Beware of Business HIV: It's On the Rise

The less you pay, the better the deal. Right? The less time you spend, the more money you save. Right? These precepts are the foundation of a creeping business virus I call the Hidden Inefficiency Virus or Business HIV.

At its most fundamental DNA, Business HIV is the average individual’s response to too much and contradictory information. Needing to make decisions that guard profit and no longer having a grasp on the millions of pieces of data that dart in and out of their field of vision, business people have settled into a way of thinking that makes them wrong often but rarely willing to admit that they’re wrong. Doing so would require more in-depth study of data than they feel they can do. Sticking with saving money as the bottom line seems like the wisest course of action to many decision-makers.

Economic, human and social realities fly in the face of this sort of out-dated logic, however. The more time you spend investigating your own needs and the offerings of different vendors, the more money you can save – not only in the purchase but also in the long-term. The more money you spend on individuals with specific expertise, the more money you are likely to make as your operations improve.

Business HIV removes the real logic and replaces it with a sense of false scarcity and urgency. Business HIV is an emotional and intellectual disease that prevents decision-makers from seeing how off course they really are. It’s ego, comfort, fear. . . and it’s just plain illogical.

The remedy to Business HIV is a restructuring of the big picture. A realization that costs such as energy, taxes and insurance are spiraling and they’re not going to come down. Competition is more rampant than ever in the history of commerce as Third World countries replicate everything better and cheaper. A new strategy based on people creating profit through innovation is the only antidote to Business HIV.

Are you ready to move from a sick mechanical business model to a healthy organic business model? Are you ready for that shot in the arm?

CJ is a regular contributor to HRTools.coms.
You can now get your own copy of his groundbreaking book, The Squaredime Letters.
You can vist CJ online at www.cjcoolidge.com.

Off-Shoring and Outsourcing: Problems for Mechanical Model Enterprises

I responded to a wonderful article by David Williamson Shaffer on Epistemic Games. The article was titled, The End of the American Century, and is a good description of America's misunderstanding of the changes that have, and are, taking place in the world economy.

My comments, reprinted here, clarify the difference in perspective between "mechanical" and "organic" business models, and how this difference highlights our cultural dislike for outsourcing and off-shoring.

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David, this is a well written piece. Thanks for your thoughtfulness, and insight.

Yes, the reality is certain, and it is different from that which most Americans assume to be true. There is a larger economic world out there, and most of it is not American.

I was reading Thomas Freedman’s The World is Flat a while back, and, somewhere in the middle, I became frightfully aware of this fact, and of the reality that most of my associates in business believed otherwise. The world’s business models have already changed, and many of us are ignorant of that reality. It became eminently clear that, as Americans, we are erroneously convinced that our long established, mechanical business models, remain the right and true way, and that we should continue to force our businesses to fit those models. This is our form of insanity.

If we are to survive, we must get with the program.

I appreciate your inclusion of the account of the Dallas attorney, Mark Richardson, who said that, out of ethical obligation, he must do what’s best for his clients, and “that includes saving them money.”

His assessment reflects what I believe to be a misapplication of the economic reality he describes. His ethical responsibility is not to “save his clients money,” rather it is to allocate their resources to produce the greatest value for their investment paid to him. His description of off-shoring to a lawyer in India at $60 per hr instead of using his in-house attorneys at a rate of $395 per hr, or his $225 rate for a junior associate, suggests that his rates are, somehow, too high.

I think this perception is common, and a misunderstanding of the real value proposition to be considered. There is a world of difference, and understanding that difference will illustrate the problem many Americans have with concepts such as outsourcing, or off-shoring.

We have a natural distaste for both. It appears that available talent off-shore will take jobs away from Americans. We can’t possibly remain profitable if we are forced to reduce our fees to compete with these off-shore providers, so we think. And, so we fear. However, we miss the basic economics of the opportunity.

America’s infrastructure is considerably well-developed and expensive to maintain. We are also well-entrenched in it. We can’t, and shouldn’t expect to eliminate it, which would be necessary if we are to attempt to compete in this world economy taking the fear-based approach inherent in our “save money” models. Instead, we need to embrace it, to recognize its value, and then use it to our real advantage in the development and delivery of the products and services it can produce. That infrastructure affords us opportunity unavailable and undeliverable by our “competition” in places, which like India, are as of yet under-developed.

The basic tenant of our capitalist economy is the free exchange of resources to gain other, more valuable resources for the betterment of our lives and our companies. At the core of every financial transaction is the idea that all participants gain value in the transaction. A consumer receives greater value from the transaction than what he spends. The seller receives greater value than what he spends to provide the product or service. Done right, both sides profit.

Take the case of the attorney. The law firm's client chooses to buy legal services that provide a greater value than their associated expense. It is the ethical responsibility of the attorney to do just that. Here is where the decision to off-shore aspects of the transaction comes in. The basic research task described in Shaffer's article is an example of a non-strategic offering. Grunt work in simple terms. Such work may provide some value to the client, but the value of that work should not be understood in the framework of the cost to produce it, but in the value of the impact of the work done. The two are really not related. If attorneys in India can provide the entirety of the value to be received for 25% of the cost of attorneys in America, so be it. The value realized is not diminished at all. If attorneys in India are happy and fulfilled only requiring $60 per hr, an efficiency is created, making it possible for the American attorney to deliver the same value to his client at a reduced cost, first to his firm, and secondly, if he should choose to reduce his fee to deliver that value, to his client.

So, off-shoring actually enables the attorney to increase his value to his client, but that value does not lie in his ability to “save his client money.” Such a limited view diminishes his value to his clients, and violates his ethical responsibilities toward his own firm. Both parties have the ethical responsibility to maximize each other’s value, and earnings. Saving money may occur, but cannot be the foundation for value description. Since there is an opportunity to off-shore, the greatest value can now be realized from better utilization of the American attorneys. They can now apply their creativity to strategic activities with the opportunity to add vastly greater value to their clients, tasks well worth the $300+ per hr that they need to maintain the operation and necessity of the firm.

The distinction between the two perspectives lies in the way we tend to view a pricing model. We tend to choose something from our mechanical, manufacturing business models. We consider cost, add some “fair markup,” and assume the rate to be some sort of value. In reality, there is no cost + fair markup anywhere in the value equation. The value exists only in the mind of the customer, and it is not a cost plus proposition. The cost has no significance to him, only that, all things considered, the purchase costs less than the economic value received. Should the law firm be ethically able to charge $300+ per hr for services it provides? Absolutely. However, and this is the critical distinction, it can only support the fee if the value provided is worth multiples of the fee to the customer.

Only when American companies end their love affair with cost plus pricing and adopt value based fees, will we be able to fully embrace every opportunity to send our less-strategic work overseas, and then become what our well-developed infrastructure requires, that is high value/ high margin enterprises.

Wanna keep struggling, or maybe become a loser? Then keep using your internal HR departments.

What's wrong with building an internal HR department? What's wrong with hiring HR professionals to manage people processes in your company? Nothing, really.

• It just won't help you get the best out of your most leverageable asset.
• And it certainly won't help you build a dynasty.
  

A great illustration of this counter-intuitive reality came from a CEO friend of mine who had done research into profitability and employee alignment. He was not happy. His company had a well-functioning HR department. He had always been satisfied and proud of this. They had good HR professionals on staff, and believed that they were doing a good job. Turns out, they were – as far as internal HR groups can do a good job. But it wasn't much good at increasing his profitability.

He told a story to communicate the dissatisfaction he was experiencing.

“Suppose that our company was a football team. Success, then, could be characterized as winning football games. Then, suppose that, of our 11 players on the field at any time, only 4 knew which end zone was theirs. Suppose only 2 actually care. Suppose only 2 know their positions. Only 2 know what their position is supposed to do? Then, what if only 2 trust their coaches, and fully support the plays that were called. What if 8 of the 11 were, somehow, actually helping the opposition? To make matters worse, suppose 10 of the 11 aren’t even committed to finishing the game. This team, so composed, will be hard pressed to win a single game.”

Then, he applied the story to his business, and what he had learned about profitability and employee alignment.

Well produced, traditional, internal HR departments have yielded the following results when employees are surveyed. These results come from case studies of 25,000 workers from all kinds of industries. The best, traditional HR practices yield less-than-stellar results.

37% know what the company’s trying to achieve and why.
20% are enthusiastic about their team objectives and organizational goals.
20% know how their job contributes to the company’s organizational goals.
20% know how their individual tasks affect those objectives.
20% believe that the organization enables them to execute key goals.
20% trust the organization and their leadership.
15% feel engaged enough to want to continue doing their job.

85% are ready to bolt if and when a better opportunity presents itself.

This CEO ran some internal surveys of his own, and although his results were a little better than these averages, he could see just how much more effective and inefficient his organization could be if he knew how to handle things differently.

He hired an outsource HR company, not to reduce costs, or to provide standard HR services, but for expertise at employee engagement and alignment. This group of non-internal specialists immediately went to work. Their fresh, external approaches suggested by multiple experts (he could not have afforded for himself alone) changed many of the dynamics within 3 months. Employee attitudes were improved, and his alignment survey results also started up. The result: Creativity, innovation, contributions by employees skyrocketed. So did his profits.

What excites him more is that he sees so much more happening in the future. He actually believes that his people can accomplish anything. He knows that he can create a sustainable competitive advantage, a "dynasty."

It's all good, now. The NE Patriots have nothing on him. Move over Bill Belichik. Step aside, Tom Brady. Well-aligned employees can do the impossible.

Don't be lulled into pseudo-satisfaction by traditional HR in your organization.

Check out CJ's professional profile at http://www.linkedin.com/in/cjcoolidge.