ALL EYES ON OBAMA: Amazon & Kindle Part 3: It's Not Just Manufacturing!

from http://www.forbes.com/sites/stevedenning/2011/08/21/amazon-kindle-part-3-its-not-just-manufacturing/

In many of the generous retweets of my articles, Why Amazon Can't Manufacture A Kindle In The USA, and Does It Really Matter?, I saw comments like "a sad review of American manufacturing's decline" or "disturbing piece on the loss of US manufacturing."

These comments, while being correct as far as they go, miss the key point of the article, which is only partly about the decline of manufacturing. The main thrust of the article is the decline of management. Outsourcing and the loss of whole sectors of the economy are the consequence of anachronistic management in the Fortune 500 that is ill-adapted to the needs of the modern economy.

The decline is also occurring in software

Thus it's not just manufacturing. it's every sector of the economy, including software.

For instance, in an interesting video, Jeff Sutherland describes the pressure to outsource software development overseas when he was working at Patientkeeper, a Boston-based firm that delivers solutions that enable doctors to get information about their patients on mobile devices.

Our board wanted us to do outsourcing at Patientkeeper for years, As long as I wasn't outside the company running around, I could prevent it. But then one time, I was teaching Scrum in Europe and our VP of Engineering was holding down the fort. He agreed to do it.

So we sent a couple of million dollars to India to a team doing software [in the traditional bureaucratic fashion]. But he kept careful track of what happened.

He found that at the end of a couple of years, that if Indian software developers [doing software in the traditional fashion] cost 10% of an American developer using Scrum, the firm would break even. But they didn't. They cost 30% of what the American developers were costing. So he had sent $2 million dollars to India and he had to pay $6 million to get it back. In a venture-funded company, that's a pretty dumb thing to do. When we showed the board that data, they agreed. It was really stupid. They stopped all outsourcing.

Distributed software development can be productive

This doesn't mean that all outsourcing of software development is uneconomic. As Jeff goes on to explain in that video, a Dutch firm, Xebia, has successfully grown hyper-productive teams using Scrum that are geographically distributed.

But Xebia's teams, some in The Netherlands and some in India, are set up in a counter-intuitive way: instead of having complete teams in each country, each team is split between the two places, with half its members in The Netherlands and half in India. The dispersed teams were at least as productive as colocated teams and sometimes more productive than the teams located wholly in the Netherlands.

Apparently splitting the teams geographically forced more conversations among the team about what the client really wanted. Being forced to explain to the developers in India each day what the client wanted helped everyone get clearer and so the teams as a whole tend to become more productive.

Xebia manages the process of dispersion carefully. It grooms the entire team in Netherlands first. It is only when the team is working well that they send half the team back to India. Achieving high productivity in such circumstances requires highly sophisticated team management.

Learning from Xebia: the centrality of the customer

We can learn several things from the Xebia example:

The problem in outsourcing to India at Patientkeeper wasn't that the team was Indian. The problem was that the team in India was being managed in a traditional hierarchical bureaucratic fashion, rather than using the radical management practices of Scrum.
When the Indian team is also managed with the radical management practices of Scrum, as demonstrated by Xebia, it can also become highly productive.
What can't be easily outsourced is knowledge of the customer. The intimate understanding of what the customer wants and needs depends upon on-the-ground familiarity with the world of the customer. (For instance, when Toyota was designing the Lexus, it had to bring its engineers to the USA to live with the customers for extended periods so that they would have some understanding of what the customers might need or want in a car.)

Developed economies and their companies will always lose out to the emerging economies and their companies if the battle is fought on the basis of lowering cost (which is where traditional management generally tries to compete.)

Developed economies and their companies can only win in the long run if they compete on the basis of adding more value, through superior understanding and mastery of the world of the customer (which requires a radically different kind of management).

Is Apple a counter-example of outsourcing?

This finding helps us respond to the question raised by another reader ("tomh") who wrote:

I am missing the point of Apple as an exemplar of Manufactured in the USA. Apple outsourced the manufacture of iPhones and iPads to Foxconn (China). How is this fundamentally different from the Dell model? To the extent that the "chain reaction of decline" cited by Pisano and Shih is correct, what is the basis of Apple's exemption?

As Pisano and Shih point out in their classic HBR article, Apple [AAPL], "has been able to preserve a first-rate design capability in the States so far by remaining deeply involved in the selection of components, in industrial design, in software development, and in the articulation of the concept of its products and how they address users' needs." (emphasis added)

But beware! The difficulties of mastering design while outsourcing all production to other countries are not to be underestimated. As the Dell experience, among many others, shows, familiarity with the intricacies of production can be a key source of innovation in design, that enables the outsourcee to out-innovate, and ultimately destroy, the outsourcer.

It's not just the USA

Another reader suggested that my article was "jingoistic" by suggesting that the USA needs to give more thought to the implications of shipping key industrial sectors to other countries.

However the article doesn't just apply to the USA. I had similar conversations in Germany recently, and another reader noted the applicability of the arguments to the UK.

Still another reader ("barmonster") noted a similar phenomenon in Russia:

Here in Russia we had similar problem with electronics manufacturing for awhile. Dispute having all critical equipment made entirely on domestic production facilities (which are modern, but expensive to use compared to China), consumer electronics production shifted mostly to China.

What we are talking about is the process by which companies and economies—wherever they are located—advance or decline. In a globalized economy, the challenge for all—wherever they are located—is to keep on innovating.

The USA-a high cost producer–has begun falling behind because the prevalent approach to management in large companies—hierarchical bureaucracy—is badly anachronistic and is not adapted to the economic environment of the early 21^st Century, where delighting the customer through continuous innovation is needed to survive, let alone thrive.

We need different management

Hierarchical bureaucracy is constitutionally unable to innovate on a continuous basis. Despite what many professors in business schools and writers in management journals say, hierarchical bureaucracy cannot be "mended" to generate continuous innovation.

One hundred years of history have shown that hierarchical bureaucracy can't be adjusted with a fix here or there. It has to be dumped. It has shown itself remarkably resistant to any and all attempts to adjust it. It bends a little but triumphantly springs back to its original shape, with ease.

What is needed is radically different management that has continuous innovation built into its DNA, with a different goal (delighting the customer), a different role for managers (enabling teams), a different of coordinating work (dynamic linking) and different values (continuous improvement and radical transparency) and different communications (horizontal conversations). A single fix is not enough: we need systemic change.

What about the worker?

This finding is relevant to the concern of another reader ("mamamich") who wrote:

Where in this article are we addressing one of the key factors (IMHO) in many companies outsourcing or moving wholesale overseas: the American worker. I managed up to 75 employees for over 15 years and the lack of work ethic in our employee base is astonishing (and not getting better with the younger generation I might add).

The statistics about the role of workers are well documented and deeply shocking: only one in five workers is fully engaged in his or her work. It may well be true that some workers are inherently poorly motivated. But it is also true that decades of top-down command-and-control management in which the talents and the creativity of the workers are routinely ignored or crushed, management has to accept responsibility for creating work environments that inspire low motivation.

The evidence is that when management inspires workers to contribute their talents, through radically different management, most workers respond positively, as the experience of Intuit [INTU] or Salesforce.com [CRM] shows. Those workers who don't respond will need to move on and take lower paying jobs elsewhere, if they can find them.

Will everything all work out anyway?

Some Panglossian readers still harbor the hope, despite what they see on a daily basis in the newspaper and the financial markets, that everything will work out anyway. As a result of cheaper and better products becoming available, people will be better off as a result of all this innovation and firms will appear to be making profits.

What they are overlooking is that if the short-term profits destroy the firm, as at Dell, and if the process of outsourcing involves the irreversible destruction of the huge areas of the economy, the end result will be not just the inevitable death of those firms but also the impoverishment and joblessness of consumers who will no longer be able to afford to buy even cheap products.

For instance: once silicon-processing and thin-film deposition capabilities is gone, it's hard to become a major player in solar panels. President Obama can talk about investing in solar as a way of addressing USA's critical problem of lack of jobs. What his economic advisors don't always grasp is that, because of the traditional management practiced in this country, most of the jobs created in solar are unlikely to be in the USA.

Hence the type of management being practiced in the economy and its consequences become legitimate subjects of fundamental economic public policy. This however will require deeper and wider understanding than the economists of Federal Reserve Board of San Francisco have so far demonstrated.

Read part 4: Amazon & Kindle: Some good news (finally)!

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Steve Denning's most recent book is: The Leader's Guide to Radical Management (Jossey-Bass, 2010).