Shift Index: Long- and Short-Term Impacts on Global Economies
Deloitte Insights video
In the grip of economic uncertainty, many executives are holding their breath – trying to improve short-term productivity and hoping things will go back to normal. But according to the Shift Index, an annual study conducted by Deloitte LLP’s Center for the Edge, normal no longer exists. Forces such as digital technology and public policy have changed the way organizations will achieve long-term growth and profitability.
Tune into the latest episode of Deloitte Insights to learn more about the Shift Index and economic outlook.
Sean O’Grady: Hello and welcome to Insights. Today we are discussing the findings from the 2010 Shift Index. It is an annual survey from the Deloitte Center for the Edge that illuminates long-term performance trends in constantly changing environments. Now, we have brought in two guests to help us better understand this year’s findings and they are both returners to the program, so we welcome back John Hagel, the cochairman of the Silicon Valley-based Deloitte Center for the Edge, and Carl Steidtmann, the chief economist and director of Deloitte Research’s Consumer Business practice. Carl, I would like to begin with you and get an understanding of the current economic landscape. What do you see going on in the economy right now?
Carl Steidtmann (Carl): Oh, really it is a tale of two recoveries. If you are in manufacturing or exports or technology, business is pretty good and those sectors of the economy are really performing rather well. If you are in construction, housing, real estate, those sectors are suffering, largely because of the fallout from the housing bubble collapse and then if you are in energy or financial services or health care, you are facing some facing some fairly significant headwinds because of the regulatory changes that are going on in those industries.
Sean: So it sounds like a real mix. John, I would like to kick it over to you through talking more about these long-term trends, specifically the Shift Index. Can you quickly tell me a little bit about the Index and its methodology?
John: Sure, the Shift Index started actually several years ago, when we looked at the kinds of indices that executives and policymakers study in order to make sense of the economy, and if you look inflation or unemployment rates — all very helpful in terms understanding the current situation. But on the other hand, we all agree we are in the middle of the long-term shift, i.e., restructuring how we do business and yet there is no index that actually tries to quantify where we are, what the dimensions are on that shift, and where we are on it. So, we embarked on this effort to create what we call the Shift Index, which has 25 metrics that try to quantify various dimensions of this longer-term shift that we have been going through.
Sean: Now, I understand that there are some key findings in this year’s survey. They are up on the screen for the audience and those findings were low levels of worker passion, ongoing performance decline, and the impact of the economic downturn on some trend indicators. John, what does that mean?
John: Well, let me start with the performance decline because I think that is the longer term, most interesting finding from the Shift Index, which is if you look at corporate performance over a long period of time, since 1965, return on assets or basic measure of performance has collapsed by 75%. It has been a sustained, long-term erosion in profitability and no surprise, perhaps given the current economic downturn, that trend has continued in the past year. So, that is one of the findings that we have. The second finding around passion, worker passion, is actually related to that in the sense that we believe that a key driver of performance in companies is going to be the passion levels among the employees and our finding is that it has been low historically. When we started a couple of years ago, it was about 23%. It is still around that area. It has actually declined in some industries. So until we figure out ways to harness more of that passion, we are going to have a hard time dealing with that performance decline and then there were a set of metrics that perhaps no surprise capital movements, for example, were down; brand disloyalty and customer disloyalty was up. I mean people were more willing to change brands given a better offer and so there were indicators/metrics that we have in the Shift Index that were certainly affected by the current economic downturn, but we really focused on the long-term trend and wanted to look at in the context of decades, not just the past quarter or past year.
Sean: Now, switching back over to you, Carl, I am interested on your economic take on these trends. What is your perspective?
Carl: It is really surprising that employee passion is down. We have lost almost nine million jobs during this recession. We have gained about two million back in the recovery, so at that pace it will be about 2018, 2019, before we get back to where we were before. The interesting thing about this is that this recovery, usually in a recession, you do not see rises in productivity. That has not been the case in this recovery, you have actually had a very strong rise in productivity during the recession because businesses were so aggressive in cutting head count. There really seems to be much more of a focus on the short-term bottom line as opposed to the broader impact that those layoffs have had on the passion and the commitment of the workers who are affected by those layoffs.
Sean: Very interesting. My final question for you focuses on those broader implications and I am interested to know what might be of value for executives in both the short term and in the long term. Carl?
Carl: Well, I think in the short term, we have to get through this recession and sort of the fallout effects of the financial crisis and there are a lot of ill effects that are still within the economy. Within the financial services industry, there was an enormous amount of regulatory change had taken place that needs to be addressed. Within the energy sector, we are seeing significant focus on greenhouse gases and the impact that has on business decision making, but I think in the longer term the need to focus on a lot of the factors within the Shift Index, because of the longevity of it, it does have a good deal of robustness in terms of the factors that it really brings out in terms of long-term performance and the fact that we have seen such a long-term decline in the rate of capital productivity I think is really quite critical, because when Japan went into their decline one of the key leading indicators of that was that capital productivity in Japan was declining and what we are seeing in this recovery is a real significant increase in business investment and capital investment and that is really one of the drivers of this recovery and in many ways that can be very self-defeating because businesses in a sense are embracing capital because of all the uncertainty around the cost of labor, whereas in the long run ultimately it is the people in the business who are going to make it a success or not and by undermining the factors that affect their productivity, I think we are making sort of short-term decisions that are probably going to have an ill effect on the long-term result.
Sean: John, you get final thoughts, your take on short term and long term.
John: I think at one level it is totally understandable that executives focus on the short term. That is what is they are measured on, Wall Street increasingly focuses on quarterly performance and so that is what they are focused on. I think it has led to a bit of a perverse effect in the sense that executives, particularly in the grip of the current economic downturn, are kind of holding their breath, taking these short-term measures to try to improve productivity and just hoping that things will get back to normal and I think one of the things we are trying to highlight with the Shift Index is we are not going back to normal there are some long term forces that have to do with digital technology infrastructure, have to do with fundamental shifts in public policy on a global scale that are intensifying competition and that is not going to change. We don’t see any indication that that is going to change even after we come out of the recovery. So increasingly, we think executives are going to have to take a longer-term view and say how do we prepare ourselves for a much more competitive global economy and what are the right decisions there, not just in the short term but that will position us for long-term growth and profitability.
Sean: All right, so there is no going back we have to get ready for the new normal. Gentlemen thank you both very much. All right, we have been talking about the 2010 Shift Index with John Hagel, the cochairman of the Silicon Valley-based Deloitte Center for the Edge. We have also been speaking with Carl Steidtmann, the chief economist and the director of the Deloitte Research Consumer Business Practice. If you would like to learn more about John, Carl, or the Shift Index you can find that information on our Web site it’s www.deloitte.com/insights/us. For all the good folks here at Insights, I am Sean O’Grady, we will see you next time.
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