The Innovation Issue

Posted: November 8, 2006 in CRM

I got a call from a friend the other day lamenting the loss of technical IT jobs to lower cost economies.    I know this is a charged subject but I thought I would wade into it to explore what it means for CRM.

First off, I am not sure I agree with the point that many people make that exporting jobs generates more jobs in our economy.  Not long ago there was a study published in the Harvard Business Review that showed that jobs really are created in the economy that exports jobs, but only after a significant lag in which some choice jobs have been exported.  So, I guess you could say that in the long run more jobs are created but as John Maynard Keynes famously said, “In the long run we are all dead.”

You need only look at the results of importing massive numbers of cars that began in the late 1970s.  As foreign cars came into the country, companies like GM saw market share drop from near 50% to just about 25% today.  True enough, jobs were created in this country, for example, some foreign car makers opened up manufacturing plants here and more people were hired to unload cargo ships but it was anything but a zero sum game.

First of all there are lots of places, like Detroit and Flint Michigan that have still not recovered.  These once proud manufacturing centers are hollowed out and economically depressed today.  Next, and perhaps most important, while new assembly jobs are now located in other states, the research and development is off shore.  You can’t look at the car industry today particularly at the emergence of hybrid propulsion technologies and not think that once, that kind of innovation was what we did here.

When the research and development moves away it takes more than jobs; it takes innovation, and its entire infrastructure.  The research that was funded domestically and performed in local universities becomes globalized and money no longer goes to domestic universities, programs get cut, and what was once a cutting edge higher education system is something less.  All that makes it harder to come up with the next innovation.

Now, this is not to blame any foreigners for the loss of leadership, at least the blame does not need to be exported.  The US car companies were not building world class cars when they were disrupted by the foreign car companies.  It was the result of many years of non-competition among domestic vendors content to build products that were good enough (for a good analysis, David Halberstam’s book “The Reckoning” is still worth reading). 

The disruption of the US car industry was also the result of paper or financial entrepreneurship.  In financial entrepreneurship, companies make money by lowering their costs rather than by innovating products.  If you export jobs, cut quality, or engage in financial transactions that make money without making better products, you are engaging in financial entrepreneurship.  The bottom line of your financial statements looks the same whether you made and sold a new product or service or if you cut your labor costs by shipping some production jobs to a lower cost market.  Net/net, you still get your bonus and stock options.  At the same time, though, you hollow out your company and if enough companies engage in the same tactics, you hollow out the economy as well.

So here’s the CRM point of all this.  I see the same kinds of things happening in CRM and the tech industry right now that we saw in the car industry many decades ago.  Having just been through a round of user group meetings, I have to say, I have not seen a great deal of real innovation happening. 

Everywhere I have been the vendors managed to highlight their improved user interfaces, which I have a hard time getting excited about.  Mostly they have been repackaging their old wares and adding a few words about the customer experience, but I don’t really think they understand the experience they are talking about.  There was also a great deal of slide-ware and some wait till next year presentations.  Meanwhile, some of the biggest systems integrators are talking about how many jobs they have spun up on foreign shores.

For the record, I am not against hiring people overseas and I do understand that we don’t produce enough people with the right qualifications to hire people only here.  As a matter of fact we never have been able to staff all of our innovation with native-born Americans.  In just one example, Einstein, Fermi and others who worked on the atomic bomb were refugees from Europe, and we were glad to have them.

My concern is with the corporations, specifically the corporations who should be leading the charge in enterprise software but who are not.  While companies like Salesforce.com, NetSuite, and many others are busy inventing the future of IT, established players with loads of capital seem lost.  Why did Salesforce.com invent the AppExchange instead of Microsoft or Oracle?  So many of the leaders of the CRM and SaaS movements are alumni of Oracle; the ideas for SaaS were certainly floating around inside Oracle in the late 1990s but they never crystallized there.  Why is that?

Today the US is the global leader in software innovation and the software economy, and the very center of it all is in Silicon Valley.  How long will it last?  The manufacturing economy lasted about 250 years from the invention of the steam engine to the late twentieth century and the information economy took over from there.  Judging by the state of innovation I have seen lately, I wonder if the vendors who should be leading have given up.

Comments
  1. Hi Dennis,

    On the innovation (or lack of it) by establised players I think the answer lies in what Clay Christiensen called the “Innovators Dilema” in which the big giants actively refuse to introduce an “inferior” technology at a lower price for two reasons:

    1. Their existing customer base are asking them to produce better versions of what they already have.
    2. The low cost system would eat into the existing revenues and make a lot of the current assets worthless.

    In this case is is normally new upstart companies (often founded by employees trained by the old guard) who will take up the challange and offer a product for an unserved market. As this product improves it starts to become interesting to the customers of the existing providers. Clay used the Disk drive industry for his research, but the same pattern emerges in many industries, I think we are witnessing a similar shift for similar reasons.

    As for the export of jobs – http://www.businessweek.com/magazine/content/05_50/b3963177.htm
    This is an issue that was high up on the agenda of the Dean of London Business School (now she’s at UC Berkley). I think her article sums it up.

  2. Great comment from Gareth Davies and I totally agree that what we are seeing is a classic disruptive moment.

    My deeper question is why?

    We’ve all read the same books, we all know who Clay Christensen is and none of this surprises us. So why are the big players letting themselves go down the same well worn path?

    Many animals can think but one of the things that makes human beings different is our self-consciousness. This is clearly a time when self-consciousness ought to save us from ourselves yet we continue down an unproductive path.

    Einstein said that the definition of insanity is performing the same action repeatedly expecting a different outcome. I think Einstein should have lived to see the software industry.

  3. Great comment from Gareth Davies and I totally agree that what we are seeing is a classic disruptive moment.

    My deeper question is why?

    We’ve all read the same books, we all know who Clay Christensen is and none of this surprises us. So why are the big players letting themselves go down the same well worn path?

    Many animals can think but one of the things that makes human beings different is our self-consciousness. This is clearly a time when self-consciousness ought to save us from ourselves yet we continue down an unproductive path.

    Einstein said that the definition of insanity is performing the same action repeatedly expecting a different outcome. I think Einstein should have lived to see the software industry.

  4. Juno888 says:

    We’ve all read the same books, we all know who Clay Christensen is and none of this surprises us. So why are the big players letting themselves go down the same well worn path?

So, what did you think?

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