken Mr. Homer-Dixon's observations to those tragically massive car pile-ups that happen a few times of year in fog-prone areas like the Central Valley of California. Everyone is driving along at a reasonable speed, with reasonable spacing between vehicles. People are sipping coffee, tuning radios, maybe talking on cell phones. Slightly distracted, but mostly responsible. All is normal.
Then the first guy hits a fog bank and can't see squat. He taps his brakes. The second guy sees red lights and fog coming up fast and taps his brakes just a little bit harder, and so on. In just a few seconds, hundreds of cars end up in a tangled heap and people die. All because the guy in front was convinced by every one of his senses and not without justification based on experience that the visibility on the next 100 yards of road would be the same as on the last 100 yards of road.
I have seen this business from both sides. I've made money, and I've been ripped off... What is called the music business today, however, is not the business of producing music. At some point it became the business of selling CDs in plastic cases, and that business will soon be over. But that's not bad news for music, and it's certainly not bad news for musicians...
Well, almost. In my business it has become habit to scoop up watershed factoids like this and--along with other bits and pieces--make sense of them in a larger context of multiple future scenarios.
...the Bank for International Settlements in Basel, Switzerland... [tracks] the size of foreign-exchange markets. In April, daily turnover in currency markets rose to $3.2 trillion, the bank said yesterday.
That's more in value than the annual economic output of Germany or China, changing hands in currency markets every day around the world. It's also up 71% from the BIS's last survey in 2004, the largest jump in volume since the institution began conducting its benchmark survey in 1989.
Last year, Mr. Shah paid his engineers in India about half of Silicon Valley levels. By early this year, it was 75%... India's software-and-service association puts wage inflation in its industry at 10% to 15% a year. Some tech executives say it's closer to 50%. In the U.S., wage inflation in the software sector is under 3%, according to Moody's Economy.com.
Rafiq Dossani, a scholar at Stanford University's Asia-Pacific Research Center who recently studied the Indian market, found that while most Indian technology workers' wages remain low -- an average $5,000 a year for a new engineer with little experience -- the experienced engineers Silicon Valley companies covet can now cost $60,000 to $100,000 a year. "For the top-level talent, there's an equalization," he says...
Some Indian outsourcing companies are themselves looking to other countries -- mostly as a response to the globalizing nature of their business, but also to tap new labor pools amid a tight hiring situation at home. TCS recently opened a center in Mexico and is planning to move into Morocco. Wipro has two centers in China and is thinking about adding one in the Philippines...
[Wage] increases... have spurred a lot of job-hopping in India. Pervasive Software Inc. of Austin, Texas, opened a Bangalore unit in 2004 and hired 45 people. But soon its turnover was more than 25% a year, says the company's CEO, John Farr. The company kept having to invest in training workers, only to see them leave. A year ago, it shut its Bangalore unit.
Hidden outsourcing costs surfaced for other tech companies as well. To bridge the geographic and time gaps, some have found they need to hire more U.S. managers to handle their Indian teams. Kana Software in Menlo Park has one engineering manager for every 25 to 50 engineers, but it found it needed one for every five to 10 engineers it employed in the Indian city of Chennai. In December 2005, Kana decided to close its Indian operation.
Mr. Khan, Riya's California-based vice president of engineering, says he often stayed up until 4 a.m. so he could talk with the team in Bangalore. Mr. Shah, the chief executive, flew to India six times a year to make sure things were running smoothly.
Straddling time zones slowed development work. Sometimes a researcher gets stuck on a problem. "It's not really a good thing to keep bugging people at midnight every day, so that introduces some delays," says Mr. Dalal. He also felt cut off. "For us sitting here in India, it's hard to get the business aspect of the problem," he says...
Shutting down in India isn't cheap. Teneros, which closed a 30-person operation in New Delhi in late 2005, says it spent $2 million to do so. It had to get out of contracts, and it brought 12 of its Indian workers over to the U.S. on work visas, incurring immigration fees. Teneros left partly because of wage inflation and a lack of information-technology infrastructure that was slowing its work, says its CEO, Steve Lewis. Mr. Shah says Riya's shutdown costs, such as immigration charges and a broken lease, will be in six figures.
He has cleared eight desks in San Mateo for the eight Indian engineers coming over and is waiting for their paperwork to clear, hoping they'll be in Silicon Valley by the end of the year. "I thought I understood India," Mr. Shah says, "but now I know it's so much more effort to have a remote office as a start-up."
The article is instructive in its particulars. One of the things I find most fascinating are the hidden risks some may be incurring in dealing with a partner in one highly stable country ('A') who is turning around and outsourcing to countries B, C, D, and E, each of which is exposed to far more significant risks. (Pop quiz: what former world power used to be talked about enthusiastically in the 1990's as a major source for technical talent... but isn't much anymore? Hint#1: they have some of the highest rates of alcoholism, TB and premature death on the planet. Hint#2: they're sometimes referred to as a deflationary authoritarian kleptocracy with nukes. Hint#3: they use the Cyrillic alphabet.)
As both customer and service-provider, I've dealt with companies operating in India (as well as some headquartered there). The former experience, e.g. talking to a remote call center, is far less unique than it used to be. Few in the U.S. have not been forced at some point to try and deal politely and expeditiously with the intangible but very real challenges of accent, culture, pacing and shared interpersonal communication conventions easy to take for granted--until they're missing.
Dell's withdrawal from India is the most well-known case illustrating that even if all aspects of it cannot be fully defined in advance, customer experience eventually translates to the bottom line--for good or for ill. There's something jarring and difficult that I've never quite been able to put my finger on about sitting down at the end of a long day and dealing with some poor sleep-deprived third-shift worker in India. It's just as difficult--in a different way--to re-read my 2AM e-mail response to a colleague on the other side of the world over coffee the following morning and wince a la Hunter S. Thompson at how poorly my brain must have been working when I wrote it. It may be true that money never sleeps, but like it not we must.
I find the article even more interesting however as a lesson in the increasing fluidity of a global economy and the fundamental uncertainties and complexities of contingent strategic decision-making on such a stage.
Painting with a deliberately broad brush for a moment, I'll assert that difficult-to-revoke choices entailing 'big-bet' consequences tended--in the past--to match the scale of uncertainties with the resources the decision maker had at his or her disposal.
A small business (or her banker) needing to choose a retail location for (say) a bakery has always been able, without much trouble, to scope out the key dimensions of site risk (e.g., sidewalk traffic, local competition, parking, utilities, rent, wage rates for counter help, etc.). By contrast, large multi-national corporations have always been able to afford (whether they chose to or not) to devote several individuals--if not an entire planning department--to analyzing a vast array of long-term economic scenarios and political risks for operating around the globe.
In today's super-connected world however, it's much easier for smaller companies to find themselves making massively risky geopolitical decisions without fully realizing they are doing so and without the ability to assess or the scale and diversity to hedge such decisions. The anecdotes in the WSJ article prove that out.
The point? It's easy to read about globalization and come to the premature conclusion that one is missing out on riches by not plunging in headfirst and surfing a trend that's pervasive. As a friend and former colleague enthusiastically put it to me recently: the future is all about Dubai, Mumbai and Shanghai! That's fine insofar as it goes. This post is not about ignoring globalization but about assessing its complexities and the myriad strategic options it presents with thorough research, appropriate reverence for what is unknowable and sufficient thought about alternatives and contingencies.
Depending on one's business, Dubai, Mumbai and Shanghai may be fine choices--provided one stays aware of (respectively) increasing political and cultural extremism, the aforementioned inflationary flies in the ointment of international wage arbitrage, and the perniciously arbitrary nature of operating in a Communist country.
All may be risks worth taking if one goes in with one's eyes open. Unfortunately some don't. Sound bytes and rumors about the grass being greener make for lousy strategic planning.
As phone coverage spread between 1997 and 2000, fishermen started to buy phones and use them to call coastal markets while still at sea. (The area of coverage reaches 20-25km off the coast.) Instead of selling their fish at beach auctions, the fishermen would call around to find the best price...
Once mobile phones were in common usage:
...no fish were wasted and the variation in prices fell dramatically... Waste had been eliminated and the “law of one price”—the idea that in an efficient market identical goods should cost the same—had come into effect, in the form of a single rate for sardines along the coast... Fishermen's profits rose by 8% on average and consumer prices fell by 4% on average. Higher profits meant the phones typically paid for themselves within two months.
In busy, technologically advanced nations where, it seems, that half the drivers on the road engage in the unsafe practice of phoning while driving, it's easy to forget that travel and communication can sometimes be substitutes for one another. The authors note that mobile phones can:
...make up for poor infrastructure by substituting for travel, allow[ing] price data to be distributed and enabl[ing] traders to engage with wider markets.