‘Need to invest in an educated and flexible workforce’

By : |June 11, 2006 0

The IT industry is going to change dramatically. The
service provider industry is going to change dramatically. Applications and
storage and processes will change dramatically. Therefore, the type of
productivity or competitive advantage you might be able to gain will also change
dramatically.  This is an excerpt from John Chambers, President and CEO, Cisco
Systems, where he shares his perspectives on Cisco and the networking industry
in the Executive Thought Leadership series.

Productivity, Labor, and Capital

The traditional
capital investments that increase organizational productivity are land,
buildings, and equipment. Other productivity gains come from improvements in
labor quality, such as education or skills training. But what are the relative
contributions of these options? These numbers vary considerably from survey to
survey. The U.S. Bureau of Labor Statistics estimates that a little more than 50
percent of productivity gains from 1948 to 2001 came from technology investments
and related process changes. Nearly 35 percent came from capital investments,
and the remainder from educational improvements and employee development. But
the more important question is about the investment target, not the selection of


Since the Industrial
Revolution, most productivity investments have been directed at reducing
production costs. Competitive advantage has been gained-and lost-on the
battleground of cost of goods sold. Innovations ranging from the assembly line
to industrial robots to Japanese kanban manufacturing systems have delivered
tremendous improvements in manufacturing productivity. While the total value of
output has grown substantially, competition has translated much of this
productivity into a steady decline in value-added and labor costs associated
with goods production, below 30 percent today in most developed-country
economies. The result is steadily diminishing returns from production-focused


During the 1980s and
1990s, many organizations shifted their focus to improving the productivity not
just of the production of goods but of the entire economic transaction. This
also coincided with the increasing percentage of services-based companies in the
economy. Innovations ranging from credit cards to inventory management and
transportation have allowed companies to attain, and in some cases retain,
competitive advantages in their industries. Although a significant opportunity
remains in automating transactions, I believe that the era of diminishing
returns for transaction productivity has begun and that the next productivity
horizon is emerging.

Interactions: The Next
Productivity Horizon

Improvements in
transaction productivity really began to accelerate during the 1990s. I might be
biased, but I would argue that it was the growth of network connections as well
as rapidly evolving market transitions that enabled many of these changes.
Banking networks enabled ATMs; airline networks led to e-tickets and automated
airport check-in; suppliers and manufacturers monitored inventory and production
status over corporate networks.

Another contribution
of the network is increased information timeliness and availability. Economic
theory would tell you that this increase in information makes the market behave
more rationally because consumers and businesses make decisions based on better
information. But purchase decisions are not wholly rational. As more of the
rules-based activities are automated, people (as consumers and employees) are
increasingly dealing with unanticipated issues, as well as those that require
judgment and insight.

This underscores the
importance of the human component and the need to invest in an educated and
flexible workforce. Adding value and context in the exchange of information is a
significant capability of people that computers and networks have not yet fully
achieved. As markets move toward greater transparency, these
will be an important
source of competitive advantage.

Know Your Customer

One indication of
this is the movement toward really knowing our customers, regardless of
industry. Governments are looking at new ways to work together with citizens.
The healthcare industry is tackling the issue of managing patients across
multiple systems. Whether you’re in healthcare, retail, or finance, how do you
identify customers and change the customer exchange from one of greeting and
query (“How may I help you?”) to one of recognition and value-added interaction?

We can observe this
shift happening in specific job changes in many industries. Retailers are using
self-checkout to move employees from the checkout counter to the sales floor.
Employees on the sales floor have a greater opportunity to interact with
customers, adding information and context to purchase decisions, which improves
sales outcomes. Banking and financial services are training tellers and other
staff members to handle everything from mortgage and insurance advice to estate
planning. The stock-trade transactions you once called your broker to execute
are dealt with online, freeing up brokers to provide a wide range of financial
advice. In the public sector, governments are developing portals that provide a
single contact point for many citizen interactions, such as license renewals,
business registrations, and tax activities. These are just a few examples of how
industries are automating rules-based activities and moving their human capital
to focus on adding more value to customer interactions.

Cross-Functional Interactions

If you think about
many of the successes in the automation of transactions, they were largely
contained within one functional group, whether it was manufacturing, sales, or
services. And we learned that in many of these scenarios, if you didn’t change
the process, you would be disappointed in the results. This becomes even more
important as you begin to think about interactions across departments and
functions; and they will extend beyond the enterprise to customers, suppliers,
and partners in ways that we are only beginning to understand. Coordinating this
broader set of complex interactions is a challenge.

Interactions and Technology

Now what impact do
these interactions have on a company’s technology infrastructure? It begins with
enabling the CEO and executive leadership team to do things they were not able
to do before .
Designing applications and flexibility that can accommodate
these cross-functional capabilities will be critical for success.

The greatest impacts
you’ll see are the changes to applications, storage, and the data center. To
fully enable interactions, employees will need to use data from the data center,
branch offices, suppliers, and the Web. This will change where data is stored
and where processors will reside, and it will alter the functions of the network
components. Instead of applications and data and storage coming together on a
single device, it will spread throughout the entire network, transparently to
the user. This has a lot of implications for what can be achieved.

Interactions at Cisco

What are we
attempting to do to make this transition? A lot of productivity growth at Cisco
has come from building upon transactional items or specific functions. The next
generation is almost all based on interactions between functional units: between
engineering and sales; between ourselves, our customers, and our channel
partners; and between engineering, manufacturing, and service.

The key takeaway,
regardless of how you view Cisco in this scenario, is this: the IT industry is
going to change dramatically. The service provider industry is going to change
dramatically. Applications and storage and processes will change dramatically.
Therefore, the type of productivity or competitive advantage you might be able
to gain will also change dramatically.

Transactions to Interactions

Our next series of
projects are not a major human resource application or a major sales
productivity application. Instead, we are focused on applications such as Quote
to Cash (managing the process from customer request to delivery and payment),
Issue to Resolution (managing the process from customer notification of a
problem to resolution and corrective action), Idea to Offering (supervising the
process until we ship our first product, whether the idea comes from engineering
or business development). When you think about these types of applications, they
are cross-functional. And we are not organized cross-functionally. It must come
together at the top.

So how do you begin
to think about addressing these priorities? We need to enable the CIO to be
successful in that environment, knowing full well that we’re going to continue
to extract transactional benefits while moving the strategy to the next level.
We need to enable business and functional leaders to connect their information
and processes across functions and then with partners and customers. If we are
going to grow at 10 to 15 percent productivity, it is these interactions in real
time that we need to be focused on for the next decade.




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