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Robert Reich tells CIOs: Rise up and adapt to global change

Linda Tucci, Executive Editor
Former U.S. Labor Secretary Robert Reich said companies that continue to measure success in terms of business cycles -- the next week, the next month, the next quarter -- will be unable to compete in an increasingly global economy, and he urged IT professionals to rise up and help their companies adapt.

"Many of you in the IT field are change agents. If you are not change agents you are not actually doing your job, because IT is all about change and the management of change," said Reich, a headliner at last week's IDC conference in Boston, now a professor of public policy at the University of California, Berkeley.

Relational capital in the global economy

Organizations that will thrive in the global economy will be driven not by the short-term expectations of Wall Street, Reich suggested, but by his so-called change insurgents. These educator-executives can persuade managers to develop strategies that comprehend the structural economic change brought about by globalization, technology and the graying of the baby boomers.

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Reich: Why the Feds should not raise interest rates

Former Labor Secretary Robert Reich took a short detour from his presentation to espouse his views on fiscal policy, telling audience members that if they happened to see newly appointed Federal Reserve Chairman Ben Bernanke, or any other central banker, Reich had a message.

"Tell them to stop raising interest rates!" Reich said.

"What's happening right now, is that the Federal Reserve Board and financial banks around the world are spooked by what they consider to be inflationary trends. The great metaphor that they are all using and is in their heads is the 1970s. This generation of central bankers has lived through the trauma of the 1970s and double-digit inflation, and they don't remember the trauma that preceded the 1970s trauma, the trauma of the 1930s. The 1930s was a trauma of inadequate demand and far too much production capacity and that led to depression.

"This economy is slowing because we have energy price increases that are going up not only in the energy sectors but all sectors. We have natural resource prices that are going up because demand is exceeding capacity with regard to natural resources and that is mostly because China and India are putting powerful pressures on demand. That is not inflationary! These are one-time price increases.

"This is not the old-time inflation of the 1970s. Quite the opposite. We have productivity improvements in the last five years -- 24% productivity gain in this country. Median wages are flat. Adjusted for inflation, no change. Labor costs are 70% of the cost of doing business. If you've got huge productivity increases, if you've got no change in median wages, friends, where is the inflation?

"There is no inflation, outside energy and raw materials. Energy and raw materials are exogenous. You raise interest rates, you are going to not only cool the economy, there is a danger you're going to pull this economy and other  economies -- because other central bankers are doing the same thing -- into  a minor or major, dare I use the word, recession. So if you come across Ben Bernanke, tell him to stop raising interest rates!"    

Globalization is "everybody's favorite word," Reich said, "and it means nothing because the cartoon version you hear people talking about is trade. It's us versus them, your company versus their company. Not true."

In his view, globalization is in large part about supply chains in which companies "are getting everything from everywhere and selling everything to everywhere."

Companies should be looking at China, India, Brazil and Russia not only as manufacturing platforms or places for cheap labor, but also as "huge and growing" markets. "You have to be there, making relationships with local providers, retailers, distributors," he said.

Successful companies have the dexterity to tap the expertise wherever it happens to be and to move their people to where demand is growing. Building the alliances with suppliers, distributors and retailers all over the world, however, is not easy because this "relational capital" doesn't show up on the balance sheet.

"My beautiful hips"

"If you are going to be a change insurgent you are looking behind the balance sheet to where the relational capital is," Reich said.

Globalization is also not just about low wages. "It's about getting cost down and also getting value up," Reich said.

He used the example of his double hip replacement. "They are beautiful. I wanted to know where they were made. I found that my beautiful new hips were actually fabricated in Germany, not a low-cost area to do work, but they are fabricated in Germany because that is where the expertise was," he said. The hips were designed in France. "I have French designer hips."

In the new order, the standard of living depends less on the companies that are headquartered in a city or state and more on the value the people in that locale add to an increasingly integrated global economy, Reich said, "regardless of who they work for."

"If they add a lot of value, they will make a lot of money. The money they make will go into the local economy and provide a lot of jobs for a lot of retail and restaurant and hotel and hospital people," Reich said. If they don't add much value to the global economy, they will not pull money into that locale and the standard of living will drop.

Innovation: the new bottleneck

Even if there were no globalization, the world would see enormous changes in every economy because of technological change, Reich said. The biggest effect of IT is in manufacturing. "Even China is losing manufacturing jobs. How can that be? Because Chinese factories are becoming more efficient," he said.

Competitive advantage from the 1950s through the 1970s meant mass production -- the ability to produce high volume and lower the cost per unit. Three or four major players came to dominate an industry, standardizing processes and coordinating prices. "It was an efficient system but did not generate much innovation," Reich said.

Technology is fueling a different means of production, allowing companies to tailor production to particular end users. High volume is no longer the entry barrier, because any niche now is fair game. (In purchasing, high volume still confers a competitive advantage, he conceded, alluding to Wal-Mart.)

In an economy where competitors have the same access to finance and information, the ability to innovate is an important competitive edge.

Business lacks the tools to measure the value of human capital. Change insurgents must proselytize the view that people are company assets, not costs to be cut, Reich said.

"The only way to develop sustainable competitive advantage is by careful recruitment, training and retention. If people are viewed as costs to be cut, your organization is moving in the wrong direction," Reich said.

Pig through the python

Access to talented people will be severely constrained by the third major trend in the new economy, Reich said -- demographic change. The 76 million baby boomers approaching traditional retirement age will present a problem on both the supply and demand side, he predicts.

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Topics: Business/IT alignment

Topics: Outsourcing - offshore

The big bulge moving through the population like a pig through the python, Reich said, will not have the retirement income their parents enjoyed because their earnings trajectory has been flat, unlike their parents, whose income went up dramatically. Except for the drug and healthcare industries, businesses will see a falloff in demand.

On the supply side, the dearth of talent will force companies to compete intensely for workers.

The companies at greatest risk for failure in the new economy are ones that have been successful in the past. "How can you change if the dominant image in people's mind is past success?" The organizations that are changing are those that have had past traumas, he said.

Let us know what you think about the story; e-mail: Linda Tucci, Senior News Writer


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