
Episode 37: When Shopping and Entertainment Collide
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This Boston Consulting Group podcast series looks around the corner of today’s big business and social issues. The goal—the so what—is to make sense of today and prepare busy leaders and executives for the day after tomorrow.
Award-winning British journalist Georgie Frost interviews the leading thinkers and doers at BCG on the trends, developments, and ideas that will shape and disrupt the future. Topics range from global warming, COVID-19, business resilience, and social inequity to the influence of digital technology on everything. This is not your typical business strategy podcast.
Financial crime has become big business. The United Nations estimates that 2%–5% of global GDP is laundering every year. If businesses—all businesses, not just banks—are not part of the solution, they are part of the problem, argues BCG’s Hanjo Seibert. Over the past ten years, half of all fines levied in financial crime cases have been regular businesses. Beyond satisfying their legal obligations, businesses can reap other benefits, such as more intimate knowledge of their customers and suppliers. In other words, compliance is good for business.
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GEORGIE FROST: Anti-money laundering, people trafficking, the financing of terrorism and fraud. Financial crime is big business, equating to around 2% of GDP. And it's something that businesses need to take seriously. Regulators and authorities can't tackle it alone. So, what is the role of companies and how do they strike the right balance?
I'm Georgie Frost, and this is The So What from BCG.
HANJO SEIBERT: In banking, it's not enough to say, "Oh, I just processed the payment." You need to look at where does the money come from, where does it go to? Ideally, what purpose does that money have in the logistics industry? It's not enough to say, "Oh, I just delivered the parcel. I don't worry about who sent it, who I sent it to, to which country did we send it, what was in it.
GEORGIE: Today I'm talking to Hanjo Seibert, BCG's Global Lead for Digital Compliance.
HANJO: If you think of James Bond fighting against sanctioned countries, Jack Ryan, the TV series where he's looking to uncover terrorist financing networks, or if we look at other movies where it's about laundering money from drug cartels or movies like Catch Me If You Can on fraud, all these things are what we call in business terminology, anti-financial crime and fraud prevention.
So, it's really a whole series of things that companies need to fight against. Most prominently, it's anti-money laundering, counter-terrorist financing, sanction and embargoes, and its anti-fraud, anti-bribery, anti-corruption, and some social risks. And that landscape is ever evolving. So, social risks like trafficking, child labor, women abuse, and so on. Already from that explanation you can see it's a quite complex landscape to navigate through. And as the crimes are evolving day by day, it's very difficult for companies and organizations to maneuver in fighting that.
GEORGIE: Talk me through, if you would, how the regulatory landscape has changed and the role that businesses have to play within that.
HANJO: Yes. Again, probably can fill a whole hour discussion in itself, but it has evolved quite dramatically and is still evolving quite significantly. So, if I go back about 20 years, I think post 9/11, a lot of the regulations also coming from across the pond from the United States, there's been a lot of regulation trying to regulate money flows.
So, most prominently, obviously banks have been hit with regulations and requirements to fight and combat financial crime. But it's…by and large, one can say, it's been a rising theme that more and more regulation, stricter regulation and also, and that's very important, stricter enforcement of the regulation is what we've seen in the market. And that's true across industries.
So, anyone who thinks of financial crime, I've understood it, it's a banking problem, it's not. It's a society-wide problem. And that spans all industries, obviously at different degrees. But that's also changing in terms of the number of regulations, the scrutiny of regulation, and the scrutiny of supervision and enforcement of those regulations, industry by industry.
GEORGIE: You said this is the responsibility of everyone, but where do businesses fit in? Let's say me as a business, what have I got to do with financial crime?
HANJO: That's an excellent question and something we hear very often, and I won't quote individuals or companies, but if you go back and look back the last 20 years, you've very often heard executives thinking, "Oh, it's not my responsibility," or "What do I have to do with it?"
My view, or I think the industrywide view is, as companies, if you think of it from a responsibility perspective, you need to be doing a certain amount of due diligence and safeguarding that you conduct your business in a responsible way. So, that means, just to give you a couple of examples, in banking, it's not enough to say, "Oh, I just processed the payment." You need to look at where does the money come from? Where does it go to? Ideally, what purpose does that money have or what is it used to buy goods for?
In the logistics industry, it's not enough to say, "Oh, I just delivered the parcel. I don't worry about who sent it, who sent it to, to which country did we send it, what was in it." Also, when you produce goods like in the health tech company or in the tech industry, it's not enough to say, "Oh, I just sold the good. I don't know who I sold it to. I don't know and I do not care whether that customer of mine is selling it to other people who then use it for military purposes or terrorist purposes and so on."
So, that's the responsibility as you do business, as you create products, as you are part of the service industry to understand who do you do business with, and who are the people and what is their intent of using your services and/or using your goods. So, it's a responsibility topic.
And last point, just to the people, because I hear this quite often, saying it's just a banking or financial services problem. To our estimates, looking back the last ten years of fines in this space, about 50%, quote, unquote "only 50%” of the fines have been going out to the financial services industry. The other 50% have been to the consumer goods, industrial goods and other industries or tech industries and so on. So, it's really something that's not only contained within the financial services industry, but it's something that's at any industry we can think of.
GEORGIE: I can't be the only one who's surprised at that figure. I imagine business leaders also perhaps are a bit on the back foot, or how would you assess whether business leaders are up to date with this?
HANJO: Very fair question. I have to admit, I was a little surprised as well by the number. That's why I keep calling it. So, absolutely. I think the answer would differ by industry. I think industries like banking or oil and gas who've been very much for a long time, for decades, in the industry of highly regulated business, there's much more awareness on the executive level for that topic.
In some other industries, it's a bit more nascent. I don't want to call out specific industries, but I think every industry goes through a maturity cycle of thinking they can just do business and compliance is on the side, then realizing, "Oh, it's actually something that we need to do." And then investing in compliance, but very often still in a silo, in an ivory tower. And then third stage, starting to integrate business and compliance in a view to say, "How can we do business in a compliant way by design?" So it doesn't appear like, "Oh, we do business."
And then there's a huge cost in addition to doing business that's called compliance, but it's something around how do we conduct ourselves in a compliant way and how do we keep it manageable in terms of cost and effort we put into this.
GEORGIE: Well, how can you build due diligence into your company? How do you get the balance right?
HANJO: How do you get the balance right? That's the million-dollar question I think. So how can you build it into the business? Overall, I would say the companies I've seen that had the biggest success were the ones that took it as a comprehensive target operating model view around not to say, okay, we have one process or we have one activity, or one person is responsible for compliance, or that's where compliance is or is not.
But rather to say, OK, this is how we do business. How do we make sure that we do it in a compliant way and how do we foster a culture, and culture is also a bit trust-related, but then also, we want to empower people, but also we want to control them at the same time. So, how do we build all that in into the way of how we do business, how we think about business? That's usually, in my view, the way that's most successful.
It's also the most quote/unquote "dramatic change" if one thinks of a company that hasn't focused on compliance and combating financial crime today, but it's one that in my view is very sustainable. And as it happens by design, is something that you can build up on as new regulations come, as new threat scenarios happen, as the world is changing and we understand, OK, fraud patterns change and so on for companies to adjust.
So, I think addressing it by looking at it as a target operating model challenge across all the things you do, thinking about it not from a pure process or data or people perspective, but all aspects of the operating model and think around how can we increase the accountability of the individuals acting and how can we increase the controls and the data we use to monitor this, the data we use to analyze things. So, end-to-end operating model.
GEORGIE: Well, let's talk about data. What role does data analytics have to play in all this?
HANJO: The short answer is a huge one. So, as we discussed before, it's an area where more and more pressure is hitting the companies from a regulatory perspective, from a supervisory perspective, also from a society pressure perspective and reputation perspective. So, if you think of these as increasing the demand, historically there was a trend for a lot of industries to keep quote/unquote "throwing people at the problem." As a result, also to increase costs as we speak.
Now, if we think of how can we quote/unquote "break that curve," I think digital, so technology solutions as well as data and analytics and the way in transforming data into insights is becoming basically the new paradigm to combat financial crime because it's all around insights. It's all about how much do I know about my customers, the third parties I'm working with, related entities, and so on? So, how you can leverage tools and technologies to help you acquire data in large amounts to analyze data and then turn it into insights.
And I'm very adamant about the turning data into insights because just having data doesn't help you much, but the real game changer is the capabilities that you as a company acquire and have, both from a tech perspective, but also from a people perspective to transform the data into insights that then you can take informed decisions on. That's really the game changer. And it's one that's absolutely needed because we also see not only the demands increasing from a supervisory and regulatory perspective, but also fraudsters are becoming more and more sophisticated.
And that basically calls for an additional need for innovation from a company side, because as fraudsters increase the sophistication of their fraud patterns, it's a bit of a rat race where technologies, so digital technologies and data and analytics, can really help the corporations to get to a whole new level and a required level because otherwise they're very blindsided against anything that's happening on the fraud side.
GEORGIE: So, clearly vital, but sounds rather expensive. How much, as a business, would you have to invest in this and how do you prioritize?
HANJO: Very good question. So, to the first part, I think the unfortunate answer is a lot. And I don't want to scare anyone, but my honest view is to really fundamentally change something, you need to invest. Otherwise, it's only a lip service that you're doing there. So, it needs a lot of money.
My two buts to anyone who's now scared, any executive who thinks, "Oh, well money is the only thing I do not have in my company." Number one is, if we stop to think just compliance and anti-financial crime, but as combining business and compliance in a way to ask the question, how can I do business in a compliant way by design? How can I transform my business and the way how I think about doing business? So, better understanding the supply chains, better understanding the customers, restructuring your data models to be much more client-centric.
So, thinking of this not only as a cost of doing business, which compliance is usually being perceived, but as something where compliance and the intelligence on your customers, the intelligence on your suppliers becomes a business asset that's something to offset part of the cost that you see that it's needed for transforming the business to...and I wouldn't say to be more compliant because that would suggest that certain companies aren't compliant today, but basically to have more evidence and more data and more structural approaches to demonstrating the compliance can also help from a business perspective.
And the other perspective I want to say is there's that quote in the industry that said, if you ever think compliance is expensive, which it is, try non-compliance. Any company who's tried to only partially complying or were not complying because this is crazy, have felt the pressure, have felt the pain. And personally, from my experience, the last thing you want to do is to go through ten years of remediation, supervisory enforcement, and so on.
So, a self-guided way into this, in my view, is always better because you can focus on the things you as a business want and need to do, rather than what the supervisor tells you what you should do.
GEORGIE: This is more than a reputation play.
HANJO: It is a reputation play, but it is much more than that.
GEORGIE: Is there a danger that a company can overdo it, being overly cautious, spending too much money, too much time and attention in this area?
HANJO: Definitely there's a cost challenge. The more resources, and I mean with people, money, tools, technology, anything, the more resources you put into this, it has a P&L impact to any company. So, it's a question on A, how much can you actually afford? And B, what's the impact to your P&L? How much can you actually absorb in terms of cost, and one of investments or fines? So, you can't just invest billions of dollars at free will into this even if you wished.
So, I think there's a point around how do you do what is needed and what you want to do in the most efficient way. And we talked about data analytics, digital technologies, and so on, that help you do this in a function rather than throwing more people at it.
The other point I would say on this is if I had a wish for the new year or the next decade is for this problem to be collaboratively solved or addressed by all the players in the market. So, I mean regulators, supervisors, and the companies, and potentially also politics because it's not a company by itself, an industry by itself, can do this, it needs a collaborative approach.
How can we as a regulator, as a supervisor help them, those willing companies, to do it in a way that's also allowing business to strive and for companies and the executives to not have 80% of their mind consumed with combating financial crime, but the right level.
And I think that right level still needs to be found, but I think that journey of searching this should be one where it's a very collaborative approach across all the players.
GEORGIE: Is it possible to stamp out financial crime without business involvement?
HANJO: Potentially, yes. The question then is at what cost? So, my programmatic answer would be, it wouldn't be advisable to do it without business because it brings so many other challenges that actually hinder you doing business in a right way.
GEORGIE: And finally, can we ever get to a point where there is no financial crime?
HANJO: Depressing answer, I think no. If we think back like probably 50 years, it's always been there in some way or form. I think the way it's being done is just transforming. If you think of money mules carrying cash over the Mexican-US border, things have changed. But the core fundamental things of what we're facing is still very, very similar to what it's been in the very old days.
It's changing with crypto, with dark net, and so on. It's always going to be there as long as there's money to be gained from illegal businesses, from then laundering the proceeds of those illegal businesses and so on. So, I think the question is more how do we keep the defenses up to a quote/unquote "reasonable level?"
So, I think the question probably much more for a society is what's the right level? What's the balance? How far do we need to go? How far can we go that we can do business, but it doesn't completely kill the business, because other than FBI or CIA, the companies, it's not their core business to combat financial crime. It's just the side equation of “I do business and I need to ensure that it's happening in a compliant way.” And so how do we find the balance in what's right? How do we combat it, and how do we evolve as the criminal side evolves?
GEORGIE: Hanjo, thank you so much, and to you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you liked this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
Georgie Frost is an award-winning freelance finance broadcaster and journalist. She began her career as a sports journalist at the Guardian Media Group before hosting sports shows on BBC Radio. In 2014, she created a daily finance-based talk radio show on Share Radio, winning honors as the financial broadcaster of the year and as one of the top five best new presenters in the UK at the APA Awards. She has written for the Financial Times, the Sunday Times, and the Daily Mail and appeared as a sports and financial commentator in national newspapers as well as on ITV, Sky Sports Mix, and BBC One. She has written and hosted the Daily Mail’s “This is Money” podcast for the past five years.
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GEORGIE FROST: Take one vanilla soft-serve ice cream, a container, a spoon, and a smartphone. Mix it all together and you have the perfect recipe for organic content that generated a huge buzz for McDonald's. It's called shoppertainment, and the trillion dollar industry is sweeping across Asia Pacific. But what exactly is it, and will it become a global phenomenon? I'm Georgie Frost, and this is "The So What" from BCG.
APARNA BHARADWAJ: It's not salesy. It seeks to entertain and intrigue, hopefully inspire, and then as a result, you get commerciality or you get shopping outcomes. But the intent is not straight away to get to a sales pitch.
GEORGIE: Today I'm talking Aparna Bharadwaj, global leader of BCG's Center for Customer Insight.
APARNA: There was such an amazing example of a brand connect that created so much buzz and yet it wasn't a campaign in the usual sense of the word. So what happened was that consumers in Indonesia started to show up at McDonald's carrying plates, steel plates. They would buy a bunch of soft-serves, they would put them upside down on those plates, they would smush them up with a spoon, and they would eat it with a spoon as a new way to eat a soft-serve. It suddenly went viral in Indonesia. It then went viral in Thailand where people were posting on TikTok about this new way to eat a soft-serve, et cetera, et cetera.
Around that time, McDonald's took notice of all these millions of consumers filming themselves, eating soft-serve, buying six or seven soft-serves instead of just a couple and bringing these plates. And that morphed eventually into a McDonald's campaign that was called McDonald's Soft-Serve Challenge. And people started posting their own soft-serve challenges, their own videos doing exactly this, and it led to massive buzz for McDonald's all over Southeast Asia.
This is something called shoppertainment. It's a phenomenon that has caught Asia. It's going to be a trillion dollar opportunity across Asia and it's growing 26% in this market and that's basically it. It's entertainment and shopping.
GEORGIE: But to me, listening to you talk about this McDonald's example, I mean, what should we do, sack all our marketing departments and hope that some kids just randomly take our product and do something amazing with it? I mean, how are we valuing something called shoppertainment, which seems very hard to define at such a high figure?
APARNA: Hmm, hmm, no, it's a question that not just, it bothers brands a lot. You know, a lot of brand managers are saying, how do I understand and how do I make sense of this opportunity? And you're right, Georgie, the challenge is that it, you know, I was a brand manager at Coca-Cola about 15 years ago and at that time, we used to control the majority of the messages that a brand would put out into the market.
But today's brand managers feel a lot more vulnerable when they realize that whether you like it or not, consumers control a large share of the messages that brands are, that people are hearing about brands, that consumers are saying to each other about brands. So shoppertainment, coming to that particular example, is essentially a way to break the clutter in digital marketing out there. Brands have caught onto digital marketing.
A huge share of media spends are now going through digital channels. It's growing every single year. But at the same time, there is a disillusionment amongst consumers about what digital marketing can do. We found from our research in Asia that 85%, that's a big number, of consumers swipe digital ads away. A large majority of them feel that it's not relevant to them, that it's overly polished and that it presents a picture-perfect version of what a brand has to say.
Consumers, particularly in Asia, are trusting organic messages that come from their fellow customers, from their peers a lot more than messages coming from the brands downwards. And so, that's happening whether brands like it or not. And the more we learn to understand and be comfortable with that, the more impactful brand campaigns can be. And that's where shoppertainment comes. It cuts the clutter, it resonates. But let me stop here and before we discuss that any further.
GEORGIE: Well, I'm just curious how much brands can really control what goes out and how you get the balance right. I mean, clearly consumers are getting a lot more savvy, particularly online. They don't want the typical digital advertising, as you said, the vast majority are just swiping across it. They're not interested. So how do you stand out from the crowd? How do brands use entertainment to sell and interact with a changing consumer?
APARNA: One part of your question, how can you use entertainment as a way to drive commerciality, let me start with that and then I can talk about the message and control on the message. So the idea of shoppertainment is that it's not salesy. It seeks to entertain and intrigue, hopefully inspire first, and then as a result you get commerciality or you get shopping outcomes. But the intent is not straight away to get to a sales pitch. The intent is not to straight away get to selling.
For example, the whole McDonald's challenge for example, was just watching cool ways to eat a soft-serve. If it makes you crave a soft-serve and try that new method of eating, absolutely that leads to commerce. But the message itself, the videos itself, if you see them are not commercial in and of themselves. They seek to entertain, they seek to give you a smile or whatever it may be. A lot of these videos are frankly funny and entertain, and comedy is serious business.
You know, it is really creating an opportunity for consumers to connect. So what we found in our research was the reason that shoppertainment worked so well where far more curated campaigns did not was that it was seen as resonating very strongly with certain aspects in digital that consumers like. For example, 80% of consumers told us, "We like something that tells a story and is educational. I like it when the brand doesn't force decision making."
And shoppertainment checked the boxes on many of those aspects. It's authentic, not airbrushed. It looks like a video that somebody made on a handy cam, not super, super produced, and it seeks to not push me to make a decision. It just seeks to inform. And it links nicely to emotional aspects of consumers' decisions. Right now, one of the demand spaces that we see really resonate with consumers and customers is emotional needs states that are around inspiration or indulgence.
We live in a world where people are challenged from mental health perspective, they are pressured with the isolation of COVID, with the work from home, with all the different priorities. And so, they seek to be inspired, they seek to have an adventure, and they sometimes simply seek to indulge themselves and they may end up buying something because it hits the spot in that moment of truth without being salesy. So that's really the magic formula that seems to work for shoppertainment in Asia right now.
GEORGIE: We are talking about Asia and Asia Pacific. Will it translate, in your view, and I know you're not an expert in these regions, you're an expert in Asia, but do you think it will translate to the US and Europe? I mean, are there distinct differences between the way that consumers consume here?
APARNA: It's such a billion dollar question, I'd say. You know, we thought about this a lot. We haven't done the research yet, the exact research in US and Europe, so hard to say how it'll port, but there is some evidence that I've seen from my experience. So, and from a central origin perspective, e-commerce in Asia has evolved very differently from e-commerce in US and Europe. In US and Europe, the template is essentially the Amazon template, right? It started with the whole books to electronics to, you know, basically the Amazon model. In China and the rest of Asia, it is actually a distinct model. I wouldn't call it the Chinese model but it's the Alibaba, Tencent model of e-commerce.
You can see it even when you look at the websites. When you look at the marketplaces, on Amazon, the marketplaces are about clean front pages, very browseable first pages, very curated to what are the data that I know resonates with you. The first page is relevant in terms of bringing the content that's going to seed a commercial opportunity for you individually as a consumer.
If you look at the websites of Alibaba, et cetera, for a Western audience, you may find it very cluttered. You may find a huge amount of variety, you may find streaming videos paired up with photographs paired up with something else, and it can be very overwhelming at times. But it works for that model.
To give you another example, not just about the look and feel, but even the way live commerce works or live streaming works, it's quite common in Asia to watch a seller, usually someone who's a trusted blogger or a trusted person who's fashion sense you trust, et cetera, modeling different outfits, hanging out and you know, trying different things. You're having a live chat with that person, and in that live interaction, you're also buying. That way of buying is actually very uncommon so far at least in the US, but it's started to trickle in.
So the models are very different. The way consumers buy is very different. And even actually the back end, the supply chain, who owns the warehousing, who owns the logistics, I don't want to bore you with those technical details, but there are so many differences in the model. So the origin of the way e-commerce has evolved and almost organically and very differently in these markets is clear.
Therefore, if shoppertainment, which has taken off so rapidly in Asia, we don't know if it'll port in the same format in US and Europe. But what I do know is that some of those underlying demand spaces do port well. The authenticity, the entertain first, not be too salesy, not be too pushy, those port well. And the underlying needs port well. The fact that consumers are stressed out and that they're looking for a small moment of indulgence, that they say I deserve it even if I'm buying a hot pink lipstick that I would never wear otherwise, the idea of getting an adventure and entering uncharted territory, that ports well.
So some of the underlying needs states that we discovered, the demand spaces, they work across markets, but whether the e-commerce model will be the same, whether it'll resonate in the same way into commercial opportunities, much remains to be seen in that, frankly.
GEORGIE: If we break it down, does the model of shoppertainment work for all goods and services or are there particular areas where it's really well adapted to or should some just stick to the tried and trusted way of doing things?
APARNA: Such a good question. Now, these are early days for shoppertainment, even though it's already poised to be a trillion dollars in Asia alone within the next five years, but we do see that there are certain categories that just gel better with shoppertainment. Fashion, for example, we saw that fashion has a extra share of shoppertainment. We found that cosmetics, again, has a additional share of shoppertainment.
So a lot of the categories where these ideas of indulgence, inspiration, you're changing a whole wardrobe, you're looking for inspiration. Your favorite blogger is trying a fashion accessory you've never tried before. You buy it on impulse. I think those categories are really ahead of the curve on shoppertainment. But other than those few categories, we do see the mix of shoppertainment map quite closely the mix of e-commerce in Asia.
So I do think that over time, other categories will start to see this as well, but we don't yet, we do yet, at this moment we see more of fashion and beauty and those type of categories resonating really well in shoppertainment.
GEORGIE: So how can brands then take advantage without falling foul of some of the, and I can think of a fair few, obvious pitfalls that may come from this?
APARNA: Ah, no, absolutely. I think brands are still learning, including in Asia by the way, brands are still learning what to make of shoppertainment.
GEORGIE: Which makes brands nervous, I imagine.
APARNA: It makes brands very nervous, indeed. There are certain beauty brands, certain "masstige" cosmetics brands that have done really, really well with shoppertainment, that have really embraced it and found solutions around it. There are certain growth tech brands and digital first brands that have really embraced shoppertainment as well. But most of the mainstream brands are still figuring it out.
I mean, there are some obvious pitfalls to watch out for, right? One is if you're giving millions of micro bloggers the opportunity to go ahead and do this, they may get it right, they may not get it right. The other aspect of it is that it can be nerve-wracking for a brand manager to say that I'm ceding control for my brand's message to the millions rather than to a few people who understand the brand deeply.
My contention would be that, you know, being a brand manager when I was a brand manager way back when at Coke versus being a brand manager now is fundamentally different. Whether you participate in this or not, the message of your brand is not only going to be in control of the company. Think of any mainstream brand. There are so many messages that come to the brand, of course from the television advertising and the media advertising put out by the brand, but there are equally, if not more, of the messages that come from happy or unhappy customers who talk about it, who talk a lot about it in the digital space, it comes from reviews that organically come on marketplaces, Amazon, here and there, about the product offer, about peer reviews.
You know, there are so many of those messages that are coming out about a brand organically from consumers whether you like it or not. To be able to learn how to work with that, I'd say to learn to be comfortable with being uncomfortable, to learn how to work with this and to do some lean experiments, some agile sprints almost and agile experiments in this space, just to understand how this happens.
To take the McDonald's example, it had to go viral with nine million consumers in Thailand before McDonald's noticed. But once they noticed, they made something really great out of the campaign. Were there risks in the way they did that? Maybe yes, but they really managed to do a great job with this and take it to the next level. So I feel that brands will have to deal with it, whether they like it or not, and by learning to be comfortable with that discomfort, they learn how to use shoppertainment to their advantage. And if they get it right, it can be extremely powerful because it's potent, it comes organically and it's authentic from the consumers.
GEORGIE: I guess being comfortable with being uncomfortable isn't a question of throwing your hands up and saying, well, there's absolutely nothing we can control. We may as well not bother trying. I guess shoppertainment would be part of a hybrid approach, where some traditional methods would still be used. Is that fair?
APARNA: Absolutely fair. I mean, I was in conversation with a luxury brand that has a huge presence in China and Asia, doing extremely, extremely well, and one thing I heard from the leadership was that we are doing so well commercially, we are selling so well. But at the same time, we also realize that we have given away a lot of the message of our brand to many, many beauty bloggers, millions and millions, thousands and thousands of beauty bloggers all over Asia and particularly in China.
And that makes us feel vulnerable at the same time, and we worry if we've given away too much. So you're absolutely right. I think letting it all be in the hands of your micro bloggers is also not the best idea or micro influencers is also not the best idea.
And finding the right hybrid of that blend of the message that you put out, that is in a more controlled environment, that is nuanced to perfection, and combining it with the organic message, even educating the organic messengers about your nuanced messages and what your brand stands for, the combination is extremely important to get this right. Either extreme is not the best and leaves vulnerabilities for brands.
GEORGIE: I guess in this current economic environment that we find ourselves in, high inflation, issues with supply chains and resources, et cetera, it's a very difficult time for businesses to make these sort of decisions to take risks. But I guess if you don't take a risk and stand out from the crowd, then you get left, equally, you get left behind.
APARNA: Absolutely. Many of the clients we work with are very well established brands. These are brands that have been really leading edge in their space and have created campaigns, have created messages that have really endured. The same brands now need to embrace what comes next and find a way to bring that same quality, that same beauty of messaging into the digital space. I work a lot with digital influencers as well, right?
As part of our work in this space. And many of those influencers also want to be educated about how great campaigns are created, how great messages are created, how long-lasting perceptions are built. And so, I think there's a win-win for brands to collaborate with many of those influencers. Leaving the influencers to figure it out on their own is also not an optimal solution. Otherwise, they'll put out something that won't be professional or on message as well.
GEORGIE: Are there some examples that you've got that really did work with the micro bloggers and the influencers?
APARNA: Ah, no, absolutely. There was in fact a pizza campaign that I saw in Asia, which was really great. It was done by a ASEAN-based micro influencer. He's in his 20s or thereabouts, and he talks about generational gaps. So he did a really cool campaign about ordering in pizza and he'd ordered pizza and takeout and things like that and his dad walks in, he's impersonating his own dad, so he's a double role playing and his dad keeps criticizing, you know, "Your generation doesn't like home food and always ordering in." And the whole time that he's doing that, he's also constantly snacking on the pizza and all the goodies that his son has ordered.
And so, it was all about that generation gap, but at the same time how you could bond with your dad around that, it was done really well. It was a mainstream brand and the campaign resonated so well with people especially from immigrant families who had massive generational gaps and were trying to connect with their own parents and the message resonated so well. It was extremely entertaining.
It's a very fun campaign to watch, but at the same time, it talks about how delicious the product is. It doesn't put the product unnecessarily too much front and center. It seeks to put the narrative of the consumer's life story front and center, but in the process, it puts the product in a great light. And I think that that balance was really well done in this example.
GEORGIE: Shoppertainment is one big one, but what other trends are you looking out for?
APARNA: Oh, there is so much going on, especially in the digital world, Georgie. I mean, there is social commerce for example, peer-to-peer selling. Especially during the COVID years, I feel like digital has been a boon for small and medium-sized businesses and they have really been able to leapfrog much larger companies through their campaigns and through their small little digital footprints.
So peer-to-peer commerce where consumers sell to consumers has been such a great unlock as well, something to watch out for. I'm seeing a lot more traction of, well, shoppertainment itself has so many different layers to it, so many different iterations that can happen. I'm curious to see how some of those formats port into the US and Europe. I know some of the players that have been very successful with shoppertainment in Asia, players like TikTok are now taking it to US and Europe. I'm curious to see how that might happen.
We are seeing also health-based models that are coming around mental health and counseling online and just being there for consumers who are facing mental health challenges. I mean, the sky is the limit. There are so many amazing models. Green is another option where we are really seeing consumers bring green to the mainstream through a new message and through a new way of connecting with consumers. So there is so much in this space. It's really an exciting space to watch out for. I think it can cover so many more podcasts if we get into all of those.
GEORGIE: I was going to say for another podcast, I think, or I hope.
APARNA: Exactly, exactly.
GEORGIE: Aparna, thank you so much and thank you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you liked this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: How inclusive is your workplace? This isn't just a question of moral imperative, but a business one too. The connection between inclusion and retention of top talent is now undeniable. If staff feel included, they'll be happier, have a greater sense of wellbeing, be more productive, and want to stick around. So how can you improve what's hard to accurately measure--our feelings? I'm Georgie Frost, and this is The So What from BCG.
NADJIA YOUSIF: The most ambitious people, so the people who really want to have a promotion in the next year, are the ones who are even more likely to leave because they don't perceive inclusive work practices.
GEORGIE: Today, I'm talking to Nadjia Yousif, BCG's Chief Diversity Officer.
NADJIA: Workplace inclusion is the involvement and empowerment of all your people. It's valuing them so that they can add value. As I say that out loud, I know it sounds fluffy, and my mission is to turn it into something concrete, to have us go from the strap lines to something a bit more scientific.
GEORGIE: You knew exactly what I was going to say there. My face says it all when you're explaining what inclusion was. It is a lot of words, it is feelings, and it's nailing it down, I think, for businesses that is the difficult part. We will try and dig into that in more detail, but you said it there. What distinguishes it from the equality and diversity part in the EDI acronym? What's the difference? What is special about inclusion compared to those other things?
NADJIA: Diversity, think of it as the numbers. Equity, so that's a little bit more around, again, facts. Inclusion is more about a feeling. It is about a culture of feeling of belonging, feeling like an insider, feeling like you're part of the family of that organization, rather than an outsider or a visitor. And when you feel included, you bring your best self to work. When you feel included, you want to go to work, you want to go work for that organization, and whatever your background is, whatever your identities are, the inclusive work environment is what makes you thrive. So it's not about the numbers. It's not about the processes. It's about, essentially, your feelings and the culture that surrounds you.
GEORGIE: Do you have any examples of companies that have managed to measure inclusion, found it wanting, and done something about it?
NADJIA: We've done a survey ourselves, actually, of 27,000 people in 16 different countries across multiple different industries, so it was a study that was really looking at the feelings of wellbeing and happiness, what we would call inclusion, the drivers of that, so what were the factors in the workplace environment that actually mattered most to them, to make them feel happy, and then I would say really, most importantly and most excitingly about this piece of research, the connection between feeling included and then your willingness to stay in an organization or your likelihood to leave it.
We have looked at this, and I've seen many organizations who want to look at this more scientifically. I think they haven't been equipped to. There hasn't been sort of the statistical modeling rigor attached to this so-called fluffy topic, but that now does exist, and I really encourage organizations to look at their own employee base. I mean, we have a tool to do that, but many organizations can take this matter into their own hands and say, "What is it that's actually driving the feelings of happiness and wellbeing?"
And if we look historically and ahead, when people are asked the question around, "Are you likely to stay or leave?" What does that tell us? And it's going to be very specific to a company's culture, whether that be geographic, whether that be a subdivision, so I would encourage all organizations to actually look at this on a de-averaged basis.
Where I've seen organizations actually sort of take this seriously, firstly there's usually a focus on diversity, so usually, they're actually saying, "We want to have more women," or, "We want to have more of a certain ethnic minority," or, "We really want to make a stand on neurodiversity," let's say.
And then they pivot to realize that the way in which they can actually attract and retain any talent, no matter what the identity is, is by conveying, and not just conveying, but actually living the sort of values of respect, open communication, and senior leadership commitment. Those things are, when we looked at our 27,000 people, the things that really do matter. It's what does the leadership at the top do and say and role model, how diverse of a team do they have at the top, because that sends a signal, and then to what extent are direct line managers really equipped to create a safe environment?
If you just take that managerial behavior as influencing factors, that actually drives two-thirds of the feelings of inclusion from the study that we did, so I think there are things that organizations can do pretty straightforwardly, to move the needle on creating an environment of inclusion. And then of course there's more specific things that only an organization themselves are going to surface, that matter to their specific people and their population.
GEORGIE: I want to drill down more into making this more scientific. We've used the word fluffy, and I don't know whether it's cynicism. I don't know whether it's companies just thinking, "How can you change what you can't accurately measure?" Or not having the right processes in place. I do think companies take it seriously. Maybe I'm wrong. Maybe they're not taking it seriously, and that's one of the reasons why we are where we are. But how can we make it more scientific?
NADJIA: I think there's two major aha moments that senior executives go through when it comes to really embracing DE&I as not just a motto, but really as part of their values, part of their leadership. And the first aha is that they themselves make a big difference to the culture of an organization. They set the tone. Even just by saying that they care about DE&I will attract a more diverse talent pool. The second aha is that inclusion, and a focus on it, is better for employee retention.
There's data that proves that, so you can look either within your own organization or you can look to what has been published out there in terms of the correlation, and we see that for organizations who have more inclusive practices and work environment, those things that I've already described, even if you just...
Sort of if you were to index what an organization's inclusion rating is, we call it a bliss index, if you were to go 10 points above the median versus 10 points below, you will cut the attrition in half. That means that you will have double the amount of people who are staying in your organization, just by focusing on this and moving the needle by just a little bit.
We have evidence that suggests that organizations that do not have that feeling of inclusion, or when employees don't feel that their organization has inclusive work practices, that up to a third of them will either choose not to work in that organization or are planning to leave it. So the difference between being an organization that focuses on it and an organization that doesn't focus on it is big in terms of the types of talent that you're going to be able to attract and retain.
One other interesting thing that we've observed is that the most ambitious people, so the people who really want to have a promotion in the next year, are the ones who are even more likely to leave or to choose a different employer because they don't perceive inclusive work practices.
GEORGIE: What does the ideal look like? And I want examples of if I'm going into the workplace and I feel absolutely included in this workplace, and I'm bringing my best self, what is going on around me to make me feel like that?
NADJIA: Well, I'll tell you, Georgie, a little bit about what will make you feel like that, and then also what does that feel like. So I think let me start with what does it feel like to be feeling included. It means that you have wellbeing. It means that you're not covering parts of your identity that you don't want to. It means that you can focus on the things that you need to do to do your job and not focus on wondering whether you're fitting in, not having to worry about, "Have I said the right thing or said the wrong thing, because everybody looks, or sounds, or acts differently, or has role modeled differently?"
When you have that mental load removed, you have much more opportunity to bring your full self to work. So that's what the feeling of inclusion, I would say, is defined as, wellbeing, happiness, ability to bring their full self to an organization.
The environment that drives it, a lot of it is driven by what senior management role models and sets as commitments and tone. So very practically, when you have your top leadership of an organization talking about diversity, equity, and inclusion, talking about the need to have a work environment that is discrimination free, that has consequences for bad behavior, and that really respects people's backgrounds no matter what they are, that already creates a huge amount of pressure removed from individuals in terms of them bringing their full selves to work.
When you have direct line managers who are equipped to know how to create safe spaces, whether that be through 360 feedbacks, whether that be through creating moments of individual discussions to have people be able to share concerns or call out when they haven't felt excluded, that is really important as well. So direct line managers actually having, in a way, the toolkit to create a psychologically safe working environment makes a big difference to, then, those feelings of wellbeing.
And then there are some policy things, which are a little bit more, I would say, table stakes, but we don't see all organizations having, which is consequences for disrespectful behavior, policies that are clearly taking a stance against discrimination, policies that create the tooling and the processes for anonymous feedback, for example.
GEORGIE: You spoke about having safe spaces, the work environment being a psychologically safe place to be, and obviously consequences for disrespectful behavior or discriminatory behavior sort of speaks for itself. But the psychologically safe place to be sounds very hard to balance, to get right. Is there a danger that companies can perhaps go too far and create a chilling effect on their workers that are too frightened, really, to say anything, because ultimately, as you said, this comes down to feelings? You don't want to hurt someone's feelings. You don't want to say things how they really are. How can you have a forward-thinking environment if people are frightened to say what they actually feel?
NADJIA: What we're talking about here is creating the right settings for the right types of conversations. So I think when you see organizations, and actually, there's statistics that prove this, so research really suggests that when you have settings where people in a team are able to have anonymous feedback, but also have clear ongoing feedback for both their line manager, but also around the team that they're working in, that it creates a better ability to then course correct. So it's not about censoring everybody to the point where they don't, in a group setting, say anything, because they're worried about saying the wrong thing. It's more about continuously observing, and monitoring, and allowing the conversations to happen.
We talk a lot about the concept of having authentic conversations in small group settings, which really make a difference to broaching topics which might be, frankly, a little bit awkward to talk about in the workplace, but are relevant for a lot of people. Whether that's transgender inclusion, or around something that's happened in the world, that's violence against women or violence against other minority groups.
Those conversations can sometimes be seeming to be not something to talk about at work, but actually, you can create moments and opportunities to have those discourses, which allow people to share where they're coming from, which is eye-opening, actually, for a lot of colleagues who might not have ever encountered somebody from that group or who has that element of identity. It can then feed into the broader feeling of, "This is a place that I can talk and bring up other topics." It's about having those processes that allow for continuous feedback, but also probably set piece moments to talk about things that, again, might not seem work related, but actually matter a lot to employees in this day and age.
GEORGIE: So then, how do you measure how inclusive you are, which doesn't involve just the number of people that are leaving too soon?
NADJIA: You have to ask. You have to engage, and this can be through regular pulse checks, a combination of focus groups and surveys, but you need to engage your workforce on understanding what it is that the organization is doing which is making them have a sense of wellbeing, have a sense of ability to bring their full selves to work. Then, yes, you do need to measure would they go to another organization if they had those things. You need to ask them, "Would you stay at this organization if we had these things?"
And there is a statistical set of models, statistical modeling that will accompany that data, to then make a direct connection between things that you're doing or things that you're not doing as an organization, and then those feelings. So it is measurable. There is a measurable way to connect interventions and then feelings of wellbeing, happiness, and then there is a way to statistically model and connect the feelings of inclusion, i.e. the feelings of wellbeing and happiness, and your likelihood to stay or go.
And that's ultimately what we want. We want to be able to say that it matters, because it keeps your best people. We also want, of course, to be able to say that it matters because you get better outcomes. That is something that also, in a way, you could measure, and we've seen in some organizations, control studies able to do this, that when you have teams that are focusing on doing those interventions that matter, that they have higher productivity.
This is much more difficult to look at on a large scale, because the definition of productivity is so different from organization to organization, but you know, if it's something that can be measured in that way, whether it's sales per hour for a sales team, or it's customer satisfaction for a customer services team, those things are measurable. And actually, the more that we can encourage organizations to look at that and to focus on it, the more that, I think, everyone will buy in, whether they're coming from a quote-unquote "diverse" background or not, will buy into the concept that actually, an inclusive work environment pays off.
GEORGIE: I'm wondering, with the changing way that people are working nowadays, more hybrid working, working from home, whether that's muddied the water, made things a little bit more difficult for companies to get inclusion right.
NADJIA: I think I would say there's two angles to this. One is, indeed, you have lost a little bit of the, let's say, opportunities to bring people together, to have the open conversations that we know create a safe space, and the opportunities for an organization to, in a way, convey to its workforce that it cares about a certain topic, or it has a certain value set, is more limited if you don't have people physically coming in, seeing what's on the billboard, seeing what's... seeing the rainbow lanyards, et cetera.
However, it also is more of a burning platform than ever for organizations to think more creatively around how they show commitment, how they role model, how they get the message out through virtual teaming, through virtual communications. So I think there is a silver lining, in a way, in terms of how organizations, let's say corporate environment, can be conveyed to in a hybrid work environment.
The other thing, though, that I've been thinking about is that we're moving to a world where because of the ability to work remotely more often, it will actually breed more workforce participation, I hope, from people who traditionally have been left out, whether that's caregivers who have different schedule requirements, or people with physical disabilities who have found it difficult and challenging to come to an office at a certain prescribed time for a certain prescribed number of days per week. And the fact that we now would have, in a way, an ability to tap into a wider pool of talent means that there is an increased burning platform for organizations to do the things that will make them attractive.
That means convey that you care about this stuff. That means think about the role modeling that you are doing in terms of your own... how diverse your leadership team is. That sounds like a big investment of time. It feels like, then, it's part of our overall strategy. Well, yes it should be. Actually, diversity, equity, and inclusion should be part of every business's strategy. It's good for business, it's good for your people, and it will actually give you a competitive advantage.
The other thing I often hear is, "What practical programs should we apply to our workforce that will already, in the short term, make a difference?" And the number one thing that I would say is mentorship programs. We've seen that this can be done for specific groups. It can be done for specific cohorts of an organization to start with. But really, that focus on creating individual connections, where people can share experiences and also help somebody more junior navigate an organization, has proven to increase feelings of inclusion, by actually quite a large factor, and in particular for minority groups.
GEORGIE: Nadjia, thank you so much, and thank you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you liked this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
Georgie Frost: Capitalism drives innovation, growth, and prosperity. But it hasn't worked for everyone equally. A decade ago, delivering value to shareholders was all that mattered. Now it's not enough. A purpose-driven approach has become a key imperative for corporations and central to discussions among business leaders.
But good capitalism is more than just philanthropy. It makes great business sense. So what does it mean to lead with purpose?
I'm Georgie Frost, and this is The So What from BCG.
Jim Lowry: The days of having a major corporation in any city and just saying, "I'm only going to make money," they're over. This is over. And if you're a CEO, it is part of your mandate for your shareholders to accept this reality and address it in the right way.
Georgie Frost: Today I'm talking to Jim Lowry, a Senior Advisor at BCG and is the first nationally recognized workforce and supplier diversity expert and BCG's first African-American senior partner. He started the firm's workforce diversity and inclusion initiative.
Jim Lowry: The big question, Georgie, is when corporate America's initiated many of these efforts many years ago, what were their goals? And I'll be very candid with you, I think initially there were riots in the streets in America. So I think initially most of the programs and initiative was just to quiet down the masses. So they threw a lot of money after a lot of things and it didn't work. And I think that was the original thing.
I think it's evolved over the years. So I think you have a different kind of leadership, a younger leadership, a more progressive leadership, a more intelligent leadership that now see it as a different thing. And really making sure that it's part of the business agenda. Before it was not. It was something they did, it was philanthropy. It was something that they were told to do, but their hearts weren't in it.
Minority business has to be looked at as a business initiative, quotes, not a charity event. To ensure that the trillions of dollars, and I really feel that many of CEOs are making the commitment that they're going to be different, has to be allocated and leveraged differently. The CEOs should assign their top executives, irrespective of race, to issues proactively rather than reactively.
The CEOs should vet the organizations, soliciting corporate support and investments. I feel very strongly about it, I wrote that in my book. I think the other thing, we should work collectively and effectively in a ecosystem and communities in which the CEO and their companies reside and operate and do it in a way that makes a difference.
The days of having a major corporation in any city and just saying, "I'm only going to make money,” they're over. This is over. I mean, the populations that's around a corporation, wherever it is, South Side, East Side, suburbs, that ain't going to change. It's going to get worse. And if you're a CEO, it is part of your mandate for your shareholders to accept this reality and address it in the right way.
Georgie Frost: What were the big changes that you noticed throughout your, how many years are we talking now, Jim?
Jim Lowry: Many years.
Georgie Frost: Many years.
Jim Lowry: Many years.
Georgie Frost: Many years. Since the sixties, I believe.
Jim Lowry: Yes. And I thought about that, because we talked earlier. And I think when I started out, I went to a private school. I was very fortunate to go to a very elite private school on the scholarship. And coming out of that experience and seeing many very successful parents of my classmates, my goal was to be rich.
And then over years of living in Africa, living in Peru, working for Bobby Kennedy in the inner city of Brooklyn and New York, it changed to a purpose, and when I saw corporate America thinking about doing the right things. And I was fortunate enough to work at another consulting firm, I won't mention the name of the firm, where they trained me on being a consultant.
It gave me access to understanding how power works, understanding the free enterprise system, understanding corporate America and the leaders and what they think. And that's when I said, "They don't really have it right." And because of my experiences, maybe with the Peace Corps, working with Bobby Kennedy, I don't know. And they just don't have it right.
And so that got me going on: My purpose is to take the good intentions of corporate America and a good intentions of CEOs and try and steer them in the direction so they can really have impact on the problems and having a positive impact on the free enterprise system.
Georgie Frost: But it's a really important question, and I think a lot of businesses, a lot of investors ask this: "Can I do good and still earn a buck, a good buck?"
Jim Lowry: Well, Georgie, you ask great questions. I mean, I think that that is where we are today. Because I think if we only look at a corporation in terms of the next quarter's profitability, it's a very shortsighted view of why we do all this. I could say the same thing probably in London. But if I look at Chicago and say, "If we'd have done all the right things when I first started my journey, we wouldn't have the serious problems that beset our communities, beset our cities, beset our countries."
Because we didn't do it. We looked at it differently as a charity, and I think that's a mistake. I really believe, and I say this and I write a lot of articles, I've even written a couple of books on it, is saying it is in the best interest of the free enterprise system to include more people of color in a meaningful way. Not in a token way, but in a meaningful way as partners because the population is changing.
What is it? In the year 2045, the majority of the people in the United States are going to be brown and black. They're going to be minority. So either they're going to be producers of wealth for the good of all of our society, irrespective of race and gender, or they're going to be consumers of other people's wealth. I really believe that very strongly.
Georgie Frost: So that's been your purpose for many, many years. For others it might be gender. Now of course, we're hearing a lot about climate change. What do you think is spurring it on in this moment?
Jim Lowry: I think that people are concerned like never before. There are many young people who have gone into corporate America, who've gone into government, who I think according to me, believe in the right things. They want to do the right things, and they want to make money too. I've wrote an article, that had to be about 15, 20 years ago.
When something... I was at Harvard speaking to the young students at the Harvard Business School, and one of the young ladies said, "Yeah, Mr. Lowry. I'm really torn. I really want to make money, but I want to do something for the community." And so I went back to when I was living in Bedford-Stuyvesant and working for Bobby Kennedy, and I was out there working every day as a community organizer.
And one of the guys, he had just left the gang and he said, "Jim, you really care about us. You're out here working all these long hours. Do you really... You do care about us, but you're not in the Peace Corps anymore." He said, "If you really want to help us, accept one thing: poor people can't help poor people." And that was the advice I gave to this young Harvard student.
And she wrote me a very personal letter and she says, "You've kind of allowed me to breathe now." And that's what I believe. I strongly believe that we can get more people thinking, accepting the givens. I mean, I believe in the free enterprise system. I believe in the capitalistic system, but we just got to make it better. We got to make it more progressive.
So if you make a lot of money, what do you do with the money? How do you invest the money? I mean, what foundations do you start? What boards do you serve? So I think accumulating wealth in itself is not bad. It's what you do with the wealth and who do you support with the wealth and how... to what extent does it become the underpinning of your culture from your cities and for your nation.
Georgie Frost: What's your perfect vision then? If we're going to be more visionary with all your experience, what does the ideal system look like? How do we get there and what role does business play in this purpose-driven approach?
Jim Lowry: It has to be business-driven. And the first major report I did for the Department of Commerce in 1978, I said, "Government can be the catalyst for change. But if real change is to occur, it has to be the private sector." I have not changed my opinion since 1978. And I think the question is, to answer your question, What does it really mean? What would be the nature of that involvement? Or more importantly, the nature of that leadership?
And what I've been working on, which is also part of my purpose, because what I...coming out of my early years of analyzing it, experimenting with it, leading it I guess, writing books about it. Is that until corporate America accepts that minorities have to be real players at the table as they make decisions, be they inside the corporation or outside the corporation as strategic partners in minority business.
I strongly believe, strongly believe, I've been writing about this, I haven't changed at all, that until we have a large population of black, brown, and Asian leaders and women leaders...I was talking about women a long time before as fashionable. Until we have them as partners creating wealth, distributing wealth, making decisions about policies to have lasting impact, we're all going to lose. We're all going to lose.
And so that's why... I'm a strong believer in the small business environment and entrepreneurs who started out maybe one family doing a business and it goes to the next generation, et cetera. But I don't believe we will see the impact we seek if we think the only way you're going to do it is small business. The vast majority of businesses that are of color, minority businesses in the United States, have no employees. They're self proprietors. They have no employees.
So what I've been advocating is having them think out of the box in terms of taking the existing minority businesses and really having strategic partners. And we helped do that in Detroit. Before the report I did in 1985 for Ford Motor Company, there'd never been a major corporation in America doing over a billion dollars for minorities, never. And we told them how to do it.
And interesting enough, we just wrote an article, we meaning a BCG partner and myself and our client, wrote an article about that experience. About how we form strategic partnerships with the large white firms and minority firms and work with them over a period of time. And so now if you look at Detroit, some of the most successful entrepreneurs, but more importantly, the real leadership of Detroit came out of those experiments working with and growing these minority leaders and growing minority businesses.
So I think that's what has to happen. And I think we all got to think, I think minorities have to think out the box.
Georgie Frost: Do you think you find your purpose or does your purpose find you?
Jim Lowry: That's a great question. That is a great question. I think you find your purpose. Let me go out on the limb. I think everyone should seek to find their purpose. There should be something in your life to get you up every day and saying, "I got to do better, or I have to achieve X. That's my purpose for my family." But I think you should also have a larger purpose for yourself in society.
Everybody can make it, but I think the circumstances also have a lot to do with it. If I hadn't been asked or given a scholarship to go to Tanzania, I wouldn't have been affected the same way. I did it because I wanted to do it. I did it when I was living in Tanzania with no electricity. I did it because I thought it was the right thing to do.
I felt the poverty...not the poverty. Well, the impact the poverty had on me in saying to myself, "This is not right. People should not live like this. People should not be denied the basics in life. Kids should be able to look forward to something that's really important so it's better than the other generation." So that was a driving force.
But Georgie, I'll be honest, I mean, I think...because you're making me deal with reality, if I hadn't gone to the right places and been with great companies that educated me and rewarded me financially, I don't think I could have had the impact I had. And sometimes the institution or the individual can help you have a clear voice that can affect change. Some are doing it, I think that's another thing. I think because of George Floyd and the impact George Floyd had, not only on the US, but I think around the world, the CEOs for the first time are dealing with this.
I know the business roundtable is dealing with it, I know the CEO summits are dealing with it. They never even talked about it before, but I think it forced them to go inside and on themselves and on their corporations say, "What can we do differently?" If you really want to affect change. And I'm all...maybe that's my early training as a consultant, I'm not about just going through the motions. I'm not getting hung up on the process if the process doesn't lead to anything.
As you know, my whole purpose is to make life better for more people. And if you made life better for more people, we'd have a better place to live.
Georgie Frost: Jim, what a lovely place to end it. Thank you so much for your time, and thank you for listening.
Jim Lowry: Thank you.
Georgie Frost: We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you liked this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: To err is human. So why not use AI? Seen as the answer to many of the world's problems, but artificial intelligence is also creating many more. We've seen algorithms run amok, whether in facial expression software for job interviews, evaluation of loan applicants, or self-driving cars, and those are the ones that we know about. And yet, implemented responsibly, AI can create a massive competitive advantage for your business. But without a regulatory framework to follow, how can you do this without putting your business and customers at risk? I'm Georgie Frost, and this is The So What from BCG.
STEVE MILLS: There are some organizations that do things that we look at that we're just not comfortable with, but by and large, all of these things are unintentional, and it comes from the fact that AI systems can fail in a variety of ways, and if you're not thinking about all these ways it can fail, you're not building in the right safeguards and ensuring that it doesn't happen and mitigating those risks.
GEORGIE: Today I'm talking to Steve Mills, Chief AI Ethics Officer at BCG GAMMA, and recognized expert in responsible AI.
STEVE: AI is increasingly becoming this force behind the scenes shaping so many aspects of our lives. So it's things like the news you're seeing in your news feeds, the other individuals on social media that you're seeing, the products that you're being fed, you know, and whether that's in apps, or in websites, but it's also starting to get to things like the offers that you're being made, you know, discount offers.
It can be the seats you're offered in aircraft, the products you're seeing in stores, for example, both in terms of the forecasting of what will be of interest in the coming fashion season, but even more tactically, which products are stocked in which stores. So if you ever wonder why when you go to one store there's certain things on the shelves and different in another, whether that's the grocery store, or a retail store, it's AI behind the scenes, influencing those decisions in myriad ways.
And then of course, things like employment. We've seen those in the headlines, the issues that have been raised, with bias in employment, and résumé reviews, and things like that. So it's really permeating all aspects of our lives in both direct and obvious ways, but also very subtle ways.
GEORGIE: I think we should go really back to basics, because there's a lot of misconception around what AI is. What is AI? Because what it sounds like is algorithms, but is it more than just that?
STEVE: Yeah, so any AI system I tend to think of it as this value chain. So it's a collection of data, and the data we're collecting, an algorithm, and I'll talk more about that in a second, and then how the output of that algorithm's used, whether that's integrated with business, business decision-makers, or in directly feeding, say, recommendations to a customer. The algorithm is interesting in that people tend to humanize AI in a sense. They think it's this magical thing.
Fundamentally, it's nothing but very, very good pattern recognition. That's really all it is. It's looking through history, through historic data, or some form of data, and detecting patterns that can be difficult for us as humans to see. Because we can see simple patterns, but not highly complex, multidimensional patterns.
And I'll give you an example, something that's been gaining a lot of interest lately in the new, and you see it in the news a lot, there's things called large language models, so these very large models that are very good at doing things like question/answer. They've even gotten to the point now where you can describe in words a website, and it can automatically generate that website for you, functioning website. But fundamentally, all those algorithms are really doing is predicting the next word in a sentence.
That's really what it boils down to. It's just that that is actually a shockingly powerful thing. It just learns that statistical pattern of what's the likely next word, and that next word could be software code. It could be language. And so, when you're thinking about question/answer, it's actually just looking for the pattern of those types of question/answers we've seen in the past. So it's, you know, it is a very powerful thing. It's very complex to build, but what it's doing is actually in many ways kind of simple, and it's why we tend to see some of these systems go awry, because it's just teasing out these patterns that are latent within society in some cases.
GEORGIE: I'm going to talk to you about where things go awry and the risks, but before we get there, let's always focus on the positives first. What is the potential of AI for businesses, and indeed, society, if we can get it right, and use it well, and responsibly?
STEVE: The potential for AI is massive. I mean, in terms of businesses, it is an absolutely powerful and critical differentiator, allows you to operate more efficiently, reach customers better, drive new sources of revenue as you sort of monetize the output of these algorithms, so making specific offers, like product offers to customers, you can drive increased sales, because you're putting the products that customers want in front of them.
So there's like the whole set of powerful business uses. Then you can think about the broader, still within business, but positive impact on society in terms of we can get better health care treatment to patients, you know, by personalizing the specific health care treatments we're recommending. You know, you're keeping people out of hospitals, you're keeping them healthier. It's a net benefit for businesses, but certainly for individuals as well.
And then you can also think about the sort of pure societal benefit of doing things like forecasting where wildfires are about to begin. This is something WEF has been working on. That is an amazingly powerful thing. If you can know where a wildfire is likely to start before it happens, it gives you an opportunity to prevent a lot of damage to individuals, to communities. So there's a sort of a range of benefits, and I think all of them are very powerful for businesses, and could be very powerful for society writ large. We just have to make sure we do it in a responsible way.
GEORGIE: What's a responsible way?
STEVE: The way I think about it is making sure that we are building AI that drives these types of transformative changes we're talking about, but does it in a way that is consistent with your organizational values and generally accepted views of right and wrong. Now, that last piece, I understand, is to some extent a little bit squishy, but therein lies the challenge.
We don't have sort of a playbook of what everyone finds right and wrong, but I think there are certain things we can all agree upon we don't want to do, like push people towards bad health outcomes, or bad financial outcomes. I think we could universally agree those are not things we want to we do, and so, it's that combination of the things we all can look at and say, "Yes, we don't want to do that," but then as an organization, what are our values, and make sure that the AI we build lives those values.
GEORGIE: I spoke earlier in the intro about the areas where we've seen AI go wrong. I mean, there will be companies that use it nefariously, but actually there's, I would imagine, I don't know, you tell me, that the vast majority of things that go wrong, or the bad headlines caused by AI were not intended. How does that happen? How do we have a situation about facial expression software for job interviews, evaluation of loan applicants?
STEVE: Yeah, you're exactly right that none of these things happen, and I don't want to say none. To your point, there are some organizations that do things that we look at that we're just not comfortable with, but by and large, all of these things are unintentional, and it comes from the fact that AI systems can fail in a variety of ways, and if you're not thinking about that ahead of time as a system developer, if you're building one of these systems, if you're not thinking about all these ways it can fail, you're not building in the right safeguards and ensuring that it doesn't happen and mitigating those risks
And when I say they fail, and I'll give you a few examples in a second, it's not always the direct issue with the system. It can be a second, or third order effect. Sometimes, there's not an easy answer to this. So to give you one example, there's been some interesting research that showed, we try to create a model to say who should we and should we not give a loan to. You know, historically, we use credit score. There's issues with that.
So we can create a model that essentially says what's the likelihood of somebody defaulting, and base our decisions on that. And you can take some steps to make sure that there is not bias against any particular group when you do that. We have a lot of historic biases built into society around lending, whether that be based on age, or race, or other socioeconomic conditions. And so that can manifest in the algorithm and we can take steps to prevent that. But then what we start to see is in doing that, we can actually at times cause worse long-term outcomes for those same individuals.
We take steps to make sure we're not biased against them, but then inadvertently, in the long-term, we create issues. And they end up with lower credit scores, and there's long-term harm as well. And so, that's what I, when I say these are not necessarily simple issues and there can be multi-order effect, that's just one example of it.
Just to highlight a few of the other ways we can think about these systems, you know, failing, it can be things like the biased outcomes are exactly kind of what you're talking about. Where you create, say, a hiring algorithm, and it's biased against gender, for example. There's been headlines about that one. It can be we don't put the right human controls in place, so where there's kind of notable examples of chatbots that have been created that very quickly became racist and misogynistic, and there really wasn't a human control in place to prevent that from happening.
GEORGIE: How did it become like that?
STEVE: Well, it goes back to this point about sort of pattern recognition, and the system is taught from a bunch of social media data, which, sadly, we kind of know the vitriol that sits within social media. Once you then expose that chatbot to people, who start saying inappropriate things to it, and sort of what I would say goading it on, it quickly starts expressing misogynist and racist tendencies.
Part of this, too, and people forget about this, is the second somebody knows AI is involved, they tend to interact with it in a fundamentally different way. It's an interesting aspect of human nature, whereas if you know you're talking to a person, you talk to me as a person, but if you think you're talking to an AI, you instantly try to make it fail, or make it say something silly, and you need to account for that. You need to expect that to happen if you're building a system like this.
And so there are ways to put controls in place where you have acceptable language lists, and unacceptable language lists, so you can filter these things out. I mean, ultimately, the solution was they basically turned that system off. But the point here is making sure that you're thinking about those types of controls, and having them in place at the beginning. And then there's also things like just privacy violations, and we think about this typically in the sense of, I've got data, and I don't want to expose that data.
That makes sense, but what happens when you suddenly have an algorithm that can infer things you might not have intended. So let's say you've got a wearable device, and you're building an algorithm to just sort of understand user behavior, and suddenly you discover you can detect somebody that has Parkinson's from that. Now, you didn't necessarily set out to do that. It's a byproduct of it. You have to think about these things ahead of time, because what if you suddenly inadvertently reveal that information?
That is very private information for an individual, and these algorithms are able to suss out some of these things that we might not initially intend them to, but it happens, and then we have to think about, "Okay, if that happens, how do we protect against that?" How do we protect that, not just the data, but the information, and the insights that can start to get revealed? And I can keep going, but I'm trying to give you a flavor of the breadth of issues that can…
GEORGIE: You have. I was just thinking two thoughts there. One, can AI ever be truly unbiased, responsible, ethical, intelligent, even, when it's created by humans? And let's be honest, we know that quite often we are none of those things. And then the other thought I had was I always tell my niece and nephew whenever they're saying, "Alexa, turn on the music," say please at the end of it. I know, it's a bit old-fashioned, but I wonder if the way that we're interacting with AI and algorithms, is it going to change us, the way that we interact with each other?
STEVE: Yeah, and I don't think that last point around is it going to change how we interact with each other, I don't think it's purely AI that we're starting to see that. It's things like social media, where you've got sort of that digital cloak between people. The person you're interacting with, while they're a real person, you don't have that connection of like you and I sitting here having this conversation.
So I do think that's starting to play into how we interact with people, and sort of in a very tactical sense, I mean, there can be cases where people assume I'm going to call a helpline at a company, and it's a chatbot, and I can treat it horribly, because it's not a person. But honestly, some of these systems are getting good enough for very structured kind of question/answer type, you know, like basic help you might call a company for, you could actually be interacting with an AI, and not realize it.
And so we're starting to get this sort of gray world, where we have to be a little more thoughtful about how we interact with people, and then, and I mean, to your point, like so much of this is getting based on social media and other data. We start creating AI that's perpetuating, if we're not careful, will perpetuate some of these historic biases and issues in society. It's just going to start amplifying them more and more and more. It's why I'm so worried about this, and why I'm so passionate about it.
Like we have to be really thoughtful, because we're suddenly doing things at industrial scale, right? We're able to scale the impact of these systems, which is what makes them so powerful. But if you're not careful, and there's sort of one of these issues inside it, you're scaling that issue at the same time, and where, you know, you create this feedback loop of perpetuating an issue that generates new data in the world, which we train another system on, and it just goes on and on. And so that's why you're seeing practitioners focus on this issue so much finally, because we're realizing that we have to be careful about the systems we're putting in the world.
GEORGIE: Is the genie out the bottle, though, in a way? We don't have regulatory framework. I think it would be very difficult, especially when you're talking about things like values. I mean, my values would be different to yours, but also this is global as well. How do you tame this beast at the moment, or in the future?
STEVE: It's a great question, and I do think in some ways the genie's out of the bottle with systems that were built four or five years ago. But those systems are being refreshed as technology renews. And so I don't think it's too late. We don't have regulatory frameworks yet. I believe we will soon. We've seen regulation moving through the EU that I do believe will become law before too long, which will regulate these systems, I should say, systems in the higher risk categories. We've seen regulation proposed in the US, so we're getting there. Some US states have it in place already.
So on the regulatory side, it will start to happen. I actually think, though, the bigger forcing function will be demands of customers and the public. If I as a customer really only want to work with companies that are being thoughtful about these issues, and I'm adjusting my buying based on it, that will start to move the needle quicker than anything. And when I talk to executives, I genuinely believe there's a real source of business value for companies here.
Now, they should do it because it's the right thing, to be super clear. It's the right thing. It's the values-driven, appropriate thing for them to do. However, I also think it drives better long-term competitiveness, faster innovation, improved customer trust, and ultimately, you know, employees want to be associated with companies that are thoughtful about this.
And so, from a recruiting and retention standpoint, it's really important. It was probably about a year ago Google released their new phone with, I believe, the camera's called the Pixel Sense camera on it. The whole idea behind it in the marketing campaign if you go look at it is to create the most diverse-aware camera ever created. And that was their main sales pitch, right? The idea was been seen as you are-
GEORGIE: Diverse-aware, what do you mean?
STEVE: So historically, cameras have done an extraordinarily bad job at capturing images of dark-skinned individuals. This actually is a great example of how these issues are embedded in society. If you rewind way, way back to when film was really beginning in popularity, there was something created called the Shirley card, which was, quote, "The ideal, average person," and that was used to tune the color contrast, like the color balance and contrast of film, and then ultimately, all the machines that developed film.
The card was named after, it was a woman in the picture. Her name was Shirley, hence the name Shirley card, but she was a white young woman. And so now think about this, every single photo lab in the country, all the photo film created was balanced to correctly capture a light-skinned white woman. That happens for many, many, many years, and now our whole catalog of imagery is capturing those people well, and people with dark skin poorly. Now we go to digital cameras. We're training those cameras on that data, and we're perpetuating that and so…
GEORGIE: Wow, it's taken until 2021?
STEVE: Yes, it's shocking. But that's…
GEORGIE: Wow.
STEVE: This is the power of these things that are embedded within our data in this way, and you know, Google, to their credit, really turned it on its head, and you know, put cameras in the hands of a whole variety of different artists, and photographers, and had them capture their world as their world is, and then worked very hard to create a better product and then use that as a key aspect of their marketing.
And so they did something that was just correct. Obviously, it needed to be done. It should've been done many years ago. But then they used that and said it's a real source of value for us as a business and for you as consumers. And so that's an interesting example in that it both captures the challenge we have with how things are embedded in our society, but then how companies can realize true benefit from addressing it.
GEORGIE: That's an incredible example. I want to row back, though, on when you said the most important thing is less about regulation and more about, I suppose, social regulation, consumer regulation. But AI seems to me to be an area where the average person, and I would include myself in that, no disrespect at all, doesn't really get it.
We hear about it a lot. We hear about algorithms a lot. We see it a lot in the popular media, in movies, mostly bad things perpetuating the kind of "Terminator" idea of it. But mixed amongst all of that is elements of trust is elements of miseducation, and I wonder if we don't know enough about it, it does leave companies free to use it as they will, and by which stage it's almost too late? We can see how much we're already given over of our sort of privacy and all of those sorts of things that in the past would've been absolutely abhorrent.
STEVE: Yeah, I mean I think part of this is over time there'll be a push to just sort of educate people on sort of the basics of data and algorithms. I know that sounds lofty, but actually as you look at curriculum in schools, we're headed in that direction, because it is understood how important it is. So over time, I think that gets better. It doesn't solve our problem, but it starts to get better.
I think the onus is on companies that are doing this right to articulate what they're doing and why they're doing it. Just to use us as an example, we recently released our AI Code of Conduct that does just that, that we as a company articulate to our employees, to our customers the steps we're taking to make sure that we're building our systems correctly. Now, that doesn't obviously require anybody else to do it, but if you as a company, and all your competitors start to do that, it sort of compels you to do the same. And as a customer, it sort of makes you say, "Well, wait a minute, these three companies I know of are sort of telling me at least. So maybe I don't understand all the details of the algorithms, but they're telling me conceptually how they're thinking about making sure that these systems adhere to their purpose and values as an organization."
They start to ask questions for the company that isn't, and you know, that it just leads to that questioning. And so, it's, I guess, less about as much of a forcing function as more of it starts to become a differentiator that drives behavior, and in doing that sort of brings everybody along with it. Now, I will say maybe I'm idealistic, but I really do think we, as customers, as citizens, have a much more powerful voice than we give ourselves credit for in this conversation, and we can really start to move the needle.
I mean, we saw this when you rewind into natural resources, and there's a concept within natural resources called the social license that emerged, and the idea was if you are, it really came out of paper manufacturing, but if you're operating a paper mill within a community, it's incumbent upon you to work with that community, articulate what you're doing, why you're doing it, hear their concerns.
I think the same is true here. Now, to your point, it's a little more under the hood, right? A paper mill is something there. It's a physical building. You can see it. You can see emissions. You can see wastewater leaving. You can ask questions. But we should start to think about sort of the digital world in the same way. I mean, to your point, AI is behind a lot. You should start to say, and think about the companies you interact with, and how are they using AI, and am I comfortable with the way they may be? Are they telling me? Are they giving me any transparency? I think just we can start to ask a lot of critical questions that we haven't asked yet, and change our behaviors based on it.
GEORGIE: So before you get regulated by your customers in that way because you've done something wrong, or you've made a mistake, what steps should you take? I guess, what steps are you taking at BCG, and, because I assume they would be the ones that you would advise other people to do.
STEVE: We tend to think about putting in place a pretty comprehensive program. It starts sort of at the top, thinking about what is our overall strategy, our goals for this. With respect to AI, what are the sort of principles and values we want to live around our AI? And then taking those and dividing them down further into, you know, what you can think of as standards, or policies. So it's very easy for me to say to an AI developer, "You should build an algorithm that's fair."
To your point, it's impossible to be unbiased. We want to be as fair as possible, but what does that really mean? And so, we have to think about how do you take that sort of goal of creating a fair algorithm and divide it into sort of piece parts, and make sure that your teams are then doing that. So that's sort of thinking about the big picture, what we want to achieve. Then there's a set of governance to put in place to make sure, one, kind of a check and balance to make sure that your teams are doing the things you want, but more importantly, that teams have, your product teams have a way to escalate concerns. And for us, we have a global council we stood up that is actually a source of both reviewing projects, but also then being a source of expertise if people have questions, because of the fact that there are times where there is not a clear right and wrong answer for these things.
We talked about it being value-driven, and to give you an example, if you're a company running a supply chain, it's entirely possible that you can save a lot of money by doing sort of just-in-time restocking. So you carry less stock, you're paying for less warehouses, you replenish more frequently. But the implication of that is you're putting more vehicles on the road. More trucks on the road to bring shipments to stores, let's say, which has a bigger carbon footprint. Where do you live in that balance of reducing cost versus increasing your carbon footprint?
That's a discussion that has to happen at a senior level of the organization. You need to put governance in place in order for that to happen. And then there's a sort of a whole set of processes around just making sure the product teams are doing reviews, and thinking about these issues in a structured way.
There's a piece around tooling just to make this as easy as possible for teams. What we try to do is burden product teams the least amount possible, make it very easy for them to do things like evaluate data for bias against any group. And then there's a whole piece around cultural change. I mean, fundamentally what we're talking about here is catalyzing a cultural change where everybody in the organization is thinking about these issues and asking critical questions, and that's a journey and it takes time.
But you need to consciously think about that and think about how you're going to catalyze that type of change. So it's sort of the five levels we think about, and obviously, there's a lot of details behind all of that, but that's how we tend to approach these problems, and I will say that sounds like a lot. Putting in place a really mature, comprehensive program is big, but there's simple steps you can take like putting in place checklists and having clear policies and having somebody in your organization charged with this. I think small steps like that can really go a long way to start to changing behavior.
GEORGIE: Steve, thank you so much, and to you for listening. Of course, this is a field that isn't standing still. There have been plenty of new AI innovations, even in the last year, including content-generation tools, like ChatGPT and DALL-E, which are making these questions even more pressing for businesses and the likes of you and me. We've got plenty more episodes coming up looking at these topics, so why not click the Follow button to be the first to hear about them? We'd also love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit Subscribe, and leave a rating wherever you found us? It helps other people find us, too.
GEORGIE FROST: Cars are no longer feats of engineering design. Now they're one of the most sophisticated and expensive mass-market software products. Around 90% of all new capabilities in automobiles are software-defined. The industry, as a result, has been forced to change. But is it moving fast enough? I'm Georgie Frost and this is The So What from BCG.
ALEX KOSTER: If I compare the vehicle from 50 years ago, it was literally like a freedom machine. This was the thing you get into to get away. When we look at the car of the future, it has thousands of sensors, cameras, body temperature, you have vibrations, everything that is being measured. So it's literally the opposite.
GEORGIE: Today I'm talking to Alex Koster, BCG's lead for automotive tech.
ALEX: We are just at the very start of a major transformation of what has been a very consistent product for the past 100 years and has looked and felt more or less the same way. Yes, it went a bit faster. Yes, it went a bit more clean over time. But I think now we will see that it will change fundamentally. The reason why that is is mainly because we are seeing the shift from mechanical to software.
And what that will do is it will bring innovation at an exponential speed. Because basically when you buy the product, it's not a fixed product anymore, but it can change forever in the future. It will constantly download updates, get new functionality, new capabilities. And there are in particular two main areas which I would like to highlight.
One being the AI driver. So essentially you replace the human driver by a machine operation. That is one big change that is only possible through software and the latest computing. And the other one that is happening is the digital cabin. The whole interior experience which was very much focused around you driving the vehicle and pushing buttons. Well that's now going to be an immersion space like an experience environment, which of course, if you're driven around, you can now fully explore. So those two are the main ones that will feel and look in a very different way than what they do today.
GEORGIE: Before we get to the future, just give me an idea of where we are now. When I spoke earlier about 90% of all new capabilities in automobiles are software-defined, where is this software? What's it doing in the cars that we're driving?
ALEX: So I think the comparison that you could do is if you think about how it worked for smartphones, initially you had keyboards. Keyboards were very fixed, you bought them, they were very mechanical. People loved that. They became very fast and efficient at using it. But it was always the same.
Now you changed it to a software-defined device which was the touchscreen. So the change was you could actually continue evolving it over time and now it is predictive, it is super fast, you have a thousand different variations of using it, and it has really grown into many different topics.
So I think right now we are right at the stage where we are starting to replace the physical keyboard by the first touchscreens, but we still have software Version 1.0. What we now will see is this will now go exponential as innovation kicks in and as technology players bring their software into the vehicle at a very fast pace.
GEORGIE: Why do you think the automotive industry has been so slow? And I think about it in comparison to perhaps other industries.
ALEX: So I would almost first say, I wouldn't say that the automotive industry has per se been super slow. The problem is highly complex. On one hand, auto manufacturers are today only doing about 20% of the overall vehicle. The other 80% come from suppliers. So there's a huge amount of companies that are involved in actually making a car happen, literally hundreds.
So if you want to change anything more radically as what we are looking at at the moment, you need to change the ways of working for all those hundreds of companies. The capabilities, the people, what they know, and what they need to do. Second, it is a highly regulated environment because you're actually driving around people and there's life and death questions which you don't have for most other consumer electronics products.
So as a result of that, if you want to make this happen, you really need to make sure that you fit into all the liability issues and you don't get essentially bills afterwards of billions of dollars because you have made a mistake in the software somewhere. And then third, there's about 15 million people globally directly working in the automotive industry and there's another 50 million of people that are dependent on it.
Think about chemicals companies, other engineering companies. So you would have to change many of them eventually to come up and really turn around the industry. So all of this is leading to this being a hard problem so to say. And I think people are acknowledging that they need to move, but it just can't move as fast as they should or want to.
GEORGIE: Do you see a place for the traditional automotive industry or do you think this is just going to be dominated by tech companies?
ALEX: So this is an excellent question, and I think the jury is out if I look at it today. And you do see them coming with very different capabilities. The auto companies come in and they do understand the complexity of assembling the hundreds of parts of playing regulation, understanding what they need to do to deliver a safe experience eventually. They also understand all the differences on a regional level because driving a vehicle in one place is very different from another place.
Tech companies are learning this the hard way at the moment. But then on the other side, you have the tech companies that obviously are much faster. They are used to innovation at the speed of light and they basically release new capabilities every few months. But they get to the point of being careful about the potential liabilities, as I said before, of life and death questions.
And if you get stuck in this, and there were some spectacular such cases in the last two years of self-driving attempts by technology companies that basically blew up completely. And I think we will see in the near future how somebody is probably putting all their chips on the table and getting this really to the market.
GEORGIE: Are we seeing new challenges emerge?
ALEX: So I think the kinds of challenges that we see at the moment are also massive partnership challenges because I think both the tech companies and the auto companies acknowledge that they need to somehow find a path together. None of the two can probably work entirely without the other. However, the ways of cooperation are massively challenged because they come from two different planets literally.
Whereas automotive companies are all about global scale suppliers, waterfall cycles, slow development, very safe, working with a ton of different suppliers that they all control. Technology companies are about fast iteration, trying it out very quickly, building platforms and ecosystems, and working with hundreds of thousands of different players but in a very different ballgame, also being very close to the user. So they come really literally from different cultures, capabilities, philosophies, and ways of acting in the industry. And they haven't quite cracked how they should work together. To me this is one of the main unlocks that we will need to see over the near future hopefully.
GEORGIE: Do you have an answer?
ALEX: I think it will be a mix depending on the area where you're looking at. There is going to be a fundamental operating system in the vehicle that will have to come from a more classical OEM manufacturing approach because that is something that needs to be standardized across the industry. That's the only way you get scale and you get cheaper electronics into the vehicles. If everybody does their own thing, it's going to be too expensive.
But then you have for example, the in-cabin area which I was speaking about, which is the classical domain of the tech players. They just are years ahead from what any other player is doing in the market right now. And my expectation is that this will be a logical place where the tech players will eventually dominate. And then you have the interesting area of the AI driver where I think we are still seeing the fight of the technologies between the ones that start gradually and go there step by step as we see most auto players doing, and the ones that are trying to go straight onto the robo-taxis and then work their way back from there and we don't see them landing either yet.
GEORGIE: You mentioned the issues with safety and I want to delve a little bit more into some of the implications of software-driven cars. I mean, looking at the global supply chains at the moment, the shortage of chips, those sorts of things, I asked at the start whether automotive companies are moving fast enough, maybe the drive as it were, no pun intended to go to full software is going too fast. Let's look at some of the implications, some of the good ones and some of the bad ones.
ALEX: If I start, because you mentioned the safety topic, and I think that is a key complexity that we need to look at because on one side, a major part of the opportunity is assisted driving and automated driving eventually, that is a huge value pool. We expect that about three-quarters of all the value of software in the future will come from assisted driving and autonomous driving capabilities.
Now to make that safe, the expectation is that it needs to be at least 10 times to 100 times better than a human is. Otherwise the expectation is this will not be socially acceptable and it will never be accepted by regulators. That means in practical terms that you cannot have more than one fatality per 100 million miles driven. Now we are sometimes approaching this in easy situations where cars drive slowly, where there's good weather, where the streets are wide, and where there's nobody else on the road.
However, whenever we have complexities coming, we are very far from having evidence and really the support to make sure that this is really feasible. So in order to get to safety, you need tons and tons, literally exabytes of data and practical experience and simulation on a massive amount. And so at the moment what we see is a race to collect the data to try out in a gazillion different fashions how you can get into what are so-called corner cases or situations.
Just imagine any kind of strange animal passing the road or a plane landing on the highway in front of you. So all of those situations actually exist and you need to somehow have simulated them so that the algorithms learn about it. So this is a massive investment into data and into experience.
And this is something where the auto players are approaching in the stepwise approach, learning as they go, they start off by having simple highway staying in one lane, then they learn to shift lanes, then they eventually learn what to do if something happens and the driver is not interacting. So how do you stop if you are on the second lane? How do you stop suddenly to get into a safe mode? How do you exit or enter a highway?
Then you go into urban. So you basically work your way through this and you always make sure that you are safe in what you have been learning so far and you do the next step. That is one approach of doing it and I think definitely one that seems to be working eventually. The other approach is you take a black box AI, a big machine, you don't know what's happening inside, but you just train it and train it and train it and you hope that it continues to learn how to drive, which is probably what a human does eventually.
But we just see that the amount of computation that is required to do this and of data might surpass anything that we have ever seen. So those two paths are currently still kind of competing in the market, and at the end of the day, the regulators will have to make a hard choice if they want to homologate one or the other or both and that's where the jury is out where we will eventually land. So safety is going to be a huge concern.
GEORGIE: Safety's one area, and absolutely it will do. Privacy I imagine is another.
ALEX: So privacy is another interesting one and I think one that we haven't even started to really look into, if I compare the vehicle from 50 years ago, it was literally like a freedom machine. This was the thing you get into to get away, just like drop it all, drive out, have also your first love, have your first expectations of like adventures that you do.
And I think when we look at the car of the future, it's going to be almost the opposite because it is totally connected, it is always clear where it is. It has thousands of sensors in it, around it. You have cameras, you have body temperature, you have vibrations, you have everything that is being measured. So it's literally the opposite. Now of course that will give you all kinds of convenience of experiences of new things that you can explore, but it needs to be clear that we are getting into a space where depending on where you live on the planet, you might have experiences that you don't want to have in a super-connected vehicle that has sensors all over the place.
And I think this is where at least I see some very positive developments in Europe like we saw on GDPR and so on which are being deployed also globally. But I think we haven't really cracked the case how to think about a truly fully connected, fully sensor-ized vehicle and how that's going to play out eventually.
GEORGIE: It makes me wonder about cost. Sounds very expensive to get to a point where you want to be. I know it's a very difficult thing to predict in long term in the future because this isn't going to happen tomorrow, is it? But is there any space do you think or will there be any space for the traditional car, because plausibly it might be cheaper? I don't know, would it?
ALEX: So my expectation is actually first of all, in order to develop a self-driving capability, my expectation is you can easily spend 10 billion plus. The number of players globally that are able to spend that amount of money is naturally limited. And that basically also leans to a consolidation of the market of those that are eventually able to deliver this.
Now that being said, when you have developed it for the first time, that is when the typical tech cost curves set in, which is what typically happens. If you look at technology, think about the first big screen TVs that you had at home, they started at 10,000 bucks. Now you get them for 100. And the same happens of course for the chips, for the connectivity, for all other kinds of computation that is required.
Likely scenario is you will spend the 10 billion, there will be a few surviving companies that eventually make it to that point and then they will productize it. So make it cheaper, scale it up, get more and more into hardware, into chips that you can mass produce, and then you will be able to penetrate all the different vehicles.
There will be a period though over the next few years when it starts more or less at the upper end of the vehicle spectrum. And I think that is probably a little bit unfair because it means that mostly initially there will be only certain segments that will have access to all those fantastic new innovations and maybe also more safety. And then it will be regulated so that it will really go into everything like anti-brake systems and other things that were regulated the same way. And that's when it goes into the volume, goes downmarket.
GEORGIE: How will this sit alongside current infrastructure? How will our towns and cities need to change?
ALEX: Another unexplored space, I would say. There are a lot of very controversial studies that we see. Same for example for mobility. We saw that going to shared mobility can have potentially very positive effects but can also have negative effects. And if you look at the net-net, actually maybe traffic is not improving in cities because it might even turn some people to shift from basically metro, bus, and other kinds of approaches over to shared vehicles.
So suddenly you have more vehicles on the road whereas all the ones that already have individual vehicles might continue to do so. So you're more stuck in traffic than ever before despite having shared vehicles. Now a similar thing may well happen on some of the other expectations, like there's a hope that we can get rid of parking spaces in cities, which is a huge driver of areas, right?
If you look at the way, especially US cities have been built but also Chinese cities to a significant degree, the more recent ones, they are really built around the car. Now if suddenly you don't need any more parking space because you can send them autonomously somewhere underground, well that's going to give massive space back to other redeployments. So I think this is something that needs to be explored, but we have quite some way to go before we actually do see that at scale.
We will see real self-parking cars probably second half of this decade. Self-driving cars will be another 5 to 10 years after that and then they will have to be sold. Today we have 1.5 billion cars in the world. So in order to replace at least half of them, it's going to take us another ten years. So the time when we actually do see cities changing in their fabric big-time is going to take 20 years. Except for the few urban centers where it is pushed very heavily by governments, regulators, where we might see faster change, but the volume is going to happen in 20 years time.
GEORGIE: Is this the end of car ownership? Because it just sounds to me like a kind of Uber but with AI drivers, would work.
ALEX: I think we've seen some interesting waves over the past ten years on this. First of all, there was a huge expectation that we have autonomous driving cars ten years ago. That turned out to be not quite right. Then we went into a period of everything is turning shared mobility and we will all leave our cars and young people don't want to own cars anymore. It's all going to be rented. And so everybody was talking about that and it's all going to happen in the next five years.
Now again, we look at the numbers, it hasn't turned out that way. Most of those companies have somehow gone bankrupt. Corona hasn't helped. It has actually further amplified individuality and people wanting to sit in their own little cubicles, so to say. And I think if we look forward, our expectation at the moment is that we will actually see a further strengthening of the individual car.
And that is also true if you look at the biggest volume driver of all, which is China. There's about, I think, 16% that are claiming that a car does not raise your status, which means all the others do. So there is still this huge amount of people that are entering their next status level and they just expect that having a car is part of making that journey and they want to be kind of participating in what other people in the world have been doing before. So I think we do see a continued good time for the individual car. And that's not going to change with autonomous driving anytime near time.
GEORGIE: Are you a car guy, Alex?
ALEX: So that's a cool question because I never was. When I actually spent my first 30 years, I never had petrol in my veins. I'm actually an electrical engineer so I'm more on the side of the clean fuel, but in particular I'm more a software and tech guy. And so what I find fascinating now is how this industry is now entering the tech age and how it's going to be transformed just as the others have. And this makes me very excited to watch.
GEORGIE: Because...yeah, I imagine it does, but I imagine it also makes petrol-heads rather nervous about what you're talking about and rather grumpy, I imagine.
ALEX: I would say that's a massive phenomenon. And you do actually also see a substantial turnover even of C-level people in the past two years over exactly this issue. And you can basically see them in the news every other day. Either it is management that is being exchanged because there's an expectation that transformation should happen more quickly, or you see significant merger and acquisition moves which are also on a scale that we have never seen before.
So there's a risk-taking in the industry at the moment to somehow ready your organization to this new future that is very hard to get there. By the way, I don't think it is anymore the fact that people do not intellectually recognize that this is what needs to happen. I think the petrol-heads have come around to at least analytically understand the problem. But I think we are still light years ahead of that kind of transforming into actual culture change, process change, new capability buildup.
And it's just what has happened in any other industry before. You are in a space where you are locked of your own success. The profits in the industry are still huge overall, and that doesn't really create a burning platform for you to change anytime soon. So making the change while you are successful and all the people who are in your organization have always been successful in the old way, it's just very hard to achieve.
GEORGIE: What are the implications for big tech?
ALEX: So first of all, this is a goldmine to them clearly. I mean whoever you talk to, first of all it is the ability for them to get into an extension of what they have successfully been building in other places. If you've built Alexa, you want to make sure that Alexa works everywhere. If you have already captured five different devices at home, be it your smart home and your smartphone and your TV and a few other things, well you just want to get into the car and make your software ecosystem as relevant as possible to all of those places.
And it actually looks like this is going to work because people are used to the habits, they love the intelligence, they love the simplicity, the seamlessness that they have to have their digital lives across all of those different spaces. So it's getting into it immediately.
Now that being said, the technology companies, they do come around the fact that a car is not as simple as a smartphone. It does have liabilities coming with it that could even eventually potentially even kill them overall, as we see from some recalls in the automotive industry. There are recalls that literally require you to recall hundreds of thousands of vehicles at a cost that is just enormous, and liabilities that can take your company down. So this is what we see tech companies now facing next. Huge opportunity, clear right to win, but a huge risk also to their business model.
GEORGIE: Finally, I want to talk about the relationship with electric cars and the climate change movement and where that sits in your future because there are some parallels. The idea that some people are very opposed to having electric cars will always be because they just don't feel like proper cars as it were. But also there's a lot of technology there, there's a lot of advancement and then you are now requesting that the industry makes even more changes. Are these complementary or is it a completely different kettle of fish?
ALEX: They're completely complementary. I think what we actually see in my view is first of all, the industry is really getting their head around electrification. And we do see that the numbers are now coming up massively in terms of new products. Like literally hundreds of new products are introduced to the market now within a very short timeframe. And in ten years time, more than half of all the vehicles sold will be pure battery electric vehicles.
So that's a massive shift and the industry has done it fairly quickly. And to be fair, that is still a continuation of what they had before because it is still a vehicle that drives you from A to B. It is still largely driven by a powertrain, similar setup, similar capabilities, you sell it similarly to the same people. So in many respects that was kind of an easier task even if it is already a generational shift for the industry.
Now in order to deliver though an electric vehicle successfully, you do need software because you do need to be embedded in charging networks. You need to be predicting the way you use your battery because batteries are a very scarce item. They basically deplete very quickly. So you want to be much smarter in the way you use it. So if you have software that is smart enough to predict how the road is going to be over the next few miles and therefore can steer the vehicle powertrain and torque and so on in a different way, well that's going to be a key contributor to make it that effective.
And if we look at some of the trailblazing companies that have been first to deploy electric vehicles, that's what they did. They had technology stack totally geared towards a climate-friendly electricity-centric future and making the whole experience much more integrated for that new set of customers. So to me, the two are really going hand in hand, and electrification is now the ability for the auto companies to also rethink the whole setup on the software side and drive it forward.
GEORGIE: Alex, thank you so much, and to you for listening. We'd love to know your thoughts. To get in contact, leave us message at thesowhat@bcg.com, and if you liked this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: How highly do you value the internet? What would you be willing to give up in order to stay connected? Well, according to a BCG study, three-quarters of Americans would forgo chocolate and alcohol for a year, a fifth would even abstain from sex, and that study was done a decade ago. High-speed internet is no longer a luxury. It's an essential requirement to every part of our lives, yet 2 billion people, or one in four around the globe, don't have any access to the World Wide Web. So how do we close the digital divide? I'm Georgie Frost, and this is The So What from BCG.
VAISHALI RASTOGI: Every corporate should be thinking about what is the one action that they could be doing? What is the one goal they can set to really contribute to digital inclusion: set a goal, take initiative, and measure progress.
GEORGIE: Today I'm talking to Vaishali Rastogi, managing director and senior partner at BCG and global leader in the Technology, Media, & Telecommunications practice.
VAISHALI: I think I can safely say that a decade later people would give up even more things for the internet. I would say it's no longer just a form of entertainment or a form of connection like it was a decade ago. So many of our daily activities are now done on the internet.
Imagine if you didn't have, well, of course, first of all things like online shopping, but also education, but also things that are so critical in emerging markets as well. Think about telehealth, digital identity, and digital payments that allow transfers to be made to the right segments of population. This is something that is now critical for everyone: first world, but also the entire world I would say.
GEORGIE: Could you put a value on the price of the internet?
VAISHALI: I think that would be a hard question, but needless to say, I think it is something that... or should we call it priceless?
GEORGIE: And yet, we have a digital divide. What exactly is a digital divide? Just explain to us how many people does it affect and what's the impact of those people that don't have what you just described. So if it's so valuable, yet a lot of people don't have it.
VAISHALI: So the digital divide has been talked about for a long time. And look, the definitions have changed as technologies have changed, but in my simple mind, it just means enabling everyone to leverage the power of the internet to do things that are critical to them and benefit them every single day. Digital inclusion is actually synonymous with social inclusion.
And what do I mean? If you just look around you, the entire world is getting connected digitally. So information, communication, education, social wellbeing, it's all part of our digitally connected lives. And if we just close our eyes and just think about Covid-19, and how it helped us, and what would we have done if we didn't have the internet?
So when the world went into lockdown, within a short space, some schools, at least, started operating remotely, financial institutions could carry on business, but it's not just about work and education. I talked about how digital can be, really, an enabler to break the barrier between reach and cost, and ensure access to health, to finance, to government services for so many different segments of society. This is something that is really impacting, I would say, at least 3 billion people, which is a third of the world's population today.
And this is even though 95% of the world's population resides within the range of a mobile network, well, at least on that front we've done a good job or our telcos have done a good job there. But beyond that, there are many other factors that need to be fulfilled: devices, skills, much more. And this will only gather speed. I mean, more and more activities will be done digitally, and I think there is no going back.
GEORGIE: I just want to draw out, of that 3 billion figure you're talking about, perhaps a lot of people think, "Well, this is just a developing nations issue." But it's not, is it?
VAISHALI: No, absolutely not. I would say that, of course, the challenge is greater in what we call more developing economies where, you know, almost 70% of the households are not covered by fixed broadband or don't have the connectivity we need. In middle income countries, you know, the figure drops, but even in high income countries, there's almost, I would say a third, or 20 to 30% that really do not have the access they need in the way to fulfill their lives.
GEORGIE: I guess the solutions to those would be different, so how would you go about looking to fix this problem, bearing in mind different locations, different geographies, different socioeconomic issues?
VAISHALI: Absolutely. First of all, I don't think there's any silver bullet, and there is a lot of different solutions that are needed, and there's a lot of different actors that need to come to the table. I would summarize it as the three As: accessibility, affordability, and ability.
Accessibility means the ability to gain access to the internet. So that means do you have the infrastructure? Do you have the devices? Are they at the right speeds? But also, do you have all the ancillary elements, like electricity access, which is more a developing nation challenge? But then, there's affordability, and affordability talks about do you have the capacity to use the kind of connected digital ecosystem that exists at the speeds that exist?
And the last is ability, and by ability I'm talking about really digital know-how and skills. I'm sure many of us remember that when 4G and smartphones came out, well, at least I certainly do, you know, you have to sit with your mom and say, "This is how you do a video call, this is how you do digital payments, and by the way, it's safe, and you don't need to go to the bank. This is how you can access your internet and it is just fine to do it here." It required skills.
And then, now if you extend those skills and you talk about other things as well that people need to do online, this is an important component as well. So I would say all three are needed: accessibility, affordability, and ability to drive digital inclusion.
GEORGIE: Yeah, because I imagine when people think about the digital divide, they think very much developing nations, perhaps very much access, telecommunications, technology, that sort of thing. But I mean, you can have all the technology in the world, but if people don't know how to use it and to use it properly, well, it's as good as useless, isn't it?
VAISHALI: We talked about individuals, but you could switch that as well, right? You could switch it to businesses. And when you look at businesses, and I think about the small and medium-sized businesses, they matter because they yet form a bulk of employment, both in the developing markets, but also a fair share in developed nations. And many of them actually are not really very sophisticated digital users in terms of how can they use it for e-commerce, how can they use it for suppliers, how can they use it for productivity?
And so, yes, I mean, it's a real challenge, and it's a challenge for individuals in their daily lives, and it's a challenge for individuals when they're part of small businesses, given that small businesses account for such a large share of employment globally. So absolutely, I think without that, what we call ability to use, I think the best platforms and the best technology is useless.
GEORGIE: I'm always surprised living in, as I do I in the UK, which, let's be honest, we've moved quickly towards getting high-speed internet. But I live maybe 40 minutes from London, it's a black hole, and sometimes even in London. I'm always surprised that this, given how important it is, and if the pandemic hasn't shown us anything, I don't know how we would've done what we did without the internet during that time, why more investment, more focus isn't put in this area to making sure developed countries have good high-speed access everywhere. Do you think it's perhaps sort of looked a little bit like, "Oh well, it's sort of a first-world not quite essential problem." Do you think we need to change the narrative around the internet?
VAISHALI: It does need to be thought of now as something that is absolutely essential. I mean, think about education and supplementary education even as schools restart. Think about all the other elements that come into play, like I was talking about livelihoods. So I would say that this is something that we cannot really leave and say, "You know what? If it doesn't happen, it is OK." I do believe that digital inclusion is an absolute necessity for people.
GEORGIE: For countries and societies, I mean, you've suggested in your research that reducing the digital divide by half over the next five years will require $2.1 trillion of investment. That is, as you admit yourself, a dauntingly ambitious goal. It's very expensive.
VAISHALI: And that, by the way, is the amount that we need to reduce the digital divide by half. So we would take it from 53% that have access to all of this to 80%, but we are not even getting to the final mile. We do need all different parties to come together here.
We need governments, of course, but we need private corporates to come in and contribute. We need non-profit organizations. It really will take a village to deliver on this task. And I don't think we could just say, "Let's look at the telcos and let's wait for them to deliver this." I think this is really a societal challenge, not an individual corporate challenge.
GEORGIE: Can I drill in, though, to that 2.1 trillion figure? Where'd it come from? Where would that spending go?
VAISHALI: So first of all, we looked at all three As, accessibility, affordability, and ability, and we looked at it globally, and we then said, "What is the investment we need to reduce the gap in coverage?" And when I say coverage, I mean high-speed coverage, because we said 30 mbps, and that's a technical term, but what is the minimum amount of speed you need to do your daily activities? So we said, "How much money is needed to deliver that?"
Then we said, "OK, to access this kind of internet, what kind of device do you need, because some people do not have this device." And then we said, "OK, not just that. How much would it cost as well to access this?" And then the last one is what kind of education programs that we need to run to familiarize people, especially in rural areas, with using, really, the internet to deliver on their activities? And then, we put all this together, and that's where we got the 2 trillion number. And as I said, it only gets us to the 80% mark, not the 100% mark.
GEORGIE: I mean, it's difficult at the moment when we're calling on people to fight a climate issue as well, and there's lots of figures bandied around about that, and now it seems another figure. What is the business case? Why should privates contribute?
VAISHALI: There are a lot of issues that need to be tackled, right? If you look at the SDG goals, there's a whole host of them. I mean, climate is absolutely front and center, but there are many, many others. But I don't think it's a question of "or," or it's really to for me a question of "and." If you look at digital inclusion, imagine the positive change we can make.
We can make sure that kids in remote areas get the supplementary education they receive and how education can be transformed. It's about making sure that payment transfers can reach people using digital identity in a timely manner.
I mean, there are several countries, think of Aadhaar in India, that has combined digital identity, banking accounts, as well as mobile connections to ensure that in the Rogers plan they deliver the cash welfare payments to the women in the family in a targeted and timely way. I mean, medicine can be democratized, livelihoods can be facilitated in developing markets, so many examples.
We have social commerce platforms that allow millions and millions of small sellers to find markets and to be able to sell. So housewives, people in tier 2 towns can now access the entire country. There are so many of them: Meesho in India, GoTo in Indonesia, Facebook Commerce. Farmers, we attempted something like this many years ago to try and include farmers and bring them the right inputs for their crops, buy produce, but I think the infrastructure was not ready.
But if you look at what Olam has done through Jiva, it's really a sophisticated version of what we tried in 2006 where they have taken farmers that are really small farmers, hold very small holdings, have no access to advice that is specific, not general, have no ability to sell their produce at the right price, and have no access to financing if they need money for seeds or other things, mechanization if their crops fail. And that's what they've brought together on a digital platform.
So in my mind, just imagine, I mean these are just a few examples, but just imagine the change that we can make everywhere in the world. And of course, in the first world, or in more developed nations, I would say this is really a means to make our lives even more convenient, even more simple, giving us more leisure to do other things that are important for us.
GEORGIE: And I also guess for businesses, I mean you mentioned their access to new consumers, but access to talent as well, which is particularly pertinent at the moment.
VAISHALI: The internet can change the way that we provide education to a huge segment of society that isn't able to get it: vocational training, other training, and that unlocks businesses as well. There are just so many. I guess I could talk more and more about it, but I personally think this can be a game-changer if we can make sure that we conquer the digital divide.
GEORGIE: On our current path, when will full digital inclusion come? Will it ever?
VAISHALI: I don't think I would put a number to it because I think when we put our minds to it as a society, I think we can make a lot happen; so I think this really depends on how all of us come together. I mean, there are so many grassroots examples that are happening. We need to just multiply them.
We worked with the World Economic Forum and UNDP to really set up what we call a digital inclusion navigator to say, "You know what, there are hundreds of ideas. We don't need more ideas. What we need is people to really take those ideas and apply them." So we made it available in a curated dynamic form. There are so many other individuals also helping. ITU is helping. There are corporates that are helping. American Tower has initiatives. Vista has initiatives.
I mean, there are hundreds of corporates that are also coming together here. So I think if we can get, really, the power of the government sector, nonprofit organizations, multilateral organizations, and corporates to come together, I think that, you know, we could safely get to this even by the start of the next decade.
GEORGIE: Where do we begin then to change the path, because it doesn't sound like we are on the current path to full digital inclusion in a speedy manner. So something needs to change and quite quickly, but how do we begin to make that change? Where does the pivot come globally speaking?
VAISHALI: So as I said, digital inclusion in my mind is a public-private joint responsibility, and I think every corporate should commit to some aspect of digital inclusion in their broader goals. And it could be anything: it could be on access, it could be on affordability, it could be on skills, it could be services that you provide on top, on anything. And similarly, I think governments need to step in as well, both at the federal level, at the country level, but also at the state levels.
I think we need to set the right incentives, the right investments, provide some of the right subsidies as well, to ensure because not everything is economically viable and possible, and so they play an important role as well. I mean, if I look at Singapore where I live, the government has done an amazing job in really saying, "I want to get the SME sector, which accounts for, I don't know, two-thirds or more of employment here."
And they're not very digitally literate and savvy, so they are finding active and targeted ways to really bring them up to speed and raise productivity there. So I think it's important to set these goals and to say how each of these actors would contribute in making a real difference.
GEORGIE: And how can we make sure that this is done fairly, equitably, morally even?
VAISHALI: Georgie, that's a great question. In my mind, I don't know if we would have the perfect answer. I would say that if we can even do it one step at a time, one contribution at a time, that is perfectly fine. Because waiting for the perfect solution, I think that is very hard. Really accepting every grassroots effort, every contribution makes a difference in my mind. Something that I know doesn't stick well with really having one universal frame and then everybody contributing to it, but that's the nature of the beast.
GEORGIE: What is the expression, "Don't let perfect be the enemy of good?" You said that this current crisis is an opportunity. You see it as an opportunity.
VAISHALI: In a way, Covid did for digital inclusion I think what nothing had done before, right? I mean, we've been talking about this, or I have been at least passionate about inclusion for a long time. But I think people need to experience it themselves to value why it's important for others as well. Covid just taught us, I mean, not all jobs could be done remotely, but so much more of our lives went on as normal thanks to what the digital ecosystem allowed us to do.
Imagine if this pandemic had hit 20 years ago. At most, I would say less than even 1% of our labor force would've been able to work remotely, so our entire life would've come to a halt. I mean, think about education now. We had at this point during the pandemic at least 200 million students that were able to continue their education, and that's like almost a hundred times more than that would've been possible had this happened earlier.
I can go on and on. I mean, think about providing online shopping and ensuring that vulnerable populations got payment transfers. I think this pandemic just showed us the power of what digital ecosystems can provide us and why digital inclusion is so key. And I think people realize that it's very hard to live without being digitally included, and I think that experience, that individual experience, has become the rallying cry in my mind for creating this change faster than we would've ever done it pre-crisis or pre-pandemic.
GEORGIE: Vaishali, can I ask you why this subject is particularly important to you?
VAISHALI: Georgie, I really like that question because digital inclusion is not something that I'm doing because it's part of my work. It means a lot to me. I guess inclusion for me itself has been important in many ways, right? In terms of choosing a career when no one in my family did so as women, or being a minority when I went to business school, or women in tech where inclusion is important, or education for women.
So inclusion has been important for me in the last 30 years, but today, for me, digital inclusion is something I deeply care about because I do believe that with the right access to digital and digital services, we can really improve people's lives, we can make a real change. And I really want to be part of that journey, so it has special meaning for me beyond just, you know, what I can do in my role.
GEORGIE: Vaishali, thank you so much, and thank you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com, and if you like this podcast, why not hit subscribe, and leave a rating wherever you've found us? It helps other people find us too.
GEORGIE FROST: For those in the money business, the last couple of decades have been pretty good. Government policy and central banks have been supported and despite one big crisis after another, asset management firms have remained secure. But are the good times finally over? Costs are rising, customers are changing their habits, and economic shocks are biting. So if money makes the world go 'round, what happens if it stops? I'm Georgie Frost and this is The So What from BCG.
DEAN FRANKLE: We expect global wealth to continue to increase, the rich will get richer, institutions will always be looking for ways in which they can outperform the market. So there will always be a demand for the asset management industry. The point to keep in mind is how the industry will shift over that period.
GEORGIE: Today I'm talking to Dean Frankle, who leads BCG's asset and wealth management practice in Europe, the Middle East, Africa, and South America.
DEAN: So the asset management industry has had the most incredible run. Over the last 20 years we've seen industry assets under management go from roughly 30 trillion to almost four times that. I think our latest numbers are over 110 trillion at the end of 2021. So that's been an amazing, amazing growth. In fact, 90% of the industry's revenue can be ascribed to that growth, so a rising tide has literally lifted all boats.
And actually that has supported the growth of an incredible industry that there aren't many other industries out there that have a near 40% profit margin. You've seen huge innovation in terms of the movements to electronic exchange-traded funds, et cetera, shifts of alternative asset classes, but the fundamentals of the industry are that assets under management support the core of the business, and actually that has been growing double digits over the last couple of years across every single region.
And it's a hugely supportive environment. COVID as well; saw huge amounts of money being pumped into the system. As one head of an asset management firm said to me, "I wish it was COVID every year." It isn't that often that firms just have large checks being given to their clients and that needs to be put somewhere and when you can't go out of your house and spend it, it often gets saved. So really, really supportive environment.
I would, however, caution the optimism going forward because I think asset managers have probably never had it so good. When we just take a step back and look at how the industry has evolved, there's been as I mentioned before, a near quadrupling of the assets, but that hasn't actually flowed through to profits.
So I think profits are up about three times since the last 20 years. But increasingly, over the last couple of years, or interestingly over the last couple of years, costs have been rising at a much faster rate than revenue. And a lot of the actual economics of how firms look at it in basis points which is a percentage of assets under management, is actually because assets have risen rather than anything else.
So I always caution my clients and the people I speak with to say it's great that markets have been supportive, but a bit like going to the doctor and saying, your blood pressure's going up, it may take some kind of cardiac instance for people to realize they need to do something about it. A bit more uncertainty in the economic environment has seen quite a few firms say actually, look, maybe we need to be a bit more aggressive here on the cost line because a lot of these things may not be supportive, or as supportive, going forward.
GEORGIE: So while the picture looks very rosy, actually when you delve a little bit deeper there are some perhaps more worrying indicators there. Cost being one, costs rising. Why have they risen so much?
DEAN: Firstly, asset management is a people business, so about 70-odd percent of overall costs are people-related. You just have to look at double-digit inflation in most of the developed markets. See that flowing through to wage growth and you see that asset managers, wealth managers are no different from any other firm in facing those pressures. You've also seen huge increases on risk, compliance, regulatory requirements. The industry is very, very fragmented and actually a lot of money is being spent on sales and marketing in order to differentiate versus peers, but a lot of that doesn't necessarily lead to bottom-line performance.
So only a few firms have actually gone down that route of saying maybe if I project forward and say I think the industry's going to undergo massive change in the next few years and I need to have a cost base half the size, as an example, what does my technology stack need to look like? Very few firms have gone down that route and done that exercise, because in absolute terms, costs have actually been rising quite rapidly over the last few years.
GEORGIE: Well, let's do that, shall we? Let's project forward. What disruptions is the asset and wealth management industry facing? Will it face?
DEAN: Yeah, firstly, how firms make their money. They typically make their money as a percentage of assets under management, and a lot of those assets are there for a long time. So if you're retiring and you're planning to retire and you're accumulating your wealth, it may be that you're actually saving for 20, 30 years. And I think unlike a lot of other industries where you need to be selling products every year, if you're a supermarket selling itself, if you close your doors, you get no money. That isn't the case in the asset and wealth management industries.
You need to retain your clients and unless you do something terrible, be that terrible performance or treat them badly, they often stay. So you see retention ratios in the high 90s, at least on the wealth management side, and it comes down to a business of how do you get new clients in the door? So a lot of this revenue, bizarrely, is actually going to stay.
If markets fall 20%, firms' revenue kind of will fall by a commensurate amount, but a lot of players will link some of their variable pay of fund managers, salespeople to market, so actually they're somewhat insulated from that. But I think what you will see is we expect global wealth to continue to increase.
The rich will get richer, institutions will always be looking for ways in which they can outperform the market. So there will always be a demand for the asset management industry and our projections around future growth will see the industry of AUM increasing. I think we say to 150 trillion by 2026. So we're expecting it to increase, despite the, maybe some uncertainty in the economic environment.
I think the other point to keep in mind is how the industry will shift over that period, and actually there's two quite fundamental trends which areshaping the industry. One is the rise of passive product. And so even if you look back to 2005, that was roughly 10% of the overall assets under management in the industry. And that's products that kind of track the market, don't try to beat the market, but as a result come at a much lower price point. We project that will be, well, currently it's about a quarter of the industry and we think that will continue to increase by a couple of basis points over the next few years.
At the other extreme you've got the more alternative asset classes, which, again, historically were a sliver of the industry overall, but actually going forward, will be about half of the industry's revenue. And that is slightly distorted because it's a very high-margin, costly product, so to speak, but that is requiring a very different set of skill sets. It's really shaping and changing what asset managers do. That's investing, even owning infrastructure assets, toll roads, et cetera.
And so the industry itself will change. We see a lot of firms saying: how can I move away from the more traditional asset classes and actually pivot my business more towards those high-margin products where I'm able to invest in infrastructure and maybe even owning private assets, et cetera. And we expect that trend to continue.
One additional point is that I think why we expect that trend to continue is because actually, when you take a step back, those are the types of assets that probably should be invested in by the majority of the public. So in summary, I think if you project forward, about half the industry's revenue's going to be in those higher margin products, but actually I think it'll be quite an even split between passive product, more traditional core specialties, alternatives, and some kind of structured solutions for the more bespoke industry institutional clients.
GEORGIE: Let's zoom out. What are the wider implications for society, for business, of changing asset and wealth management industries going forward?
DEAN: So on the retail side, I think the biggest change is going to be the continued rise of passive product and what that enables firms to do. So firstly, it is cheaper. And so a lot of assets currently are on legacy products. A lot of our research just shows that, especially on the retail side, people don't necessarily change their product and a lot of new product innovation, ends up being unsuccessful. So you've got a lot of money sitting in what is ultimately probably higher margin. They're paying more for things than they may need to.
And so I think one thing is you will see over time a continual shift towards more passive tracking and essentially lower priced product. The other trend is that there will be, and you've seen certain firms investing quite heavily in this field, a shift towards more personalized indexing. And what that means is that, whereas at the moment people buy a fund, in reality they should be buying something that's personalized for them.
So in the same way that you want to buy some paint for your wall at home, it shouldn't be the case that you have to choose between four or five different colors that are available to you. In an ideal world, you can design the exact perfect paint for you. And actually the technology now exists for people to do that, so really understanding the preferences, the needs of that particular client, and being able to adapt and modify a portfolio specifically for them. And most importantly, in a scalable and cost effective manner.
GEORGIE: How would you measure that though? Success?
DEAN: So that's a really interesting question and I think historically you would say success is some kind of risk and reward tradeoff. And increasingly, the conversation is moving towards risk, return, and impact. And the impact dimension hasn't even been looked at, if I'm being honest, over the last few years. If you asked some traditional asset managers to provide impact calculations, they would really struggle to do it. But it's really important.
If you speak to maybe a high-net-worth individual in a private bank, you should be asking questions around what it is they want to do with their investments. Say, maximizing the return subject to risk is an important dimension. It's what a lot of people may want to do, “just make me money.” It could also be that they don't want to lose money, but more importantly it would say I want to make a certain given return, but I do want to deliver certain outcomes and deliver this impact.
And whether that's on a particular UNSDG, gender equality, or whatever it is, there needs to be a way of enabling people to put their money where they want to put it and to really focus on trying to deliver certain outcomes that is the best use for those funds. And so increasingly what you're seeing is, as part of knowing your client type work, really understanding what it is that people would like to do and then trying to adjust those portfolios to deliver against specific risk, return, and impact tradeoffs. Being clear about what if there are tradeoffs along the way, what they are and how much that would be. And you're seeing the regulation really trending in this direction.
GEORGIE: Forgive me, let's take a step back. We've talked about how we think the asset and wealth management industries will change and the implications of that, but after each decline, big decline we've seen recently; the financial crisis, COVID, a recovery has followed. Not just a little one, a big one taking the markets to new heights. Do you not just see, well, you know, continuation of the same pattern happening again?
DEAN: Possibly. I think in reality, firms tend to solve for their profit margin. They're very good at saying, look, and that's how typically the annual cycle tends to be, I had x-percent profit margin last year. I'm trying to get to something better this year and I can never kind of account for the markets, but maybe, look, I'm in control of my cost line. So I will try and adjust for that and let's see what happens to markets overall. The hope is that markets continue to grow. When you look at the long-term average of stock markets, they have gone up over time and I think the expectation is that that would always continue.
And as mentioned earlier, the industry makes its money as a percentage of assets under management. And so I think there is a requirement almost for industry revenue to grow, for markets to increase. But as I said, traditional equity markets end up being a smaller and smaller proportion of how an asset manager makes their money. And so I think what you will see is more diverse revenue streams, maybe a lot of asset managers moving away from purely product into distribution as well where there are new sources of revenue. But as I said, the starting point is more around how do I increase my profit margin? And then that drives a set of behaviors that, ideally, are market independent.
GEORGIE: You've covered probably quite a lot of these, but I'm just curious what you think if we don't have much of the same continue and the environment does change as we expect. What opportunities that perhaps businesses haven't thought about will exist in this new environment?
DEAN: One of the topics that is increasingly getting a lot of focus, and rightly, is on the climate and sustainability realm. In reality there is a huge regulatory requirement to make sure that ESG factors are considered as part of the investment management process and historically they haven't all been. So it's not a question of saying, “I've considered everything and I just don't want to do it.” It's more giving due consideration to all of the various elements and then having that, proving that you've done that and being able to make your decision thereafter.
So it's a bit like food hygiene standards in a restaurant. You just need to prove that the person's washed their hands before they prepare the meal. There's then another part of it which you may hear Article 8, Article 9 funds, where the specific outcome of what they're trying to do is geared towards a particular outcome that is more climate-related. And I just see this as being a huge opportunity given what the world needs to do to meet the net-zero requirements for 2050, et cetera.
There is a whole set of opportunities around specific asset classes to funnel money towards particular projects and opportunities, and we're only just scratching the surface of that. So be that natural capital or blue hydrogen type ideas, there's just an immense array of money that needs to flow into funding and sourcing some of these new forms of technology and the benefits that come from that. So you're seeing a lot of asset managers trying to pivot into that area and it's different to what they were doing before.
If you compare sourcing and owning a wind farm versus buying a stock on an S&P 500, it's a very different business. It comes with very different risks which all need to be managed. If you appreciate that and then say, look, I can see the long-term trend and I need to be involved, then I think that creates a huge opportunity for the industry as well. And one that I don't think can be ignored.
GEORGIE: You spoke about innovation earlier. Have the asset and wealth management industries really been that innovative over the last two decades as much as perhaps they could have been? And how important will this be going forward?
DEAN: Yeah, we actually, as part of our report this year, looked at the innovation within the asset management industry, and I must say I was actually quite shocked how much innovation there'd been. I think because, maybe I live and breathe it every day, but if you look back and say over the last 20 years we've had the launch and the scaling of index investing, we've had the rise of fund supermarkets that began to democratize investing in retail. We've had big data within the industry moving beyond the terminal for new sources of alpha.
We're starting to see now more automated decision making, particularly in the middle and back office to reduce costs for investing. And then you could say going forward as well, we've had the FinTech data providers, et cetera. Who knows what will happen in the future? But I think just firstly there's been huge innovation actually, over the last 15, 20 years and probably more so than a lot of other industries. So I think we tend to forget that but it is true.
When you look forward, I remember someone once said to me, probably a couple of years ago, very visionary CEO of an asset manager said, "I'd love to speak with one of your experts about 5G and 6G." I was racking my brains thinking like what's the implication of that on the asset management industry? But when you think actually that could provide next generation real-time access, you kind of start and think that, actually, maybe that does provide a bit of an edge in certain trading applications and you see how the industry can evolve further.
When you continue to look further forward and say what else could there be? I've spoken already about direct indexing and hyper-customized products with cost economics that really are effectively democratizing personalization. I haven't even mentioned the metaverse, but I think the ability to apply quantum computing to some of the data sets that may exist or could exist I think will just drive a next level of insight.
GEORGIE: Explain what that would be and what that would mean.
DEAN: It's more computer power on steroids, is probably how it was best explained to me. That the ability to ultimately transpose some of the, yeah, to run super computers on analysis that would do things in two minutes that would take two years. And when you think about some of the data sets that might exist today that can give more on the hedge fund side, but give people a bit of that extra advantage.
I suspect that that will continue to drive some form of disruption within the industry. One other thought, one other point just linked to this all is that it comes at a cost. So both the asset and wealth management industries are highly fragmented. And again, because there is a lot of legacy in the client book and there's a lot of inertia, you do find that you just have this long tail of clients. And the more that some of the technology requirements increase and increase, it does provide more of a catalyst for convergence, consolidation within the industry to take place.
GEORGIE: So going forward then, how do firms in this new market, this new environment, offer value, differentiate themselves, thrive, take advantage of all this disruption?
DEAN: So two things I would say. One is deliver great performance. It is a relationship business, and I'll come to that in a second, but ultimately you are being hired and paid a fee to manage money. And so, bluntly, do a good job. If you deliver outperformance, if you beat the benchmark, whatever that benchmark may be. But if you constantly outperform and deliver great return on investments, I think you've met hurdle number one. So that's par for the course. It's not always the case that that is actually happening.
And look, for some index providers who may say, "You're not hiring me to do that. You're hiring me to beat the market." That's fine, but just kind of do what you said you would do. The other one is really getting closer to the client, and I think a lot of firms, particularly on the wealth management side, think they know their clients but they really don't. So most wealth managers segment their customer base, you or I, based on wealth bands.
They'll say, you are owning this amount of money. Therefore, this is what I can afford to give you. Which is completely the wrong way of looking at it. It needs to be based on needs and behaviors, but ultimately, the service or need level of how frequently you will interact with them and the products that you need that drive their cost. Because if you're like me, where you don't really want to speak to someone, you'd rather they just do it and don't tell you about it, they don't need to come around to my house, they don't need to phone me up, and actually it's better for them.
And really understanding those needs and behaviors means they can better service their customers. Just as an example, we did work for a private bank on their ultra-high-net-worth segment. So it's people that have invested with them more than $20, $30 million, and they had one segment. For them it was, well, you're either ultra or you're not. And if you're not ultra, we segment you in a different way.
And when we ran all the analysis, we ended up finding nine different segments within that one book, each with very unique characteristics around different product holdings, different service requirements. And within that there were three or four where you'd say, you know what, given who we are, we probably shouldn't be serving these people because they're after something which, if we're 'hand on heart' honest with ourselves, it's not what we want to be providing, it's not who we are.
And so the bliss point would be you find a couple of them that really resonate with you and you can scale them and service them appropriately. And actually the clients benefit, because they say, you're listening to me, you're hearing me, you're giving me what I want, as opposed to giving me something just because I've delivered or given you a certain amount of money.
GEORGIE: Dean, thank you so much, and to you for listening. We'd love to know your thoughts, so get in contact, leave us a message at thesowhat@bcg.com. And if you liked this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
The So What from BCG Podcast
GEORGIE FROST: The global path to economic recovery remains rocky. Inflation is soaring across the West. In response, central banks are hiking rates, risking recession, and geopolitical tensions abound. How can businesses not only survive in the face of such unpredictability, but thrive? And is risk always such a bad thing? I'm Georgie Frost, and this is The So What from BCG.
ALAN INY: If you are able to understand the early warning signals and prepare accordingly, when surprises happen, you'll be ready to accelerate, you'll be ready to jump into those situations more quickly than others, even in your same sector.
GEORGIE: I'm talking again to Alan Iny, Global Leader and Director of Creativity and Scenarios at BCG, and author of "Thinking in New Boxes: A New Paradigm for Business Creativity."
The last time we spoke, we talked about the uncertainty advantage. And what exactly is that?
ALAN: It's a good place to give a refresher. The idea of an uncertainty advantage is to be better prepared than others for whatever lies ahead. And if you have any hope of managing that, you have to start with the humility to admit that you cannot precisely predict what lies ahead. And frankly, one of the things that's really become more and more obvious in the last couple of years is that surprises will happen.
GEORGIE: Well, indeed. You say, though, better prepared than others, but you need to do it with humility, that you're not going to know everything. How in this environment can you prepare for what's coming down the line for your business?
ALAN: Step one is to go beyond the headlines and the pundits, and have a little bit of, when I say humility, what I mean is acknowledging that you cannot precisely predict it. And it's not just you. You know, if somebody with a fancy title, a chief economist of a country or a Fortune 500 company, or whatever tells you that this thing is going to happen, okay, they might be right. In fact, they're probably right. 80, 90%, they're right.
But surprises will happen. And so no matter what you're reading, no matter what you're hearing, taking the time to take it with a grain of salt and think about what else might happen, and try and de-average it in terms of what it actually means for your organization, for your business, that's a beautiful place to begin.
GEORGIE: Let's be clear. I mean, sadly, even in the darkest times there are always inevitable winners. You know, we've seen that through the pandemic, we've seen it in the global financial crisis. There's always companies that are naturally positioned. A bit of luck? That's just maybe their business. Let's focus on those that aren't naturally positioned to win in a situation like that. But can you pivot yourself? Can you adapt to be one of the, if not out-and-out winners, but you can at least have an advantage against your competitors?
ALAN: Absolutely. And I think, frankly, it's true in any sector, because it's very easy for me to say, "Okay, well, in general, in recessionary times some of the inelastic players like grocery and health care are relative winners. Okay. And in this current Russian crisis, which, you know, okay, we can say it's a humanitarian crisis and an ethical crisis and all the rest of it, but in the end, if you're an oil player, well, you're doing okay.
But among oil players, then what? I mean, you're competing against other oil players. So good for you, you have a natural inbuilt advantage. But even within that sector, what does it take to have a relative advantage? What does it take to have an advantage over the other oil players? What does it take for a retailer to have an advantage over the other retailers, and indeed, in the sectors that are less inherently advantaged, what does it take to rethink these things? I think that the question really applies to everybody, not just the inherent winners and losers.
What it takes is, you know, some of what we discussed last time is how can we understand the signals and facts better? How can we become more resilient by being prepared for a broader range of things? And these are the sorts of things we've been tackling now with a variety of players. When you think about the semiconductor shortage, yes, it's not only affecting the refrigerators, but also the automobile industry and the laptop industry, and whatever else you want.
And when you think about automakers, when there was this first shortage of chips, there were fundamentally different reactions to it. The classic Detroit-style automakers would say, "Uh-oh, we have to slow down our production, because we don't have enough chips." And okay, they have a few months' notice, fine.
Yes, it's classic management, fine. What did Tesla do? Tesla actually reengineered their cars so that they wouldn't need that particular type of chip, and they could use this chip instead. But the classic automaker is not set up for that sort of thing. The ability to reengineer, the ability to rethink the way you've been doing things, is not just a cultural thing that one wants to instill on an ongoing basis, but it's something that pays off in this particular type of environment.
GEORGIE: Let's focus a bit more on this type of environment. Central banks are trying to do what they can to bring inflation down. That includes raising interest rates, that includes slowing growth. And in that environment, as a business, how does that create an advantage for you?
ALAN: It's a very interesting thing, because central banks and chief economists of big corporations, and all the rest of it, are now stating what should be done in terms of interest rates, or what have you, based on what they have learned in the past. This is perfectly reasonable. We're human beings, we learn from the past.
And yet there are plenty of ways in which this particular economic situation, which may or may not ultimately be called a recession, but there are plenty of ways in which this thing is different. I mean, whoever heard of a situation like this where there's high employment rates and low unemployment? This is not normal for a recession. The type of situation we're facing, where there's an energy crisis at the same time as this, where there's still this lingering endemic COVID, this is unprecedented.
This is not the same as every previous recession. I don't know enough to say whether that means they should or shouldn't raise rates, and what that actually means, but what I am reading and what I am hearing is that if there is a recession, it'll likely be shorter than previous ones. If there is, it'll certainly have vastly different effects on employment and on wages than previous ones. So this is a different animal, and I think the more policy makers are able to acknowledge that and able to attach a dose of humility as well to their prescriptions, I think the better off we would all be.
GEORGIE: We've spoken about central banks raising rates. That's an external area, a big one, that as a business you need to be focusing on. What other areas should you be thinking about could impact on your business, and take away that advantage?
ALAN: Well, if I were a policy maker, or if I were a CEO, I would take to heart the fact that more than half of the Fortune 500 was actually founded during recessionary times. And so there's actually reason to believe that difficult economic times breeds innovation, or "necessity is the mother of invention." I mean, we've heard that all the time. And so what does that actually mean?
It means that we should think about new sparks of ideas. We should think about empowering startups, we should think about incenting startups to experiment with new things. When we say "new things" and "the next big thing," it doesn't have to come from Zuckerberg in the dorm room, or Hewlett Packard in the prototypical garage, but it can come from the large organizations as well, if they are willing to adopt that kind of mindset, the mindset of challenging the status quo, doubting that the way we've always done things will be the way we should always do things. And that willingness to actually experiment is a beautiful thing, especially in uncertain times.
GEORGIE: And a very risky thing.
ALAN: I think so. You're right, it is a risky thing. But then when you take that word risk, you know, there's this thought experiment I do with clients sometimes, and I say, "When I say the word risk, what words come to mind?" And people say, "Oh, avoid, minimize, mitigate." Nobody often says, "take advantage," or, "exploit."
Yes, it's a risky move to make, and yes, sometimes it won't pay off. But thinking from a risk-intelligent point of view, which risks do we want to mitigate, to be sure, which risks do we want to just tolerate, and which risks do we want to exploit and take advantage of? This is a fundamentally different way of thinking than just this business of, "Every risk is something to be minimized and avoided," and, "We have our compliance people," and all the rest of it.
GEORGIE: Obviously you don't want to go in gung-ho, foolhardy, but how do you be risk intelligent? How can you make that thing in your company?
ALAN: I think this mindset we've been talking about, in terms of acknowledging that surprises will happen, having the humility to admit that you can't predict things, and hence you should be willing to challenge your way of doing things, all of that leads to, yeah, what I would call this kind of risk-intelligent mindset, this organization that is willing to take risks under the right circumstances, if it's thoughtful, and acknowledging that a certain amount of them will lead to negative results, will fail, and all the rest of it.
Imagine the mindset in the old days, of a pharmaceutical company that is investing in a whole pile of compounds and seeing where they'll go. And then in phase one trials, some of them fail, in phase two trials, some of them fail, in phase three trials, some of them fail. And so, okay, but the interesting bit then is that, for the scientist who shepherded a particular compound for years of her career, all the way through to phase three, and then it failed in trials. Okay, well, they're doing some other things as well.
That's not a black mark on her career, the way it would be for somebody who shepherded some idea for a few years in a bank, or a retailer, or almost any other industry. And if all of those other industries can mimic that kind of environment where thoughtful processes that sometimes lead to failure are accepted. I don't mean the kind of failure where your kid doesn't study for an exam and then flunks it. But if it's a failure that comes from a thoughtful process and as part of a portfolio of ideas, some of which will fail, I think that's wonderful.
GEORGIE: So you think even in... These are scary times. Just looking at the front pages of the newspapers over the past couple of years, it is gloom and doom, and to talk about uncertainty advantage and intelligent risk-taking, it will run counter, I think, to a lot of companies, that will just at this moment probably want to hunker down and reassess where they're at this moment. But you think that companies can turn this. Even if it's not a natural, as we said at the start, not a natural win for a company in this environment, you think that they can turn it to their advantage?
ALAN: Absolutely. And I think, look, it's also a question of when and how, and under what circumstances. If you remember the early days of the COVID pandemic, or the first few days after Putin decided to make his invasion. At those moments, of course there is a fire drill, there's an urgent short-term thing. "What should we do about our people?" "How can we set them up to work at home?" "How can we pull them out of Russia?" "How can we deal with whatever it is," all of the...
Okay, so there are legitimate short-term things that need to be dealt with, I accept that. But not forever. And whether it's a few weeks in, a few months in, at some point to actually lift your head up from the short-term crisis and take the time to ponder the medium-term, to think about what kinds of worlds might I have to operate in, and how can I be better prepared than others for all of them? Which doesn't mean that we have to make a million bets just in case X, Y, and Z happens. It means making thoughtful, decisive moves, and being willing to adapt them, being agile and nimble enough to adapt.
But it means being ready to move ahead while others are flailing around and still stuck in the short-term, or, frankly, being ready to pause thoughtfully while others are rushing ahead without thinking. And so, either way, it's that kind of decisive move or decisive pause, based on better information and better risk intelligence and more thoughtfulness, that can actually lead to this uncertainty advantage.
GEORGIE: How do you get that better information? Where are you looking? Do you need different personnel? What is your company going to look like for you to be positioned in a way that can take advantage of the uncertainty advantage?
ALAN: So for a company thinking about this, yeah, there are times when they can subscribe to more information, they can go deeper into this. But in the end, I think there's a limit to that. Let's say I'm a hospital system, I'm a health care system, thinking about the fact that... My demand is relatively inelastic, because people are always going to get sick and so on.
But actually, if I look at the overall system, costs are going up in the health care system in every Western country, but outcomes are not, really. People are not really living longer, and that clearly is not a sustainable thing. So we all have access to the same facts about aging population, rising health care spend, more testing, and all of this, but in the end, it's also the humility to step back and think about how might I interpret those things in new ways? What if I challenge the mindset of, well, I mean, the health care business.
What if I'm in the health business, and that enables me to think about more prevention and more proactive care? And what if instead of thinking about hospitals, I think more about home care, again, in the preventive manner? Or instead of thinking only about quality of an individual test or intervention or care, I think about value and whether it's worth it? And these are the sorts of shifts in mindset that can be necessary in any industry, in any sector. Taking the time to challenge your sacred cows, your deepest held assumptions and constraints about how business works, is the best way to get better information, quite frankly.
GEORGIE: When, Alan, would you be going into a company and asking them to take a look at the way that they do things, how they think about things, how they process that information and that data? Is it now, when we're in these dark economic times, or is this something that you should have been looking at years before?
ALAN: My instinctive answer is that it's always important. But that's easy for me to say as a consultant, and I can't expect a company, "Well, look, okay, every Monday morning we have a brand new strategy." So that's unreasonable. And yet it's only in fostering that kind of mindset on an ongoing basis that you'll be ready to challenge these sorts of things.
Or if something comes along, whether pandemic or Ukraine, or other sorts of shocks that may happen, cyber attacks, I don't know what, these things didn't necessarily create trends like working from home, or home delivery, or all of that stuff, but they drastically accelerated a lot of them. And so, if you are able to understand the early warning signals and recognize those sorts of things and prepare accordingly, then when surprises happen, you'll be ready to accelerate, you'll be ready to jump into those situations more quickly than others, even in your same sector
GEORGIE: You mentioned there working from home. We're getting different narratives, aren't we, about working from home? One is, "the work-shy, and we need to get back into the office." And the other is, "actually, this is an opportunity." It's not the only change that's happened over the last couple of years. Are there other areas that actually, that you could look at in two totally different ways, and if you could take advantage of it, it'll put yourself in an amazing position?
ALAN: Absolutely. I'll give you a couple. The idea of climate and in particular flights. If you are in the airline industry, what you are seeing now towards the end of 2022, "Oh wow, demand is recovering, flights are full. This is great for our bottom line, even with oil prices high," et cetera, et cetera. But what about the planet? Five, ten years ago, people in my industry thought nothing of crossing oceans for a two-hour meeting.
And now I've shown up at a client in Scandinavia, and they said, "Oh, did you come here just for us?" And I had to have an answer ready to go and say, "No, I have three, four different stops in Europe. I'm making the most of this trip. It's not just for you." And maybe even that isn't going to be acceptable in a little while. But thinking about this concept of flight-shaming, what might that actually be like in the future?
Is there a situation where the US doesn't have 50 states in five, ten years? I have no idea. I don't know better than you. But five, ten years ago, when I would ask people what's the chances that air travel goes down by 95% in the spring of 2020, people would've said, "Oh no, that's never going to happen." And then it did. So the point is not so much to predict these shocks, but rather to try and prepare for a broad range of them.
GEORGIE: Have your conversations changed with clients over the past few years?
ALAN: Yes, in some ways my job is a little bit easier, because I no longer have to start by convincing people that surprises can happen. But then my clients are all still human beings, and so they're still reluctant to believe about the next one that might happen, whether it's a massive cyber attack, or nuclear weapon being used somewhere in the world, or the things we've just discussed in terms of climate shock or countries breaking apart, or whatever else.
I'm not predicting any of these in any specificity, but I think pondering them, and others, and thinking about what would happen if this regulatory change came about. What would happen if our biggest competitor bought our second biggest competitor? What would happen if a disgruntled employee released a billion internal things to WikiLeaks? To be prepared for these sorts of things is an advantage.
GEORGIE: Let me in onto your secret, then. What does it look like when you go into a company? What is this scenario-planning like? I mean, who are you speaking to? What are you saying? How are they responding to you? What games are you playing? I don't mean that in a derogatory way, but you know, what examples are you giving?
ALAN: Not at all. Games are wonderful. We all love, we're all a kid at heart. Starting with, as best we can, an understanding of the relevant issues and trends. Laying out some of the core uncertainties that we're facing. And for a typical company, maybe these are, okay, geopolitical, technological, fiscal, consumer demand, climate.
Okay, so five, six, seven different uncertainties. And then it can be quite fun to think about how might each of those things evolve? How might each of those things land in the next few years? And allowing ourselves to be really expansive and just put some options out there. This is the sort of thing that I can--
GEORGIE: Bet you get some amazing responses, some really crazy ideas.
ALAN: Yes. It's fantastically fun. And in fact, I can give you an example that I sometimes use as a thought exercise with clients. If you're trying to think about different scenarios for the future, imagine instead you were asked to come up with the next James Bond book, or the next James Bond movie. You might think about, "Let's start with the gadget that James is going to use to get out of that. Okay, let's be super creative and think of a bunch of cool gadgets he's going to use that get introduced at the beginning, and he uses them at the end."
Okay. Number two, let's think about the exotic locale. "I don't know, he's been in the Caribbean, in Japan, in the Alps. I don't know what." Okay. Fantastic. Now let's think about the villain. Let's come up with a really creative thing for the villain. What's she or he going to be like, and so on? And fourth, let's think about James's love interest, whoever she or he, or however you want to think about that.
So imagine that we're super creative in coming up with a bunch of options for each of those things. Well then, if you take one from each of those, suddenly, you have the skeleton of a plot. I mean, there's a lot of details you'd have to add in, but you could look at a bunch of different permutations of those things.
And so similarly, if we have done something like that by thinking expansively about what might happen in geopolitics, in technology, in climate, in consumer demand, in whatever else, and then pick different options from there and combine them into permutations, suddenly we have this picture of 2030, where, yes, there's still more meat to add to the bone of that skeleton, but there's a lot of different scenarios that we can concoct that are suddenly more multidimensional in this.
And then, of course, the real value comes from thinking, "Well, how could we become better prepared for these? What would you do if these things were going to happen?" And of course we can never be comprehensive and map out all possible scenarios, but the idea is to be representative of a range of possible futures that we might have to operate in, and then think, "Well, how might we become better prepared for each? Are there some no-regret moves that make sense across all?
Are there some contingent moves we should plan for but not pull the trigger on?" And then, are there some bets we want to make to nudge the world in a direction that's better for us, or better for the world, or better for humanity, however we want to think about it, but can we nudge the world in a preferred direction, because this scenario would be better than that one if it came to pass.
GEORGIE: Alan, thank you so much, and to you for listening. We'd love to know your thoughts. To get in contact, leave us message at thesowhat@bcg.com. And if you liked this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: We're on a highway to climate hell, with our foot still on the accelerator. The message set out at the start of COP27 in Sharm el-Sheikh from UN Secretary-General Antonio Guterres couldn't be clearer. Since then, we've had discussions, big announcements, and negotiations to the wire, because our planet is fast approaching tipping points that will make climate chaos irreversible.
I'm Georgie Frost, and welcome to "The So What from BCG," as we reflect on COP27, the hopes and expectations, the successes and disappointments. So what would be the legacy from Egypt?
PATRICK DUPOUX: So it will be clearly remembered as the first COP where loss and damage was agreed. This will be the biggest single legacy of COP27. To a lesser degree for progress on adaptation, progress on food and agriculture. And this will be remembered also as the COP where the just transition has been high on the agenda.
GEORGIE: We've been looking at the solutions and the economic opportunities that climate action presents. Go to our YouTube channel to watch dozens of our interviews from COP27. But first, let me take you back to the start of the conference.
Head of BCG Africa, Patrick Dupoux, welcome. So here we are, Patrick, in the BCG studios in the heart of the blue zone where negotiations are taking place. Just tell me if you would, your impressions for anyone who's, and probably most people listening, will have never been to an event like this. This is certainly my first time. Not your first time though.
PATRICK: Actually, yes, it's my third COP. I attended the last Africa COP in Marrakech, Morocco in 2016. and I attended Glasgow last year. Well, this one is I would say a bit different. The sense of urgency has increased just this year. There has been horrible weather events in Mozambique: hurricane destroyed full infrastructure in the central part of the country.
In East Africa we have terrible droughts which impacts food security and agriculture. And in the country where I spent most of the last 13 years, Morocco, we had the first water restrictions for ages. So the reality of climate change is really big in Africa. I think it's not only Africa. I think we saw Pakistan this year, but also Europe. So it seems to me that compared to the other COPs, the sense of urgency of the situation is now very broadly shared by all participants.
And you feel that in the discussions, in the conversations. Then for the rest, it's the same frenziedness. There are like dozens of pavilions, lots of discussions, high-level discussions with heads of states, and a room full of ministers and so on. And then smaller discussions where you have more people on the scene and the panel than people actually listening. But that's the variety of the COP, and that makes it both exciting and a bit tiring, I need to say.
GEORGIE: I was going to say, overwhelming was something that sort of struck me. I mean, it reminds me of a bit of a cross between a travel expo and a party political conference: noise, loads of different languages, amazing dresses, just everything going on. But what of all of that noise, are the key issues that are, particularly for Africa, coming out on the center stage out in the global media? What are the key issues?
PATRICK: Yeah, so the last Africa COP, COP 22 in Marrakesh, we had actually worked with the Moroccan presidency. It was the first time BCG was involved in COP. And at the time, we had raised the attention of the Moroccan presidency on what we call the AAA gap. Three areas where climate discussions were not spending sufficient time, and where climate finance was not spending sufficient money.
The first one, the first A, was adaptation: getting prepared for the world that we will have to live in tomorrow. Then the second A was agriculture. It was 4% of climate fundings, despite the fact that agriculture was 25% of emissions, and would be the sector which would be most impacted by climate change. And the third A was simply Africa. Africa was receiving only 4% of climate funding, was not part of most of the discussion, despite the fact that 35 of the 50 most-impacted countries in the world by climate change are in Africa.
So now, two years later, these are three topics that are central to this COP. And we are already seeing that it's actually growing in terms of funding and in terms of attention.
GEORGIE: Another big topic on the agenda was loss and damage. Who would pay for the destructive impacts of climate change that can't be avoided either by mitigation or adaptation; impacts of which disproportionately affect developing nations.
PATRICK: We are seeing visible impact of climate change. In some countries, it can impact the GDP by 5, 10% GDP. We did a study in Lagos. Three million inhabitants of Lagos will need to be either protected or displaced. It could impact the GDP by way over 10%. So African countries are saying, "Listen, we have not caused this climate change. We need to be compensated. We need also to have a funding mechanism to repair when disasters are occurring."
So loss and damage will be a priority topic. And the good news of the first day, the first day of COP, is that there's been an agreement for the first time to put loss and damage formally on the agenda of COP27. Another new topic which is growing, it's just transition. It's not only about reducing emissions in Africa. It's how do we give energy access, in particular electricity, to 600 million Africans who do not have access to electricity today.
So it's nice to come and say, "Listen, you have not emitted nothing. You have emitted nothing. But on top of that, you cannot increase your energy production." We need to help them provide and deliver a low-carbon energy system that gives access to these millions of Africans who do not have electricity today.
And I would say the last topic, which is probably the most important in this COP is climate finance. To deliver on this agenda, adaptation, food and agriculture, Africa, loss and damage, just transition, we need money. There will probably be discussions around reforming the overall global financial model. And we believe this is going to be, hopefully, a big outcome of this COP27.
GEORGIE: Are you hopeful about the outcomes of this COP for Africa? Is there a sense among countries on this continent that perhaps the world hasn't been listening, hasn't paid enough attention to Africa, that they've been sidelined?
PATRICK: I don't think you need to get a sense. You just need to look at the numbers. And Africa is still only getting a very small numbers of climate funding. We promised, the North promised, $100 billion a year by 2020. We are in 2022. We may hardly get to 70 to 80. And the share of that going to adaptation, which is probably the biggest claim of African countries is still way too low. So it's not on only about feeling outside the main conversation, it's just like looking at the numbers. Follow the money. The money is not there. So yes, African countries feel that they are suffering from something they have not caused, but they are not really given sufficient attention.
GEORGIE: COP gave me the opportunity to speak directly to those people on the ground in the countries most affected by climate change. Tolu Oyekan, head of BCG Nigeria explained why climate adaptation is so important for Africa and African cities, and how hopeful he was to achieve it.
TOLU OYEKAN: We need to focus even more on cities, because with the increasing urbanization, cities is where we have the bulk of people today, and we expect to have even more people over time. So we need to focus on building resilience in Africa, in African cities today. One of the challenges we'll all need to grapple with is the fact that we live in a world of finite resources. And nowhere is that more evident than in Africa, where we need to develop, where we need to develop and build human capital with limited resources.
And so I think the first thing we must do is ensure that we have a deep understanding of the risks that apply to us on a local level. Because we need to tailor our solutions to those risks. So the first thing we must do is build understanding of the risks. With a deep understanding of the risk, we need to build a clear portfolio of projects that are tailored to that risk. And then we need to galvanize stakeholders to drive financing towards those projects.
We see in our work three types of projects that we need in Africa. I think one is we need to build resilient infrastructure. You have coastal cities that have their power lines on the coast, but are going to experience sea-level rise. You have buildings that are not appropriately weatherized. The first thing we must do is build resilient infrastructure
In addition to building resilient infrastructure, we need to build resilient communities. There are individuals that are going to experience seawall and flooding right now that we need to consider relocating. We need to ensure that people have insurance to absorb the shocks of these climate impacts. And as government and as city planners and country planners, we need to also improve our ability to assess the risks, anticipate the risk, and respond when these climate impacts realize and arrive.
GEORGIE: There was much talk too about the economic benefits of the transition to the green economy, collaboration between the private and public sectors, and what solutions are being implemented. BCG's Vice Chair of Social Impact, Climate & Sustainability, Wendy Woods, told me how technology can contribute to adaptation and mitigation solutions.
WENDY WOODS: So technology is a fundamental and a critical enabler to actually making progress on any of this. One of the examples, we're working with many clients using AI to help understand how to be much more efficient in everything they're doing: less electricity, less materials. And then on the adaptation front, technology enables you to see so much more.
The geospatial analysis that we can do at massive scale, but at a level of detail, allows the kind of planning that we need to do for adaptation. So technology is fundamental to making progress on both of those.
GEORGIE: To change it, you need to be able to measure it. And that unfortunately is one of the problems with companies. They have the goals, they have the ambitions, but tracking emissions is a very difficult process. So how can technology help here, and also more generally, companies to achieve their climate goals?
WENDY: Well, technology enables you to measure things right now. And understanding your baseline in the first place. And then understanding what actions you can take to actually change and improve on that baseline become incredibly important. One of our tools, CO2.AI is doing that with clients.
And understanding and measuring the baseline, finding actions and then enabling that progress, that becomes incredibly important. The other thing I would say, technology provides so many nudges for all of us all day. And when we think about the behavioral side of what we all need to do differently on climate, the nudges that technology provide us in the right direction on what we can do to support climate become very important.
GEORGIE: It's important to remember not to leave people behind in the move to a green economy. So there was a lot of emphasis on a just transition, making sure the benefits are shared widely, and those who stand to lose out economically are supported. One group that is already being disproportionately affected is women. I spoke to Zineb Sqalli, managing partner at BCG Casablanca. Zineb is very active on the topic of women's empowerment in Morocco and Africa.
ZINEB SQALLI: We now have evidence that women will be disproportionately impacted, because they tend to be more vulnerable, poorer, so they are less equipped to deal with climate change. There are three numbers that tell the story quite well. Number one is 80% of the people that were displaced by climate disasters in 2015 were women. 12 million girls are at risk of school dropouts each year. So 12 million girls each year.
Why is that? Because when these climate disasters happen, we realize that families actually favor boys to stay at school rather than their girls. And then the third number is 60% of Sub-Saharan women work in agriculture. And we know how much agriculture is going to be disrupted. So actually, climate change will have a higher burden on women when it comes to their health, their education, their income level. Even their own survival is more at risk.
GEORGIE: You've spoken about climate change disproportionately affecting women, but also climate action as well. Through your work, you found that it sets back gender equity by 15 to 20 years. Tell me more about that.
ZINEB: Yeah, this is counterintuitive, because climate action, that's all the efforts we're making to build a better planet for everyone. So obviously, women as well as men, even more than men in some aspects, will benefit from living in a more sustainable planet. But what our research has found out is that women might also be at risk of missing out on the green economy's massive investments and job opportunities, or at least some of them.
Jobs, for example. We know that the green economy will be creating 65 million green jobs by 2030. These jobs, the highest paid, the more stable ones require what we call STEM education. That's science, technology, engineering, mathematics. And women today only represent 35% of STEM students globally. So they are clearly at risk of missing out on these opportunities. Second example, companies in high-emitting sectors such as energy, building materials, industrial goods will be spending as much as $500 billion by 2030 to upskill their employees.
The problem is these industries are male-dominated, historically male-dominated. So mechanically, women are less likely to benefit from these re-trainings, again, widening the skill gap between men and women. And then entrepreneurship. We know that female entrepreneurs get less access to funding than male entrepreneurs. So there are already a few say clues to the fact that if we do not do it right, climate action could also be widening the gap between men and women. And this is of course not the intention.
GEORGIE: After the elongated negotiations were finally wrapped up, I caught up with Patrick Dupoux again to get his reflections on COP27. So I'm back with Patrick Dupoux. I'm in London. You, Patrick, are in Johannesburg. The weather is distinctly less sunny where I am than it was in Sharm. But what about the negotiations? Were they warm? They went on after we left, didn't they, into the weekend? What was the mood? What was discussed? What was agreed?
PATRICK: Friday for us was our last day. But I would say that it's really where the action started for them. When it's tough negotiations, it's always being completed a couple of days. So they reached an agreement during the night of Saturday to Sunday. Clearly the biggest outcome is loss and damage. That has been a long claim from the Global South. And up until now, most countries in the North did not want to accept any mechanism for loss and damage, because it has some implications on potential liabilities and so on. So it was a no-go in Glasgow.
It was mentioned that we could start thinking about it, but it was not a done deal. And I think the key outcome of COP27, it's there is now an agreement to create a fund, an agreement that loss and damage is a reality, is part of the discussion that there will be some fundings. And it's a huge victory for the South. And I think it will also bring back some sort of trust in the climate negotiation cycle from the Global South, who have seen that the North has not lived its promises of the 100 billions from Paris and Copenhagen, who are starting to doubt the fairness of the overall process.
And at least their voice has been heard. And this one is the biggest one. Then there are a number of things in the final declaration. Nothing to really get enthusiastic about. The good news is that the 1.5 is alive, but the truth is that there has not been a commitment to update the national determined contribution, so the emission reduction targets every year. And so that has been a disappointment to some.
But at least we didn't go back on this 1.5 target. And adaptation resilience, there has been an agreement to create a work group on the doubling of adaptation finance. So that's good. But I would say loss and damage is the key achievement of COP27. And all the other topics which have been discussed during the two weeks I think are important. As I said many times, it's the COP of the South. And I think the South, the Global South have felt that their voice were heard, even though again it's it's still for .
GEORGIE: What, Patrick, do you think will be the legacy of COP27? How will it be remembered? And also specifically, how will it be remembered for what it's done for Africa?
PATRICK: So it will be clearly remembered as the first COP where loss and damage was agreed. So this will be the biggest single legacy of COP27. It will be remembered, for, to a lesser degree, for progress on adaptation, progress on food and agriculture, which was very much mentioned, and will be talked, discussed, financed more and more in the future.
And this will be remembered also as the COP where the just transition. So not only reducing carbon emissions, but also access to electricity. The social element of the climate transition has been high on the agenda. And lastly, it has been remembered as the COP which initiated movement toward the reform of the Bretton Woods institutions, and the development of finance institutions to increase climate finance in the years to come.
So we start, this is not a content answer. This is a process answer. We start a process to reopen how the Bretton Woods institutions are working to channel much more funding towards climate. But this has started during COP27.
GEORGIE: So Patrick, finally, what are the next steps then? What are your hopes between now and when we next talk, hopefully we'll talk before that, Patrick, but in Dubai for COP28, but also the next time it comes to Africa in five years time, what are you hoping we'll achieve, and what are the next steps to get there?
PATRICK: Well, first of all, we need to be realistic. Emission reduction targets are nowhere near what we need. We are really far off. Some complained that we were not, no more pledges. The truth is it's not so much pledges that we need, it's action. It's to make sure that these pledges are sustained, because right now this is not the case. So when current pledges go for minus 30, minus 25 reduction by 2030 of the emissions, and of course we need minus 40.
But the reality is the current policies go towards plus 10. So the top priority is to live our promises to achieve our pledges, and to accelerate. Because we are way too slow. There is some momentum. We are in a way reassured that it was not broken up during this year of conflicts and crisis. But it's still way too slow.
So what can we hope in the next months? Acceleration, acceleration. More projects, more funding, more actions in the North, in the South. More of everything. More multilateralism.
Because we will not achieve anything if China and the US and even India are not actively collaborating. So there are some technical things we are expecting, which is how do we implement what has been agreed on COP27, during COP27 on loss and damage and many others. But what we need to see is more action on the ground from the private sector, from the public sector. We need to see massive acceleration. Because the truth is we are on the highway to hell, and I'm not sure we are accelerating, but we should have a feet on the brake, and we don't have that.
GEORGIE: Patrick, thank you so much for joining me. And thank you for listening. That's it from COP27. We'd love to know your thoughts. To get in contact, leaves us a message at The So What@bcg.com. And if you liked this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: Can a healthy economy, a fair society, and a clean environment coexist? It sounds like a utopia and a bit of a pipe dream, but that's exactly what the idea of just transition seeks to do, to maximize the social and economic benefits of climate action and support those who stand to lose economically. And it's what's taking place in South Africa, one of the most challenging places in the world to decarbonize, given the country's heavy reliance on coal, its triple challenge of inequality, poverty, and unemployment, and its weak economy.
We're going big on climate change for the next couple of episodes while COP27, the UN's Climate Conference, is taking place in Egypt. But then we'll be back to our usual variety of topics. In this episode, what can be learned from South Africa's just transition? I'm Georgie Frost, and this is "The So What from BCG."
KESHLAN MUDALY: We shouldn't come out of this looking the same as we did before but greener. We should come out of this looking much greener, a much more socioeconomically viable world with the distributed ownership and thriving economies.
GEORGIE: Today I'm talking to Kesh Mudaly, principal in BCG's Johannesburg office. In his role, Kesh focuses on energy, climate, and sustainability.
KESH: So when you talk about a just transition, I think you have to look at it within the context of the world moving to a lower-carbon economy, and I think as the world shifts its reliance on fossil fuels as an energy source, effectively you're reshuffling the economy.
You're reshuffling the socioeconomic value pools, the techno-economic value pools -- what I mean by that, the actual energy pools that really make up the economy today to something fundamentally different. And the key tenet of a just transition is to effectively ensure that nobody is left behind as we move from this fossil-fuel-based economy of today to something more distributed and something more greener and sustainable to the future.
GEORGIE: Is it inevitable that a transition to a greener economy will not be just?
KESH: So I wouldn't say it's inevitable. I think there is a lot of challenge in actually moving towards a just transition. I think the world has acknowledged that just decarbonizing is not really going to be practical in the transition to net zero.
Decarbonizing is one element of the equation. If you do not move the socioeconomic needle, then the world faces massive challenges: migration of labor, inability to deploy the infrastructure that's required to actually get to net zero on time and to the right quality because, ultimately, at the center of all of this big infrastructure development that's going to come is really people, and so if you look at the objective of decarbonizing, you cannot de-link it from the social aspect of it.
And I don't think it's been given enough attention in the past, but I think in recent times, the world has stood up and listened, and I think what we've seen at COP26, for example, the creation of a just energy transition fund for South Africa to really try and help deal with these very difficult socioeconomic challenges, kind of speaks to the fact that there is hope that we are going to make this, to a certain extent just and really do this in a responsible manner as well.
GEORGIE: A just transition, therefore, is an essential part of getting to net zero as well as a moral imperative.
KESH: Yes, I would definitely agree to that. I think there is a massive moral imperative here, not just between politicians and society, right? I think that's one lens to take on this, but I think also between sort of developed countries and emerging markets. I think there are multiple moral imperatives here that we need to get right, and if we don't do that, I think the impacts to society, both sort of regionally but also globally, are going to be massive.
GEORGIE: How do we achieve a just transition though? Where do you start?
KESH: So that's a great question, and I think the first part of trying to understand how to achieve a just transition is to try and understand what actually is it. And you hear the term just transition many times in many different forums, and generally, I find it means different things to different people and different stakeholder groups, right? You know, we started with a very simple definition up front, saying, "Nobody is left behind," but what does that actually mean?
When we first started thinking about this in South Africa, we thought, "Well, actually, it's moving to a lower carbon economy but making sure we create more jobs than we lose." That was the sort of starting point of our thought process. But as we kind of went through the process of defining, you know, the different pathways to net zero and how different sectors of the economy change, we realized that actually, you know, for example, take the power sector.
Most of the best renewable energy resources is 1,200 kilometers away at the coast, and most of the coal resources that we have today to generate power is in the northeast of the country. So even if we create more jobs than we lose, there's a massive labor migration that needs to take place. And then you start thinking, "Well, how do you make that labor migration happen?"
Not everybody can be reskilled and redeployed to a different part of the country. Some people may be able to move, some may not, and for those who not, what's the role of social welfare in making sure that they can actually have a sustainable livelihood once we move to a lower carbon economy? There are other aspects of this as well with regards to the quality of jobs that you're creating, quality in terms of wages.
So, of course, nobody grows up wanting to be a coal miner, right? But actually, coal mining actually pays quite well in most emerging markets, and with the transition to a lower carbon economy, how can you make sure that you don't lose that sort of earning power as you move to a green job, even if it does come with health benefits, which we know it does. And so I think the quality of jobs is another aspect to consider.
And maybe the last element I'll touch on here is just the element of inclusivity. So there is a term called procedural justice, and procedural justice speaks to the fact that you need to bring people into the decisions that are made with regards to shaping their own future. It's not for one particular stakeholder group to decide what's best for people who are not included in the economy today. They need to be, you know, inherently part of the process of defining what their transition looks like.
And so making sure you can bring in previously marginalized groups in society, be that on many different dimensions, but socioeconomically challenged groups is a critical part of a just transition. We shouldn't come out of this looking, you know, the same as we did before but greener. We should come out of this looking much greener in a much more socioeconomically viable world, right? With the distributed ownership and thriving economies.
GEORGIE: So how do you explain to a coal miner that their job may be lost, that they will be moving to a sector that may not pay as much and they may have to move the other side of the country, or to businesses that have to relocate and have the same issues or shut down?
KESH: Yeah, so I think you've hit the crux of the matter here, Georgie. I think when it comes to managing these transitions, being able to land the message down at the level of an individual is going to be quintessential to making this work. Just having macroeconomic plans or sectoral plans for how the economy can transition is not enough, and so that message needs to filter down to the individual for that to take effect in society.
And so let me give you an example of what's going on in South Africa for today. So, you know, one of our big coal-fired power stations is called Komati up in the northwest of the country as well. Been burning coal for the last 50 years or so, and there's been a community that has, of course, grown around that power station, right? Not just a community but a set of livelihoods that depend on the shops that are in the area and the various different trade that happens around the power station.
Now, if you're going to transition to a new economy, the people that are affected by that transition needs to be really engaged in a transparent manner where they can really understand what the transition means for them, not what it means for South Africa as a country but what it means for them as an individual. And so practically, how do you do that?
It's not that easy, actually. You can't just go and have individual conversations here. There's a well coordinated, orchestrated approach with the right people in the room is going to be critical here. You need the right mix of government, business, labor, community leaders, all to be on the same page here in order to affect trust. If you do not have the right forum, you do not have the right stakeholders, you don't have trust.
And as soon as that trust is not there, then there's not really a common understanding or not a conversation that's going on. So I think that's what we are trying to experiment with in South Africa now is to try and figure out what's the right procedure to actually go through in order to include, you know, those people in the conversations in shaping their own destiny?
So it doesn't happen that, you know, government or one particular country makes a decision and then that affects the individual. No, what we want to do is really bring them into the decision-making process and consult them very deeply on what it means for them and what support they need in order to make this transition a reality.
GEORGIE: Kesh, just explain to me why decarbonization is such a challenge in South Africa or for South Africa.
KESH: South Africa is quite a unique and challenging starting point here. It's the 13th largest emitter globally. To put that into context, South Africa emits more than France. With an economy that's much smaller than what we see coming out of France. So on a dollar per ton of CO2 emitted per dollar of GDP basis, we're twice the G20 average, right? So a massive outlier. At the same time, we're massively socioeconomically challenged. So pre-COVID, 30% unemployment. That's now sitting at around 35%.
We also have the highest gini coefficient in the world, so that's the gap between the rich and the poor, and a legacy that stems from our history of apartheid. Especially dispersed racial groups. And that creates quite a challenge when you're thinking about things like a circular economy where people, population density, for example, drives up efficiencies. But also an interesting example here could be something like why we're so reliant on coal.
So in South Africa during the apartheid years, we actually had an embargo on crude oil imports, and one of our major sort of pillars of the economy, our syn fuel sector, sort of took some German IP and commercialized it. It's called the coal to liquids process, the Fischer-Tropsch technology, and basically, we make liquid fuels from coal.
Now that did great for securing energy supply, but actually it means that that one single plant is the biggest point source of CO2 emissions globally, right? It emits every year more than Portugal does as a country. So you've got these highly concentrated CO2-emitting assets that have massive economic value for the economy, but at the same time, you know, you've got a hugely socioeconomically challenged populace, which means you can't change those things overnight. You have to make sure that the transition moves at the right pace.
GEORGIE: Is there a sense with some countries like South Africa that they're sort of almost being talked down to by the rest of the world as to how this should look?
KESH: It's a really interesting question, and I think maybe I would rephrase it a bit. I don't think it's about being talked down to. I think there is a feeling of unfairness and maybe a misalignment of incentives, right? And let me tell you what I mean by that. I mean Africa cumulatively has contributed to something around 2 to 3% of total emissions globally, right? Yet they're going to be disproportionately affected by the effects of climate change.
For example, in South Africa, for every two-degree rise in temperature globally, we're probably going to see a localized impact for, what, four degrees. And we don't really have, you know, the economic power to try, you know, buy our way out of that. And so a lot of the historic kind of levers that developed economies pulled to get themselves into a position where you've got cheap, reliable power cannot be used now to do the same thing within an African or an emerging market context.
And so when you look at emerging markets, they look at the developed world and say, "Well, actually, you know, this is not fair," right? And that's where the complexity comes in. There is a massive amount of misaligned incentives if you look globally but even locally as well.
I mean, take for example, the topic of gas. So gas, actually, you'll see around Africa, there's many different resources that have been found recently, and the question is, well, should those assets be developed or not? You know, the world is moving away from gas, but you know, Africa's now finally found these reserves, which could have massive impact on the economy. And the question is can it be done in a responsible manner?
If it's done in a responsible manner, then yes, but how do you guarantee that it's going to be done in a responsible manner, and how can the developed world that's going to fund that guarantee that that's going to happen? And so you see that that kind of distance between the different sort of stakeholders and their interests is what's really difficult to try and overcome in this situation.
GEORGIE: How long is this journey going to be in South Africa?
KESH: So I don't think this change is going to happen overnight. Yeah? I think this is a journey. It's not a point of inflection that overnight, you know, the economy successfully transitions. You know, we've done work to try and understand what this picture looks like up until 2050. And we think that, you know, a net zero world by 2050, I say, could be viable.
You know, we know the sort of technical things we need to do. We know some of the economic things that we need to do as well. I think the policy is where it becomes a bit complicated and to get that coordinated and done right, but we see that playing out over sort of 30 years. Having said that, there are very tangible things we can do in the short term to make a difference, you know, no-regret moves as we like to call them.
GEORGIE: For example?
KESH: For example, 60% of all of the emissions reduction needed to get to net zero comes from renewable energy, which is cheaper, so NPV positive, less risky to deploy, and actually starts to create more jobs before we even start demobilizing jobs in the coal sector, right? And so I think those sort of moves needs to be fully committed to. And if you think about the challenge that that's going to take, in South Africa, we've done some rough numbers here. We need, you know, six to seven gigawatts a year every year for the next 30 years to be built. We've built five in the last ten.
Not just how do we create more jobs. Where do we get the skills capacity to develop this infrastructure at scale? That's a massive opportunity for us, and if we can, you know, take one of those use cases and use it as an example of how to ensure just transition in one sector, that's an amazing thing to do, and I think that, you know, we can start seeing tangible benefits on that in the next five to ten years almost.
GEORGIE: We spoke about the unique challenges facing South Africa, one of the most challenging places in the world to decarbonize, heavy reliance on coal, inequality, poverty, all those sort of aspects. So I'm wondering for us, let's say take a developed economy, very developed economy like the US. Can they learn anything from your experience in South Africa?
KESH: Yes, I think, I think so. I think actually, you know, the building blocks of a just transition, if we reflect back to what we discussed earlier, which is, you know, making sure you create more jobs than you lose, making sure you can manage the labor migration that comes from the transition, making sure that you understand the role of social and ecological welfare in the transition, and making sure you can transfer ownership and see this as an opportunity to move to a more fair and equitable world.
You know, those building blocks are the same for many countries that are going through a just transition. It's the emphasis that changes. So the emphasis on geographic maybe dislocation in South Africa is very high, right? Given the spatial inequalities that we see coming out of apartheid may not be the same for a developed economy, but you're still going to have fossil fuel-based jobs that need to be transitioned into a new green economy, and somebody needs to figure out how the skills development system works in that space. Somebody needs to figure out who can actually be reskilled and redeployed. So I think the emphasis may change, but the building blocks are still the same, even for developed economies.
GEORGIE: I want to broaden this out to the continent of Africa and to look at the role of business. What is the role of business?
KESH: I think business has a critical role to play here, Georgie. Business has the financial capital, the human capital, and have the responsibility also on the natural capital of South Africa to make sure that we can preserve what we have, but also, particularly when you talk about human capital and financial capital, grow that in a sustainable way.
You know, an interesting topic here is the concept of inclusion and diversity in the workforce. You know, you need a diversity of skills and you need to be inclusive in the way you bring communities in, for example, to projects. When it comes to companies, you know, it's critical that that's a key factor when they're thinking about scaling up operations and investing in these big renewable or green energy infrastructure assets, right?
I think at the same time, decarbonizing, as we talked about earlier, one element of this, but it's not just about decarbonizing. It's about creating green economic opportunities. Sustainable green economic opportunities, and that's business's bread and butter. So making sure that the trade agreements are in place, making sure that, you know, new green industries are catalyzed with the right level of IP, with the right level of funding is going to be critically important here.
Take green hydrogen, for example. We know there's a massive economic gap today. We know that there is a massive demand coming in Europe in recent times. We know that Africa is also going to be structurally advantaged in the production of green hydrogen because of ample land and great wind and solar resources.
So how can business play a role there in making sure that it's a collaborative way of, you know, investing in these new green economic opportunities like green hydrogen, covering the economic gap in innovative ways but also making sure that the infrastructure needed to transport those green molecules into Europe in the future is there, and, most importantly, that the ecosystem of partnerships form, ecosystems across the value chain so that Africa can actually start to localize a lot of these value chains and really compete sustainably in the long term? That's going to be critical.
GEORGIE: What will it take? What opportunities as well do you envision for the continent of Africa to be a leader in global sustainability? You've spoken of some aspects there, but holistically.
KESH: I think we can't sort of overemphasize the massive and huge opportunity that Africa has in its natural resources, right? And natural resources here being land. Availability of land, to the things that come for free, which is wind and solar. Africa, if you look at it and you do some modeling on this, you'll find that it's got some of the best wind and solar globally, actually. No spatial constraints to that is a huge opportunity.
So I think we can't ignore that. I think the second one here is regional collaboration. Regional power sharing. So, you know, as you move to a more intermittent variable source of energy and as the sort of, you know, wind and solar may be working in one place but not the other, regional collaboration and regional power sharing becomes more important. And also regional skills development and regional trade.
The Africa Free Trade Agreement is a step in the right direction, but we still have quite a lot to do in that space. And then I think in general, integrated policy and coherent policy planning. This is going to be critical. What do I mean by that? So take, for example, the renewable energy case that we've been talking about in this podcast. That's going to require a massive amount of commodity movements--bulk commodity movements, steel, et cetera, to build these power plants.
Now we can't just have policy that enables the development of renewables. We also need policy that enables the development and operation of efficient port infrastructure, right? So that you can get all of these things into the country on time. Making sure that those policies speak to each other is going to be critical. But also policy coherence, I think, it's important when you look at emerging markets that we start signaling coherently, you know, that we are going to move in the right direction and justifying, you know, some of the policy choices we make.
That's the core of also starting the conversation at forums like COP26. I think, you know, what South Africa did well at COP26 was put together a very transparent, coherent plan. That said, this is what we need to transition the economy. This is how much it's going to cost. These are the levers we need to pull, you know, very clear, transparent view of what that roadmap looks like and the supporting policies that come with it. And I think the more we can do that, not just within a country but at a continental level, the better it's going to be.
GEORGIE: Kesh, thank you so much and to you for listening. In the next episode of "The So What from BCG," I'll be reporting back from COP27 on the latest progress in the fight against climate change. Join me as I speak with global leaders about what's on their minds, how they're cooperating, and the impact of this year's economic and political shocks. I'll also have a sneak preview of a new series we're working on, which I think you're going to like. In the meantime, we'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com, and if you like this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: In the battle against climate change, much of the focus has been on mitigation, reducing carbon emissions. But as floods, wildfire, and extreme weather events impact economies, livelihoods, and natural assets around the world, just as critical is how we adapt to climate shocks.
We’re going big on climate change the next couple of episodes, while COP 27, the UN’s climate conference, is taking place in Egypt. Then we’ll be back to our usual variety of topics.
So what does a successful adaptation plan look like and what would be the cost of doing nothing? I'm Georgie Frost, and this is The So What from BCG.
CHARMIAN CAINES: I'd be urging business leaders to not just be thinking about their mitigation, but also thinking about what are we going to do to adapt to make our own companies resilient, but also actually to make our society resilient and our communities resilient.
GEORGIE: Today, I'm talking to Charmian Caines. Charmian is a senior partner leading BCG’s programming with governments around the world on economic development. She also leads BCG’s work on the topic of Climate Adaptation and Resilience.
CHARMIAN: Clearly, it is absolutely fundamental that we do try and reduce carbon emissions. And if we're going to achieve the 1.5 degree pathway, then there's no time to be lost there, and efforts, both private sector, public sector, public, all of us, we need to be really doing what's needed there. It's absolutely critical for all of our futures.
However, alongside of that, I mean, we're all seeing it, aren't we? A typhoon in Japan, the floods in Pakistan, the droughts in Europe through the summer, the wildfires in Australia or California, whatever. And these things are happening every day. They're in the papers every day. And so the idea that we simply try and reduce emissions, but that we don't start to think about how do we make communities, societies, cities, coastlines more resilient.
I mean, clearly there's something that we need to be doing there. And interestingly, if you talk to a leader, for example, in the developing world, in an African government or a Southeast Asia developing country, and you talk about climate, they'll say, why are you talking to me about emissions? We don't emit anything. Our issue is that we are potentially having to relocate people from one island to another, that our factories that are critical for economic development are being flooded, or whatever, day to day. And that's our issue.
And actually, if you start talking to governments in the developed world, and we've done that with a number, both in the Pacific area as well as in Europe, and whatever, they will say, our populations actually believe that we have got a plan to achieve race to zero, as you call it, to reduce carbon emissions by 2030, 2050, whatever, that we have that plan. But they're saying to us, but what on the earth are you doing about the climate events that are impacting us now, which are, potentially stopping us work, deciding where we buy a house, or et cetera, et cetera?
This is, the way I see it at least, we absolutely have to carry on the mitigation activities, as the world is. But there is this parallel set of activities—adaptation, resilience, how do we make communities, cities, et cetera, more resilient, given that these climate events are just going to continue. If anything, we would argue, they're accelerating.
GEORGIE: I mean, as you've mentioned, floods in Pakistan, wildfires in Australia, I mean, these are events, climate events that are impacting across the globe, regardless of your economic, I suppose, status as a country. So whose responsibility is it then? Because obviously, some will have more money to deal with this than others.
CHARMIAN: The bill, the tab to make the world more resilient is absolutely huge. And governments are already, of course, taking action and it's going to use more and more of public spend. But public spend is not going to be sufficient to do what's needed. So I think, looking forward, we are going to see much more involvement over time from the private sector. And the private sector getting involved not just in order to protect their own supply chains, and ensure that their distribution centers aren't flooded, or what have you, but actually private sector companies realizing that if that coast is not made resilient for employees as well as for their own factories, et cetera, then they're going to be in trouble too.
So I think, and in many other ways, actually, it can be a benefit for private sector companies if they're part of the construction industry, building some of this infrastructure, whatever it might be. So I think looking forward, we're going to want to be finding more and more opportunities and examples of private sector participation to really help build and put in place some of the solutions that are needed.
GEORGIE: What do you envision that partnership will look like between public and private? And will there be or need to be some kind of global overarching body that also looks at this? Or is it very much down to the cities, the countries to find their own path?
CHARMIAN: Yeah, I mean, I think it's really important that this, I mean, you asked it right at the beginning what's required in order to create a good adaptation plan. And a good adaptation plan absolutely has to be done at the local level. The local contexts are very different, the coastlines are very different, the extent of natural assets are very different, and et cetera, et cetera, economic activity is different, populations are different. So you absolutely have to be doing it at that local level to really design the set of solutions.
And I come onto that in a moment. And then also, at a national level where resources typically will reside, there has to be an understanding of where you are going to put those resources and so forth. In terms of how do you bring the private sector into it, I think it's going to have to be at all levels, right? There will be companies at that local level who realize that they need to get involved with what the local councils and planning bodies are doing, and get involved there. But equally, I think you're going to see some of that happening at more national levels too.
GEORGIE: You said this will come at enormous cost. Could we talk about balance? I mean, how do you decide as a business, as a government as to where you put your resources? Because this is huge and we don't want to, I assume, take away from the drive to reduce emissions.
CHARMIAN: No, and I think this is, I said I'd come back to what a good adaptation planning is. And I think this is sort of part of the answer to that question, which is that this is not simply, when you think about where do you allocate these critical resources, which are always very scarce, there are different angles that you need to come in. And I think what we're finding is really powerful is to start with data and facts. And there's plenty of data out there. It's not that it doesn't exist, it's just that it's often scattered around the place.
But you know, what is going to be the impact on a particular city, for example, of sea level rise, or of heat intensity, or storms, or whatever it might be. And that data is available, and you can play with that data, and you can look at bad scenarios, less bad scenarios, different timeframes, et cetera. So you want to start there and then you want to be starting to say, OK, given that, what will be the impact of those different scenarios on three things?
So one is economics, so what will it do to GDP, what will it do to different industry sectors, the consumer versus the agricultural? Then number two, really important for governments, this is top of the agenda, which is what will it do to our population? So what will it do to the vulnerable, to the poor? How many will it push below the poverty line, what will it do to women and children? And what will it do to different types of workers and agricultural workers, versus coastal workers, versus industrial workers?
So you need that social piece and you need to understand the impact of that. And then, there's also natural assets. What will it do to natural assets in coastlines, and so forth? And I think what you can do is you can start to bring that together and say, under these different scenarios, the impact from a social point of view will be this, or from an economic point of view that. And then, it's a question of making choices as to therefore what it is you want to do. And that enables you to optimize.
And what we've been doing—for example, in one of the most vulnerable cities in the world just recently—is just that: if you like, measuring the cost of inaction. If nothing is done, what will be the impact on the population, on the economy, on the natural assets. And then what you can do is you can build up whatever solutions: is it restoration of mangroves, is it sea walls, is it drainage systems?
And obviously, different things, if you're talking heat intensity. And what's the cost of putting those in and what's the return, again, from a social, economic, and natural perspective. And at that point, you can then move on and say, to your earlier question around how do you get the private sector involved, in some of those things where carbon offsets are available, for example, the mangrove restoration idea, you'll have private sector or financial institutions being really up for investing in that. That's a bankable project with a good return on it.
And then, there are other things where actually much more difficult, they are public goods type of things. And then, of course, there are emergency services if your electricity and whatever doesn't work. So if those companies haven't got their own adaptation resilience plan, so you need that to come. But you also then need to start saying, well, how are we going to fund these? To what extent can it be funded out of public funds versus bring in private sector and other financial instruments, and so forth.
So in my view at least that, a good adaptation plan, and that is something that's been called for around, if we could get 10,000 cities with good adaptation plans, we'd be making billions of the world's population more resilient. But a good adaptation plan needs to incorporate, it needs to be based on analytics and data, and understanding the impact of those different scenarios, thinking about those different return on investments, understanding what the impact will be, the cost of inaction.
And then, obviously, mobilizing it through in order to actually get the projects funded and get them implemented. And actually, one other piece, which is really critical is building the capacity. I mean, this isn't a one-off thing. You don't do it next year and you're sorted, right? So you need local governments, central governments, et cetera, et cetera, companies, et cetera, to build capacity and capability to do this too.
GEORGIE: You speak about that this is all based around data and analytics, but actually, a lot of what you're talking about the impact, it's quite hard to quantify. How do you put a cost on people's livelihoods, lives, natural resources?
CHARMIAN: Yeah, I mean, the data is amazing, the data that you can get, whether it's geospatial data, whether it's Google data. We did it in one agricultural region, for example, and you can get data on what's being grown in different fields, and what will happen with different climate scenarios, where actually there'll be no crops, and the drought will just mean that nobody can actually continue to farm there.
And how many people will that impact, and how much will it impact? I talked about to what extent will that put those people below the poverty line, and you can put a cost on that. What would it cost to actually, for a world food program or whoever, to actually enable those people to live? And other examples in much more developed world situations are which sectors of the economy will be impacted, how many days will people not be able to go to work in a drought scenario?
Particularly, you've got outside workers versus inside workers. This summer, we've seen it, days were lost and there will be more of that. Of course, you can put more air conditioning for internal workers and create more carbon emissions. So it's complicated, but there are ways that you can absolutely put a cost on both the economics and the livelihoods. How many will be impacted, to what extent will they be impacted, what would be the cost if you didn't, the cost of inaction?
GEORGIE: I want to go back to asking you about overarching global governance or global leadership on this issue. Because I fear, if some of the emphasis or if the emphasis is on individual countries and cities, then this could widen inequality and the resources that can be put into these sort of climate shocks. And avoiding them in the future will obviously be much easier for developed countries than it would for others. So do we need some sort of global leadership? What would you like global leaders to do in this space?
CHARMIAN: Yes, look, I mean, it's undoubtedly true that the parts of the world that will be impacted, and already are impacted most by these climate events are the developing economies. And those countries typically have the weakest, the least resources to actually deal with it. And absolutely, it is putting more people into poverty, it is putting some of those on the wrong path versus having been on a better path.
So that is definitely the case. I think what you are seeing is that, without mentioning names, but Global North governments giving aid to the Global South, if you like, are putting more emphasis on adaptation resilience because that's what those governments are asking for. So you are beginning to see that, and the World Bank, and all those sorts of organizations. But that is becoming higher on the agenda, and that is where funding is going. I would argue that's the right thing because that is driving poverty, and inequality, and so forth.
We can't be totally unrealistic, though, I mean, these impacts are happening in the developed world as well, so those leaders are also struggling with how to, as well as energy prices, but how to deal with the resilience and adaptation issues that they have on their own doorstep. But I do think the focus, as we started out at the beginning of this conversation, having been very heavily on mitigation, there is a realization that actually adaptation and resilience is necessary, and the consequences of not doing it are very high.
Another cost you can look at is the cost of migration. If people can't afford to live because they can't farm, or whatever, we know what will happen. There will be more migration and that will have a cost. So you can put a number on that, if you want to put a number on that. So I think it is rising up the agenda of global leaders, and then, as we mentioned, I think, how we can bring private sector into that is going to be absolutely critical.
GEORGIE: Is it too late?
CHARMIAN: Look, I think anything we do now will make things better, and that's true both on mitigation, and on adaptation and resilience. So I mean, I did hear some global leaders the other day saying, actually nature's accelerating, and if you read the IPCC reports, they don't make happy reading at all. But we do know that by putting some of the right things in place now, and maybe it is right to move people out of certain locations now, so that there won't be so much damage and loss of life. And so, there are things we can do that will protect the population.
To my mind, let's not worry about whether it's too late or not, that's an existential question for all of us. But let's make sure that where we do spend, we spend it in the best possible way and that we mobilize as fast as we can.
GEORGIE: I asked you about global leadership. I want to ask you about business leadership. What would you be urging business leaders to be thinking about?
CHARMIAN: Yeah, so I think business leaders are very focused, understandably again, on the mitigation side of things, and meeting their contributions, and reducing their carbon emissions, and they've all got their decarbonization paths, most of them have, I hope, and are working hard to achieve that. And it's not easy, some of the major transformations that need to happen in many private sector companies in order to achieve that. So they are very focused on that, and on the regulation, and risk around that.
I think, increasingly, they, and particularly those that are, without mentioning names, but those with big global supply chains and so forth are absolutely thinking about, well, do we want to build another plant in Philippines, or how do we secure our supply chain? And so they are thinking about A&R, perhaps not in quite the way I was talking about with whatever different scenarios and so forth, but they are beginning to think about that.
I think the next stage really getting involved in some of these sort of, when I was talking about private sector participation, PPPs, and what have you, that's not yet happening. That is happening on mitigation, but that is not yet happening here. And it is harder because there's a lot more sort of public-good side to this, which is harder, but it's going to have to happen.
So I'd be urging business leaders to not just be thinking about their mitigation, but also thinking about what are we going to do to adapt and make our own companies resilient, particularly if you're an emergency service and so forth, but also actually to make our society resilient and our communities resilient.
I was talking to a company in a developed-world country, and it's a housing, it's a construction company, and they were saying, obviously, it's in our interest that one continues to construct and build on the coast where everybody wants to live, but actually it's not in our interest to be doing that, if those areas are going to be flooded. How can we work with local government to ensure that we do protect areas that it, yeah, makes sense to build on and what contribution can we make there? So, it's coming, but we need more.
GEORGIE: What conversations are you having or hearing in boardrooms?
CHARMIAN: A lot of it is around how do we decarbonize, what's the way to do that? A lot of it's further up supply chain, how do we make sure that our aluminum supplier is decarbonizing or is using green, I mean, there's a lot of pressure and focus in the boardroom as to how do we ensure our execs don't fly around so much and so on. So that is happening, but we're not yet really getting into these conversations around, and actually, should we be doing more around the adaptation and resilience our assets, and our communities, and employee, and so forth.
GEORGIE: I'm wondering what you think needs to change. Is it the messaging? Do we need to get this out more? Because we're seeing it in the news every day. So the fact that it doesn't seem to be filtering down to a consumer level, to business level, I mean, you speak about positive conversations, but really, there's a lot of hope in that rather than a lot of action.
CHARMIAN: I think governments are really on it. I think governments are realizing that they need to do it. And we're finding we're having a lot of those conversations with government. I think the public, I mean, you know as well as I do, they're sort of observing it, but are they sort of asking their governments to be acting on this? I'm not sure that's, I mean, here in the UK, I'm not sure I'm really seeing that. But I think it will come, right?
And more and more, actually, people are saying, oh, is that a place I should buy a house? So I think the public are beginning to ask, “Am I going to want to go to that holiday house, and this, or whatever it is, or go on a holiday in Southern Spain when it's going to be 40 degrees?” So I think people are realizing that it is impacting their own behaviors. And I think once, like I mentioned, the government in the developed world and the Pacific area, sort of say, our electric, and I say, and what on earth are you doing, these fires are happening, and you're not doing anything. What's the plan?
GEORGIE: Charmian, thank you so much. And to you for listening.
In the next episode of the So What from BCG, I’ll be continuing the climate conversation asking how we can make sure we get to this new sustainable world in a way that’s fair to everyone.
I’ll be looking at South Africa, one of the most challenging countries in the world to decarbonize, and exploring why just transition is the right way to do that, it’s the best way.
I also have a sneak preview of a new series we’re working on, which I think you’re going to like. In the meantime, we'd love to know your thoughts.
To get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: Your values influence everything you do as a company, from the way you recruit staff, nurture talent, do business, and drive growth. But what happens when you want to work with clients or in countries that don't align with those values? Do you simply walk away? I'm Georgie Frost, and this is The So What from BCG.
KUSHAL KHANDAR: It's in settings like these when the role of businesses becomes even more important. So if there is a company which can create a local embassy of inclusion, you know, where at least within the four walls of the company, it actually becomes a huge unlock because you're tapping into talent.
GEORGIE: Today, I'm talking to Kushal Khandhar, Global Pride@BCG Manager and responsible for shaping the company's global LGBTQ diversity, equity, and inclusion strategy.
KUSHAL: The way I look at it, values are part of the DNA of the company. They actually set the tone and the narrative of how employees, as well as customers and vendors and all external stakeholders, engage with the company. Values are the starting point. You know, there's often things that are open to questioning on whether we should do X, whether we should do Y. I think values are nonnegotiable and that becomes the guiding light for how we operate and conduct ourselves on a day-to-day basis, as well as at moments of very critical strategic decision making.
GEORGIE: It's one thing to have them written down and to pay lip service to values, but how can you ensure as a company that they are ingrained in everything that you do, that they filter down throughout your company culture?
KUSHAL: Let me sort of answer that with an example, right? Like for us at BCG, diversity is a value. You know, on the one hand, it is embedded in our discrimination, etc., policies, but that also needs to be extended to a whole range of offerings that we can give employees, right? Like does the company have the relevant policies in place to support them? So I think that's one part of it, which are very real substantial offerings and benefits for employees.
And then there's a second very important part, which is also the daily lived experience of people, like while interacting with colleagues or clients or vendors, are people from that community feeling included? Do they feel they're part of the team? Do they feel they're appreciated or even celebrated for the unique identity and diversity they bring into work on a daily basis? So I think values actually play out on a day-to-day basis, as well with every single interaction that takes place in a company.
GEORGIE: So then it actually follows, should companies be working with clients or in countries that fundamentally don't align with the values that you have as a company?
KUSHAL: Yeah, people often ask me if a country is not as LGBTQ-friendly, should they even do business there, should they even have clients there, right? It's a very, very valid and legitimate question. My perspective there is you should absolutely work in those countries as well. There's two ways of engaging in a conversation. One is you either just don't be part of the conversation and, you know, walk away from the table. And the second is you actually be part of the conversation and try and influence the local narrative and the decision making locally for the clients, as well as the local context you're operating in.
And I think it's also worth asking, what is the benefit of each, right? If, let's say, a company decides to not work in a country, will that space be occupied by someone else? And if that is the case, have you actually lost the opportunity to influence the client or of the stakeholders with your values? So I think for me, being part of a conversation is very important. And I personally am supportive of companies working in different countries because it gives them the opportunity to become an embassy of values within that country, you know, which may not fully align with the broader social context.
GEORGIE: I want to ask you, if you don't mind, about your own experience growing up, but as part of the LGBTQ+ community in India. Now this is a country where only up until just 2018 consensual homosexual intercourse was a criminal act, where the identity of transgender people has only been recognized in law since 2019. I wonder what that experience was like and how you think it shaped the way that you work.
KUSHAL: I mean, that's a very profound question. You know, I think these are such integral and profound parts of our personality, and I think it's impacted me, and I know a lot of people as well, in very, very deep, deep ways, profound ways. It's difficult to sort of actually put to words how that plays out in me today. But I mean, maybe if I were to give you some examples, just how, you know, I would carry myself as a kid or even as an adult, right?
Like for instance, whenever I would pull out a shirt to wear to office on Friday, and I would love wearing pink-colored shirts, light pink shirts, and I would always have this thought in my mind, you know, should I actually wear this? And I think this is a very small example, but if you think about it from a broader work context, right? All the dinner conversations you have about, you know, what you did over the weekend, in addition to that, even when you're presenting to clients, right? Are you looking masculine enough? You know, are you conducting yourself in a way which, you know, the clients will appreciate?
There are all these thoughts which operate on so many levels and sort of permeate everything you do, which takes a huge sort of psychological toll on you. It's a huge weight you carry. So I think having gone through that entire cycle, I personally have seen firsthand the benefits of not having to cover up so much and how that actually has a very tangible impact in the way I function at work as well.
So I think it's been a profound change for me, and that's why I'm a huge advocate of inclusion. And just for the context of the audience as well, like before I took on my current role, I used to be a management consultant. So, you know, for six years I've worked with clients advising them across multiple countries, and I think through all of it, I've realized that after I came out, just the amount of ease with which I can handle a certain meeting versus before is just phenomenally different.
GEORGIE: You work now in London, but, of course, you have worked in the past in countries where you, as a member of the LGBTQ community, would be viewed or are viewed as a criminal.
KUSHAL: Yeah, yeah. Clearly, it's not an easy choice, and I think in those stages there's also a difference between what a company does versus what a person does. A company can take itself to a certain country to sort of, you know, be part of the conversation. At a personal level, it always is a choice, which is sort of made on a barometer of what your risk assessment of a certain country is, right?
Now I firstly worked in a few conservative countries. The sort of thing that worked in my favor then was the fact that I was actually not out then. So I think being part of those countries didn't directly put me in any risk, so to speak. But at the same time, I do know a lot of people who still work there. It's very important, and I've realized through my own experience, like you mentioned, you know, being gay was criminal in India until 2018. It's in settings like these when the role of businesses becomes even more important because, you know, LGBTQ people exist everywhere. The only question is, you know, how can companies support them, right?
So if there is a company which can create a local embassy of inclusion, you know, where at least within the four walls of the company, they promise inclusion, they promise nondiscrimination and an environment which is suitable for everyone, it actually becomes a huge unlock because you're tapping into talent, and they actually have so much to offer in terms of creativity, new ideas, and innovation as well. Working is clearly not easy in such countries, but if these people find their way to the right places of inclusion, it can actually be a huge unlock.
And I would rather work for a company which was inclusive and providing me that environment in this company rather than having to work for another company which, you know, did not give me that environment. Because, you know, there was also a point of time in my life when I did not have the choice to move to a country which is liberal. Giving someone a choice to be able to stay in your home country or whatever country they choose, while providing them an inclusive work environment is something that we should all be proud of.
GEORGIE: It's more than aligned with their values. I mean, you're talking about making sure that staff are kept safe within the four walls, but do you want to be sending staff to countries where they actually may not be physically safe?
KUSHAL: Yeah, exactly. That is exactly the conversation that needs to be had in companies, and I think it's a very, very valid point. People can choose to work in certain countries. But having said that, if anyone is given an opportunity or asked to move to a different country, I think it's extremely important for that person to be able and to feel empowered enough to say no.
You know, it's not just a question of safety. It's also their personal values may not align with the country, right, irrespective of the company values. I was once in a country where I was asked to work for an industry, and the values of the industry didn't align with my values. So I actually said I will not do this project because I just don't want to work for the industry. The response I got is, "Sure, you know, we have another case for you, do you want to work there?"
This is where values matter, and this is where values expressed by senior people matter. You know, when I said that as well, I wasn't very confident, but I knew at least I had a few senior partners who had my back. I had been told very explicitly in previous different context, you know, in an LGBTQ context and other context, whatever your values are, we will support you in living them. And I think that was the top-level message that I got.
That again brings me to the conversation on how is a company inculcating and spreading values that it affiliates with because that can actually empower or disempower a person to be able to speak up about issues like these. So I think it's very important to provide that environment, and I think providing that itself is a huge step in towards inclusion because not all companies have that.
GEORGIE: It's one thing to communicate internally. And you've spoken there about having role models, having networks, but what about the external message, the way that investors or customers will look at that decision? How do you communicate that sort of a decision externally?
KUSHAL: On the external front, I'd also sort of fully understand that there's many ground realities, which make the external communication difficult, and I think in some cases like that, I think it's also very valid to not fully communicate or also to not sort of be an advocate externally before getting your internal house right, right? So I think in many countries, it's also totally fair for companies to say, "Hey, you know, we may have taken a call to be very inclusive within our environment, but I don't think we are yet ready to express these values externally fully because of the local laws." And I think that's also a very valid choice.
GEORGIE: Where do you draw the line though? When isn't it valuable to be at that table to have that conversation?
KUSHAL: Yeah, absolutely. So I think that is a tough call to be taken, and I think there's two sort of tracks that a company can take. One, of course, you know, being part of a conversation also has its limitations. I think that's perhaps what you're saying. You know, after a certain point, a company may also realize that the fundamental values are so different, they can never be scoped for change there. Or we may create more value by not being part of the conversation, in which case, you know, it is a very valid decision to actually withdraw as well.
Many companies have done that as well, very much in the recent history, as well in this year, where people pulled out of a country because their values didn't align with that country. It's just as important to identify what the tipping point is. Because I think people often tend towards, let's not be part of the conversation, when the only thing sort of my perspective there is, that should be the last resort, and there's many things that can be done leading up to that decision.
GEORGIE: Do you believe that companies can influence a country?
KUSHAL: I do believe it. I just don't believe it, I've seen it as well. So I think it's very much possible for companies to influence the local culture in companies. Earlier this year in March, we were actually invited by the British High Commission through Open For Business to actually present the economic case for LGBTQ inclusion to sort of business leaders in Kenya. So we actually had a BCG delegation presenting, to, you know, 10, 15 people trying to explain to them the importance of LGBTQ diversity.
And I think it's examples like these which make me realize that change is possible through business and by partnering more broadly with civil society organizations. It was just a perfect example of, you know, there's someone from civil society, someone from the corporate sector, someone from the government sector, all of them coming together for a common cause. And I think that for me wields magic, and that can actually cause change.
One of the examples I saw was actually a colleague who was the first woman to enter and work at a client location. You know, it's so normal for us to see men and women sitting together at the same table doing work, and here was a company which didn't have a woman's toilet. The building's infrastructure was created for men, right? That for me was a real eye-opener to see this kind of change we can make.
And I think in addition to that, there's multiple forums as well, right? One is direct client work. The other thing also is using your expertise as companies to influence decisions, right? Like for instance, we are management consultants. We work very well with data and insights and problem solving. So, you know, we channel our energies towards doing research within the LGBTQ sphere, you know?
So I've co-authored reports in the past as well where we've actually put in data to show there is economic value for LGBTQ inclusion as well. And there is a cost if you're not inclusive, right? Like that is using our own expertise to help build the narrative. People walk up to me and say, you know, "We've used your report to have a conversation in our company to get certain policies in place," you know? And I think that again is an agent of change for me, and that's how companies can help.
And the third thing also is civil society organizations, you know, as businesses, there is definitely a lot of wherewithal we have in terms of financial capacities as well as intellectual capacities. So you know, we are partners for other coalitions like Open For Business, World Economic Forum, Partnership for LGBTI Equality. So by lending our support to these organizations, we are actually also equipping the broader movement, and, you know, they're the experts and specialists in this field. So by partnering our resources, that's actually also an agent for broader societal change.
GEORGIE: Do you think that values have become, you know, more important for a company nowadays than they ever have been?
KUSHAL: Yeah, I absolutely think that is the case. I think consumers, as well as employees and potential employees, are becoming more and more aware of their own values, and they're becoming more and more demanding of companies as well. So I think it is becoming very relevant to the point where I think the economic case for it also, you know, in addition to the model case, which itself is very compelling, cannot be denied.
GEORGIE: Lay that out for me, the economic argument.
KUSHAL: So I think, for instance, you know, specifically when you look at LGBTQ, or just diversity in general as well, right? There is data to show that companies which are LGBTQ inclusive have better indicators of economic performance, be it share price performance, bottom-line performance. They have better access to international markets. They have better access to talent attraction as well as retention.
And I think there's a whole range, you know, there's actually I think more than 20 propositions which have been laid out by Open For Business. You can actually go across, you know, the social aspect, the economic aspect, the talent aspect, all of these things, and there's actually economic value that can be ascribed across the spectrum.
GEORGIE: What do you put that down to? Is just more talent available or do you put it down to a cultural thing or people can bring themselves to work? I mean.
KUSHAL: I think it's a combination of both, right? I think people are realizing that, I think especially after the pandemic, people are realizing that they really want to work in an environment which gives them a sense of purpose and which makes them feel included. And secondly, there is clearly, you know, talent is not easy to get, right? If you want the best talent, there is a huge competition. It is a place where talent is demanding this as well. You know, if this is not available at a company, they have many other options to go to. So I think it's cultural as well as driven by all these other factors.
GEORGIE: Kushal, thank you so much, and to you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you liked this podcast, why not hit subscribe, and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: Central banks around the world are hiking interest rates to get a handle on runaway inflation. The resulting uncertainty and talk of recession have markets rattled. Fears of a return to the 1970s dominate the headlines. After over a decade of low and stable rates, the biggest fear is that this era is well and truly over. So what would a new world of higher rates mean for the business and investment environment, and how likely is that to come to pass? I'm Georgie Frost and this is The So What from BCG.
PHILIPP CARLSSON: We should take seriously the risk of a permanent shift to higher inflation, higher interest rates, but we shouldn't jump to conclusions that it's already a done deal or anything like that.
GEORGIE: Today, I'm talking to Philipp Carlsson, Boston Consulting Group's Global Chief Economist.
PHILIPP: When you think about the last 30, 35 years, we've been on a constant downward trend in terms of inflation. And along with it, interest rates were pulled down. And that was really a secular generational trend. A few drivers helped us get into this very favorable world of low interest rates. Coming out of the 1970s and early 1980s, when inflation was very high, central bankers got a better playbook, they learned to control inflation more effectively.
Paul Volcker in the United States was instrumental to this. And other central bankers after him, they continued a more hawkish approach to running monetary policy. But there were also tailwinds beyond the realm of policy. This is predominantly a story of global trade, which has been disinflationary for a long time, particularly in durable goods. And then you had automation, which took out a lot of labor costs in many parts of the economy.
So there was really a confluence of forces that delivered that long-running decline in inflation, and again, along with it, low interest rates. The pandemic has upended all this in quite spectacular fashion, where obviously, as you said, inflation's very high now. The big question is whether we are in the middle of a very nasty cyclical bout of inflation or whether this is truly the cusp of a structural inflection, where we now move into a longer-term permanent problem of high inflation.
GEORGIE: What is the risk of entering a world of long-term high interest rates and how likely is that to be the case? What would need to happen for that to be the case?
PHILIPP: I think the risks are the highest easily in a generation. So over that period that I just sketched, the 80s, the 90s, the 2000s, the 2010s, there wasn't really a moment where that anchored inflation regime was nearly as threatened as today. You quite simply didn't have this enormous spike of inflation and you didn't have as many drivers that caused it at the same time. So it's certainly fair to say that risks are the highest in a very, very long time.
It is not correct in my view to say that it has already broken, the inflation regime. We're still, in terms of expectations, in an anchored world. You can see that both in household surveys. So when you ask consumers in households, what they expect inflation to be five years into the future, they don't report expectations that are elevated. In fact, it's very much contained. If you look at financial markets, you can back out the pricing of insurance against future inflation years into the future. And that price that is paid to protect against inflation is also still very contained.
So it's not quite right to say today that the inflation regime is structurally broken, but the risks are there. The biggest risk really is that the drivers are not easing up and that policy fails to push back against it. The way to move into a broken inflation regime is ultimately policy failure. Not a one-off policy failure—getting the rate hike cycle started too late or not high enough—but a consistent multi-year failure of central banks to rein in the problem.
That's how you got into the problem in the 1970s. People often equated inflation then with the oil shocks of the 1970s. That's not quite right. It started in the 1960s, very tight economy, very tight labor market. At the time, the Federal Reserve in the US cut interest rates instead of hiking them. So there were many policy mistakes made on a long path into a structural break. And today, you could be, you certainly are on a path, again. The risks are high, but it's too soon and too early to claim that that break has already occurred.
GEORGIE: How would you know when it has? What are you looking out for? What are the indicators?
PHILIPP: You know the big difference between the cyclical and temporary spike in inflation, and that can be quite long, temporary, and the big structural break is that inflation expectations change when it is truly broken. So inflation expectations are everyone's belief that inflation will be persistent many years into the future. And that's why interest rates have to climb. Because when you think that your investment is worth less in the future because of inflation, you demand a higher interest rate as an investor. Rightly so.
When you believe that say five, seven, nine, ten years into the future, you're still looking at 7, 8, 9% rate of inflation, well then you want compensation for that. And that is all captured in expectations. And again, you can—not perfectly—but you can measure expectations both on the consumer side through surveys and you can measure them through market instruments on the financial market side.
For bond investors, implicit in certain instruments that are traded, you can back out what is the price paid for future insurance against future inflation. Monitoring those is quite powerful in getting a sense of whether inflation expectations have become unmoored or whether they're still anchored. And again, I think they're still anchored, but the risks are growing that they could become unanchored.
GEORGIE: For people who are not economists, we hear a lot about inflation expectations, market expectations, sentiment, almost feelings. That doesn't seem very mathematical, and yet these feelings, these sentiments, these expectations can often be wrong. But they can still affect the material economy, which seems a bit odd.
PHILIPP: There’s the concept of a self-fulfilling prophecy. If we all believe that a certain outcome will occur, that may actually make it occur. And if we're all influenced to believe certain things, perhaps because the headlines are screaming at us that we're back in the 1970s, maybe that will trigger that kind of collective belief that we're on the path.
GEORGIE: So journalists like us should stop the panic. It's nothing like the 70s.
PHILIPP: You have a lot of power, let's put it that way. It's certainly true, but that's why it's so important to monitor the expectations. If we had evidence today that people up and down the country believe that in the year 2027 inflation is in the double digits, then we know that there is this behavior: people will push for higher wages, they will start spending differently, make different types of investments, and then we're on a path to something that is truly more destructive than what we have today, which is already quite destructive.
GEORGIE: If it continues in this fashion and it's not inevitable, what would that do to the business and investment environment? Short- and long-term, what would it look like?
PHILIPP: The benefits of an anchored inflation regime are truly enormous. We kind of take them for granted because we've lived with them for so long. So a lot of people today have never personally experienced higher inflation levels. You'd have to be 60 years or older to have firsthand professional experience of such a world, but to name some of the benefits, it's fairly straightforward.
Just think about how the very low level of rates has a material impact on valuations of assets. So because you went from double digit inflation in the 70s down to very, very low inflation in the last many years, that trip from double digit to very low levels of inflation and rates allowed valuations of many asset classes to spike.
You have a lower interest rate, you discount future revenue with a lower interest rate, that pushes up the present value of many assets. You had much less volatility because of low inflation, low interest rates. Why? Central banks could let cycles run much longer. They didn't have to go stop and go because everything was just moving along quite nicely with low inflation.
You could have long expansions, less volatility in terms of cyclical growth. Obviously, for consumers and homeowners, and particularly in the US where there's a lot of consumption based on credit, low interest rates have been an important backdrop to how the economy functions. And these are just some of the benefits, but they're enormously powerful. So if they were to go away, a lot of that would have to be rewritten. A lot of things would have to be learned anew by a lot of participants in the economy, in the investment space.
And that's why we should take seriously the risk of a structural inflection like that, a permanent shift to higher inflation, higher interest rates. But we shouldn't jump to conclusions that it's already a done deal or anything like that. It's a risk, a material risk, but it's not a reality today.
GEORGIE: And you think the solution lies in the policy decisions that are going to be made?
PHILIPP: When you think about how we got into this, it's really a succession of shocks. So it started out with too much demand in Western economies: too much stimulus, particularly in the US, pent-up demand because people couldn't spend freely and that was the initial shock of inflation. And it was not taken seriously enough with hindsight. But it's also not fair to say we didn't have additional extra shocks that came after that.
Think about the supply chain bottlenecks. They happened throughout last year. Then you had an energy surge throughout 2021 as well, that played out as we moved through the year. Then you had a labor market, both sides of the Atlantic, that was just very difficult, where labor supply was very constrained. That pushed wage demands higher. And then nobody really foresaw the shock that came out of Russia and Ukraine and what it did to commodity markets and oil, many other parts of the commodity space.
And there can be additional shocks. This is not something that can be forecast with certainty because you don't freeze the current set of drivers. There will be other drivers. Hopefully, they will be in the other direction. You've seen the commodity space is easing up somewhat. So we're off certain peaks that we've seen both in terms of oil, in terms of many other commodities. Labor markets are beginning to let up in the US.
You see some slowing in wage growth. You see the scramble for labor that came after the lockdowns were lifted. That scramble pushed up wages enormously and they're still growing very, very rapidly, but they're no longer growing as fast as they were in September, October, November of last year. So we are seeing some easing. Durable goods inflation has come down materially in the US, but at the same time, the fire has spread to other parts of the economy.
Now inflation is in housing, it's in services. So while all these drivers hopefully are moving in the right direction and we've seen hopefully the peak in inflation, policy must make sure that you now keep this on a downward trend. And it will not be enough to hike a few times and then cut again.
Markets expect the Fed to cut as soon as early 2023 again, to cut rates again. I think as inflation remains quite high, even if you come down, it will remain elevated for quite a while. It is now incumbent on the Federal Reserve and other central banks to keep interest rates quite high just to remove that risk that if you cut too soon, you are playing with that structural risk of entrenching inflation and not getting a grip on it.
GEORGIE: Do you think by and large that up to this point they've gotten it right?
PHILIPP: Now obviously mistakes were made. Apportioning blame and pointing fingers is a tricky conversation. As I mentioned earlier, the succession of shocks was really a succession, they didn't all happen at once. So when central banks felt this was under control and quite temporary, and that not all the drivers of inflation had happened, that's simply not true.
But at the same time, there was a very large demand overshoot that central banks could see and measure and monitor and they felt that was not enough to act on. They could see the dynamics in the labor market playing out. And these are things that are not by and large under their control or influence. Energy prices, there's little they can do. Big shocks in the commodity space, there's little they can do. They can do little about geopolitics, nothing really. So it's clear that they're in a difficult spot now having to catch up, but to bash them for having gotten it wrong is also tricky.
Basically, if they had tightened earlier, let's say in the middle of last year, and less aggressively, do you really think there will be no inflation today? We'd still have inflation today. Hopefully it'd be a little lower, but the drivers are so exhaustive and so all-encompassing, you'd still have inflation today even if they had hiked sooner and less aggressively.
GEORGIE: What I want to ask as we're talking about the risks of higher rates for longer, but are higher rates always bad? Is the continuation of this extremely low-rate world that we've been living in always desirable?
PHILIPP: So higher rates need not be bad per se. It all depends on the context of the economy we're talking about. So in the 1990s, you had a fairly high growth economy in the United States. You had a productivity boost that came out of prior decades of investment in information technology. In the 1990s, it began to pay off, there was a big growth bump, productivity growth was high. And in such a context, higher long rates, ten-year yield, were not necessarily bad.
It is a problem if you have a low-growth economy with low productivity growth coupled with high rates driven by inflation expectations and higher realized inflation. That's the kind of mix you don't want to be in. But you could believe that over the next say 15 to 20 years, you can return to a place of higher, more vigorous growth driven by technological innovation. Perhaps tech finally pushes up productivity growth in the services economy, where traditionally technology has struggled to deliver productivity growth. If you believe in that higher growth world with higher productivity growth, it's not detrimental to think that interest rates could move to a world of four handle, maybe high three handle. That is not something that in and of itself is bad in the right context.
GEORGIE: I guess that's one alternative world if we don't go into the high inflation for longer that we're talking about. Are there any other examples of what you think could be likely scenarios from this point on?
PHILIPP: I wouldn't rule out that you return to a world pre-COVID. I think currently it certainly looks very credible that you move to a world of upside risks. Even after you get a grip on the current inflation problem, you'll still live in the next many years with more upside risk to inflation, as opposed to the downside risk that we had pre-COVID.
I mean, it's easy to forget, but the last 20 years or so was about managing too-low inflation. I mean Japan has been struggling with deflation for the longest time, Europe, or the Eurozone rather, has been on a deflation watch regime for a long time. And even in the US, you sort of struggled to reach the 2% inflation that you wanted to have, which is healthy and important.
I think the idea that we're moving from this downside risk to a longer stretch where risks are to the upside, even after we bring down the current spike inflation, I think that's very credible. But I wouldn't rule out either that as the dust settles, you, particularly in Europe, return to a world where demand is a little too sluggish, growth is too sluggish, and you have those downward pressures on price growth.
I wouldn't rule that out at all. It's unknowable. You have to look at some of the drivers that can structurally move these questions. I think for the US, it's more likely that you move into an upside risk world where you have to constantly watch that inflation isn't rising above the 2%, as opposed to managing that it's not falling too low. And in Europe it's quite plausible that you are leaving behind your deflationary fears and risks, and it would be a good thing if in a structural longer-term basis, Europe can be much closer to the 2%, where it wanted to be.
GEORGIE: As an economist, is this quite an exciting time?
PHILIPP: Yeah, it is, certainly. It's never boring because a lot of things are happening always, tactically. The cycle is always moving on, there are always small and other shocks, but it doesn't happen often that structural risks are credibly presenting themselves. This is what we touched on earlier. The inflation regime being anchored and such a tailwind to everything has been around for so long that we're all just take it as how the world works.
Now, even though I don't believe that the inflation regime's broken and other foundational regimes of the economy aren't broken either at this point, certainly the risks are much, much higher than what they've been before. And in that sense, yes, it's a much more interesting time from a professional perspective. It's also a little more stressful because the stakes are much higher and it's much more difficult to read some of the risks that are around us now.
GEORGIE: How much can you take from the past? I mean we've joked about the headlines, they're not very funny, I have to be honest, they're quite doom-ladened, but compare them with the 1970s. Is there anything to learn from those eras? Or are we actually being a bit too caught up in past experiences that we are missing what could be a completely brand new one?
PHILIPP: It's two-sided. In our work, we're big fans of using history and we often go to great lengths to understand precisely what happened in certain circumstances, but the risk of extrapolating from the past is very clear. Basically, models are dumb. They're only as good as the empirical evidence you feed them. If a particular situation you're facing hasn't occurred before, your model can't possibly spit out an answer that is satisfactory, right?
So history is a nice way of understanding how the world we're in came about and what are those structural foundations and drivers and that's very important, but new situations present themselves. And when they do, history often has limited use. We certainly never froze the world economy the way we did in 2020. And so history didn't offer a playbook for that because we'd never done it before. If you run into another pandemic, it's going to look better in terms of leveraging history. But at that point, it didn't help you all that much.
I think for inflation, I will say I don't quite like the 1970s analogy, at least the shortcut version of it, because it wasn't just oil shocks, that’s just not true. The inflation regime cracked and crumbled in the late 1960s before the oil shocks occurred. The inflation expectations began to unanchor before the oil shocks occurred. It was a multi-year policy mistake and policy failure story that grew and festered over many years.
That is important to keep in mind. How do you actually break a good regime? It doesn't happen overnight, but when you have spikes like the ones we have today, you certainly want to sit up and take note and manage the risk aggressively. But we are not yet in that 1970s world.
GEORGIE: What should the headlines say then? I'm just getting my pen out here and I'm going to take some notes.
PHILIPP: I think the headlines should focus a little more on the two-sidedness of the evidence we're seeing. I mean even if you just think cyclically where we are, for example, in the United States, there's a lot of recession fear and a lot of coverage that basically claims we're in recession today. Why? Essentially on the evidence that we had two quarters of negative growth. You get some coverage of the fact that the labor market's very strong.
The labor market, in my mind, the truth is that the labor market's a much better indicator of where the economy's health stands. With a very low unemployment rate, very vigorous hiring, it's just not quite right to say you're in recession today. And I would even go further and say through the end of 2022, I mean we'd have to see a radical change in labor market dynamics to land you in recession in the current year.
So you have a lot of conflicting signals. They need to be presented both. It's a similar story with a lot of indicators. Think about CFO confidence that gets reported on quite a lot. When you ask CFOs around the country what is your outlook on the economy, you get record lows, it's an abysmal mood. But if you ask CFOs what they think about their own prospects of their own firms, it's actually pretty decent confidence they have in their own performance over the next 12 months. If you ask consumers how they're feeling, consumer confidence is extremely low, but they're not putting their money where their mouth is, they're spending, they're spending aggressively.
And if you look at the evidence like that, there is a, not endless, but a very long list of indicators that are quite simply contradictory. And when they're contradictory like that, there is little sense in erring on the side of doom and gloom. There's little sense in being naive and Pollyannish about how easy this is.
This is a tough headwind, but it's better in my mind to acknowledge the fact cyclically now when we think about this recession risk that we're facing. It's better to acknowledge the two-sidedness of the evidence, which is not at all clear cut and we're not today in a recession.
GEORGIE: Philipp, thank you so much and thank you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: The competition for talent is nothing new, but in the era of the great resignation, finding, attracting, and retaining the best employees has gotten a whole lot harder. Employers are now not only needing to compete with other businesses, but with the desire for a whole new way of working. But could the best talent be closer than you think, and could technology help you find it? I'm Georgie Frost, and this is The So What from BCG.
NITHYA VADUGANATHAN: Given that over 50% of people today are actively looking to leave, the chances are that if you don't help them actively find a career progression within your organization, they're going to leave anyway.
GEORGIE: Today, I'm talking to Nithya Vaduganathan, Managing Director and Partner at BCG, and a Fellow in the BCG Henderson Institute, researching Creating Talent Advantage. Also alongside Nithya is Brian Hershey, an expert in Talent Mobility and Management, and Director of Strategic Initiatives at Gloat, an external partner of BCG.
NITHYA: On one hand, there's over 11 million job openings in the US today, yet I see nearly 6 million people are unemployed. And because of the great resignation and changing preferences amidst COVID, more than half of Americans plan to look for a new job or are actively looking for a new job. So when you put all of that together, we're really in a meaningful supply-demand mismatch in the labor market, in addition to having high turnover.
GEORGIE: Brian, how do you see the changing working landscape? Is this something that is likely to be permanent, or with inflation running high across many parts of the globe, rates rising, etc., will people be perhaps less keen to leave their roles, or come back to the workplace, and we'll actually see us revert back to the traditional style?
BRIAN HERSHEY: Yeah, I mean I think right now, there's no question that we're entering a new world of work altogether. And I think what we've seen is that there's sort of a quiet revolution happening in the way that enterprises are really managing their workforces, utilizing their talent, and enabling careers for their people, because they have to. We see companies doing really incredible things like looking one level deeper at the skills and aspirations of employees to make smarter decisions about how to allocate the workforce, how to respond to changes in the market at speed, and also how to give employees more agency in their careers, and create a more equitable environment for people to grow and develop.
GEORGIE: So much of this is about, as I said, finding, attracting, but also retaining the best employees. But let's go to firstly, the looking for this talent, where should, Nithya, companies be looking? Where are these hidden pools?
NITHYA: Yeah, I would say to Brian's point of the quiet revolution, one of the solutions I'm most excited about is really looking beyond your floor. More than 60% of people who are leaving their jobs in the past year said one of the top reasons was because they didn't see career advancement prospects, yet only 10% of job opportunities today are actually filled by internal lateral hires. That's a pretty big gap. And you start to say, "Well, what are folks really doing to get at this?"
Unilever is one I'm pretty excited about. They've used a much more strategic approach to unlock internal talent and help people move laterally within the company. They've unlocked over a million hours of capacity, they've moved over 9,000 people. And what's really exciting is that many of the projects that people are getting to do are cross-functional, cross-geography. I'm sure, Brian, you can add a lot of examples on this, right? And 60% of opportunities are going to women. So it's not only a win for a company in their case, right, helping fill roles that were left sort of open, but it's also helping individuals find new prospects and help develop their skills. So to me, that's a really exciting one in terms of a win-win.
GEORGIE: I want to get some examples from Brian, but I just want to find out why you think, Nithya, that figure is so low, just 10%?
NITHYA: Yeah, I think part of it is many sort of organizations and managers, it's sort of a natural behavior to want to hoard your talent or hold on to people, especially those who are really good. But given that over 50% of people today are actively looking to leave, the chances are that if you don't help them actively find a career progression within your organization, they're going to leave anyway. I'm a big believer in that folks do boomerang if you play the long game on people, and if you actually support and develop them in helping them achieve their aspirations and develop new skills. They may actually come back to you or help you attract other talent over time.
GEORGIE: Do you think, Brian, that in companies, especially larger ones, that they can act almost in silos?
BRIAN: Yeah, absolutely. I think really the way we've built our organizations for the last 100 years, it's sort of what we see as a system of people in boxes. You're hired into a certain role in a company, you're expected to contribute a certain set of skills and capabilities in a certain place in the business, doing a certain set of tasks, usually with a specific team, laddering up to executive leadership.
What's missing in that equation is there's no real mechanism to actually look at the skills and capabilities we have in these boxes. You know, "O.K., this is someone who works for me as a product manager, but what did they do before they came to my company?" Folks who are passionate about graphic design, and maybe are doing audio engineering in their free time, maybe speak languages we don't know about. How can we actually tap into the talent we have and bring it to where it's needed in the business in near real time to solve real business challenges?
We've made it exceptionally difficult I think for an employee to find their next career opportunity inside of their organization. And so we're trying to really break down those walls and silos in the organization. It's more than the technology that comes into play to make that actually happen, there's a real mindset shift that has to happen in the way that leaders think about the workforce and about utilizing human capital to make our businesses successful.
GEORGIE: It's hard though, Nithya, I'm just listening to Brian there, like if I'm a manager, and I've got a great team, and I know that there's a skill shortage out there, I am not going to want to let any of my staff go off, even within the same company.
NITHYA: That's right. I mean, it can't all be just on the manager, right? I think the manager mindset is an important part of this, but I think if we look at what some leading companies are doing, they're starting to really change the rules I would say at the company level as well.
I look at Seagate as an example of an organization that has shifted to say, look, when we have open roles, we really want our leaders, our managers, to look internally first to try to fill those gaps. Look beyond just the folks, the boxes, that report up to you, and if there's a 75 or 80% skills match into a role, look, that's good enough. And by the way, we're innovating on our learning and development solutions and offerings, so we can actually help individuals sort of bridge that gap. So when I look at examples like that, that gets me quite excited about not only breaking down silos, but sort of putting in place more of these enabling mechanisms so it's not just the onus on an individual employee or an individual manager.
GEORGIE: Brian, where does technology fit in here?
BRIAN: Yeah, so using an internal talent marketplace and opening up talent in the organization can give a manager super powers. Unilever is one example Nithya mentioned, there are others, I mean Schneider Electric, and Novartis, MasterCard. There are dozens of organizations operating this way at this point.
Unilever actually was able to staff 17 experts in their company from different geographies to nine different projects, they were able to do the actual staffing of that in about a week, and then they were able to actually not just launch those projects, but complete those projects in 26 weeks. And by the way, this is all the innovative kind of work that's really going to carry the business forward, was able to do that at speed. That's really a game changer.
GEORGIE: How did they manage to do that so successfully?
BRIAN: O.K., so let me paint a little picture for you of what a talent marketplace looks like inside of one of these companies. So imagine a senior leader in a business announcing to the entire workforce that they're reinventing the way that they work, they're reinventing the way that you as an individual can build your career inside of a company. Every employee will be invited to come into this platform and create a profile, right? So, upload your LinkedIn resume, give us a copy of your, PDF of your CV, and then tell us a little bit about what you want to do in the future. What are you aspiring to, what do you want to develop, what roles would you like to learn more about? And using all of this data, our platform is then going to be able to look at all of the open roles, projects that managers are posting on our platform, mentors, learning opportunities, and actually match employees intelligently to these opportunities so that they align with their capabilities and also align with their interests. For leadership, keep in mind this also translates to business results.
GEORGIE: I think I heard Gloat described as "Tinder for talent" or "Tinder for jobs." I've heard of some dodgy Tinder dates, I hope it goes more successful... But is that about fair, is that sort of the idea?
BRIAN: Yes, we've been called a Tinder-like app for enterprise before. There's some parallel there. So when you think about how it actually looks for an employee to find these opportunities, we're making it really simple and we're making it kind of a consumer-grade experience, like the way you would find a movie on Netflix, or a product on Amazon, or in this example your next date. You want to be able to quickly browse through all the opportunities that are relevant and give a quick thumbs up or thumbs down. Am I interested, am I not interested? We know that users love it, they don't want to fill out complicated applications and screening questions. They want to see the opportunities, they want to tell us what they're interested in, and all of that feedback we get from employees also gives us really great data about how to actually surface opportunities for every employee in an organization that are relevant to their skills and their interests.
GEORGIE: Nithya, like I suppose dating in this day and age, it feels like there's a tech solution for everything. But it's not all about the technology, is it?
NITHYA: No, it's not. I think there's a lot of aspects of what this kind of marketplace can do that's very exciting, that's different from the old way of... You know, you ask me, "Why is that 10% so low?" It's because in the prior world, if people want to move laterally, it's because an individual might know someone and if they have a supportive manager, right? But imagine this new world where opportunities are more transparent to everybody. Bias-forming parameters are actually removed, so that increases the odds for folks who may be a little bit shyer to try to approach something that might be out of their quote-unquote "wheelhouse."
This is where the engines can actually proactively suggest things based on their skills and say, "Hey look, have you considered X, Y, and Z?" And then, if you couple that with leaders that are saying, "Look, we're taking a more expansive sort of approach. Given talent is such an issue, we really need to not only be able to have innovative ways to bring in talent, but we have to be much more deliberate and thoughtful in how we retain talent. Here's a new aspect of our employee value proposition, and we're actually going to reward managers who help their talent sort of find new opportunities."
And you start to then see the move to this not just being one or two people doing it, but sort of as an organization, it's a totally different mindset. I think the other aspects are can you actually integrate some of this mobility into some of your other talent practices, right, so it's not just the standalone aspect? You know, a manager saying, "Okay, let me give you feedback on your performance and your role." There's also a conversation about, "Hey, are there other potential roles within the organization?" "Are there new skills you want to develop, how can I help you?" And managers are being held accountable to doing that with their employees. Yes, the technology is an enabler, but that broader sort of operating model is changing to create more of, I would say, the groundswell to scale this kind of innovation.
GEORGIE: You spoke about a mindset, a culture, lots of different things that you can do alongside the technology, and a lot of it does seem to be changing a bit of the mindset around it. Where do you begin as a company? What sort of tools do you start to implement, what sort of attitudes do you begin to have, I suppose?
NITHYA: Yeah. I mean, you can start small to try to test this. I would say more permanent job transfers might be sort of further off for someone to start with, but why not start with projects or almost creating an internal gig economy where employees have the chance to dabble, try something new? It can help with retention. But managers don't let need to let go of their people sort of overnight, so it's a way to kind of dribble and try that. And then I would say it's starting to kind of move in this direction of, "Can we actually rewire the way we do things like performance reviews, or how we fill open roles?" Right, like what Seagate's doing.
BRIAN: It's never a good time to do any kind of change in a large enterprise environment. There's always a lot of complexity. We kind of say, "You need to spark the change," and, "You need to be the spark of change." And we've seen HR teams who have been incredibly empowered in the last few years, especially as organizations have really relied on HR leaders to make it through all of this change, actually coming forward and saying, "We need to change the way we work, and we need to implement mechanisms in our business and build muscle around being more agile and adaptive."
It goes far beyond HR to C-level leadership who understand that in this environment, not just how fast your business needs to move, but also that you really need to make changes to hold onto your people, and to take care of your people, and develop your next generation of leadership, and have a sustainable approach to your human capital strategy.
And increasingly, I think what we're seeing is that if your business doesn't have this capability to draw on talent inside your inventory of skills and capabilities, bring it to real business problems, get projects launched faster, bring products to market, get there before your competitors, enable fulfilling careers for your people, your business is at a serious disadvantage in this world of work. So what started as an HR initiative, "This is good for our people, this can help us develop skills," has translated into a real business strategy to staying agile and adaptive in today's world of work.
GEORGIE: Nithya, I do want to ask about the dangers of too much. I mean 10% seems very low, but I'm wondering if there's an ideal number of internal hires you would like to have. And I sort think there about institutionalization, you know, there's often benefit to having someone come from the outside with different experience that can bring a different fresher approach to things.
NITHYA: Yeah, I mean I don't think with the level of job openings that exist in most organizations, with the level of new skills, with the changing half-life of skills that organizations need, I don't think we're at risk of filling every single spot internally. This is sort how do we... When 60% of people are leaving because they can't find career opportunities and only 10% are filled internally, we could narrow that gap a little bit, but there's still going to be a lot of room and need for external hires.
I think the other aspect of this though is in driving more of this internal mobility. We're seeing opportunities for more cross-functional teaming. So while it may seem slightly counterintuitive at first, it actually is driving more innovation because it's a way of bringing folks with different experiences and backgrounds that otherwise wouldn't have found each other to kind now come together to solve problems, right? So, even that in itself is an unlock on innovation, which is quite exciting.
GEORGIE: We've spoken about hidden talents, and the main focus of this podcast was of course about internal hires, but just briefly, Nithya, with all your research, where else can we look?
NITHYA: Yeah. Thank you, Georgie. A couple other sort of, I would say innovative solutions on talent advantage that get me quite excited. So, one would be just how do we redesign the actual work that needs to get done, and how does that help us break apart what I call skill unicorns?
I think another one that gets me really excited is also this idea of screening in, not out. Many organizations quickly go to more easily identifiable criteria that might be things like degrees, or time you might have in a role, as key requirements to get a job. The reality is that actually filters out a lot of really good candidates. And what we're seeing is that companies like IBM have actually said, "Look, in half of our US job listings, we've removed that degree requirement," and that's helped them widen the talent pool in terms of qualified talent pool.
And the reality is, I would say, is there an opportunity to get beyond these easily identifiable criteria and actually look deeper to try to understand what actually makes people successful in a job? And maybe it's not that degree, but it's actually have they had experience working on a team? Let's look at the success of projects they've worked on, which might actually be much closer to helping you identify good talent.
GEORGIE: Anything you would add to that, Brian?
BRIAN: Yeah, I mean we see companies looking to alumni of their organizations, people who know how the organization works, and even some of the people they've been working with already. We see folks looking into the broader workforce ecosystems out there. So, not just necessarily the broader labor market for full-time roles, but also the contingent workforce.
You know, is there a full role requirement here, or can we actually, as Nithya pointed out, look at the work that needs to be done, kind of break that apart into sort tasks, and staff things up that way?
We've actually had at one of our financial services organizations and also one of our manufacturing customers, we saw the same thing happen, which was in this case a woman leaving on parental leave. Typically the MO for the business was to find a temporary worker to come in and fill that gap. Instead, what both of these organizations were able to do was look at this individual's role, break it down into constituent projects, they posted those to their internal marketplace, and sure enough there were employees internally that had those capabilities, had the capacity, and more importantly had the interest in doing that type of work two hours a week. That kind of thing gets us really excited.
GEORGIE: It sounds cool, it sounds exciting, it sounds a little bit messy, and a little bit scary. But Nithya, I mean Brian outlined earlier what would happen if companies don't start being more flexible and thinking differently about the world of work. What do you think will happen if companies don't try to be a bit more creative, a bit messy even?
NITHYA: I don't think folks have a choice not to do something here, right? So if they don't change and look to innovative solutions, embrace new, whether it's the technology or broader operating model changes, I fear they're going to get behind in terms of their ability to get their services, or products, and offerings, to market at speed because they lack the talent to do so, and they're unable to... Sort of combination of bringing in enough talent, but then I think even more importantly sort of in this context of the great resignation that we're in, being able to retain that talent.
GEORGIE: Thank you so much, Nithya and Brian, and to you for listening. We'd love to know your thoughts. To get in contact, leave us a message at TheSoWhat@bcg.com. And if you like this podcast, why not hit Subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: Digitally transforming your company is a no-brainer. The rewards are immense. Fail to do it and you risk becoming uncompetitive and disappearing altogether, but many businesses are simply failing in their efforts. So what is the secret to a successful digital transformation? I'm Georgie Frost and this is the So What from BCG.
PATRICK FORTH: There are six things that a company needs to do that will flip those odds from 30% success rate, to over 80% success rate. And only one of those is a technology-related issue.
GEORGIE: Today, I'm talking to Patrick Forth, senior partner at BCG and expert in digital transformation.
PATRICK: I think firstly, we've got to understand how important it is to digitally transform. It's a real imperative. It really is impossible to manage for productivity, a good customer experience, to leverage data and analyze user advanced analytics, and then to think about growth from innovation. So, those are the reasons why it's an imperative for every company, from a bank to an airline to a mining company. The problem, and why the 70% are failing, is because these are new muscles for organizations.
Organizations tend to be good at delivering the past business model of their core business. And they're not necessarily very good at building new digital capabilities. Most companies, I think, figured out during COVID how to support remote working, but that's a very, very narrow scope for digital. What I'm talking about is the ability to really impact a company's strategy. So, to fundamentally change the customer experience, the way customers interact with the company in digital channels, but also in physical channels as well.
Really, what I'm talking about is a fundamental re-skilling of organizations in a way that creates value for the company, by creating value for their customers. And it is fundamentally what is going to underpin competitive advantage in the future.
GEORGIE: Is the problem that the will is there, it's just the execution? Or is there a perhaps an ignorance of what benefits digital transformation can bring or perhaps even fear that we don't do that as a company? That it will change our business model if we have to do that.
PATRICK: Yeah.
GEORGIE: Is it a question of companies don't want to change, or that they do, they just don't know how?
PATRICK: Yeah, look it's really interesting. I think when you think us as human beings, leaders of many companies, haven't lived through a digital world and don't have digital experience, perhaps on the board or in the executive team, and therefore all of their received learning and experience comes from a largely pre-digital world. And therefore it is often the inability of leaders to really, really understand what technology can provide and how to make it happen.
But that's a soft answer. The hard answer is, we've done a lot of analysis on exactly how to make these digital transformations successful. And it turns out that there are six things that a company needs to do, that will flip those odds from 30% success rate to over 80% success rate. And they are things like making sure that your strategy is really aligned to your digital initiatives. They are things like making sure your leadership is genuinely committed down through to the middle management, which is where a lot of important things happen in organizations. It's about making sure you have enough digital talent in your organization. It's about making sure that you have agile governance so that you can make quick decisions, escalate, and address roadblocks very early. It's about making sure that you're measuring the right things and that you have one source of truth.
And then lastly, there's only one that's about technology, which is making sure that you have a good technology architecture and data architecture, which suits the business needs. So, interestingly, there are only six things to worry about and only one of those is a technology-related issue. And so what we spent a lot of time doing is figuring out a sort of pass/fail scorecard on each of those six so that we can get to a very granular agenda of how you configure your organization for success.
GEORGIE: Forgive me. I sound negative when I say this, you said taking the success rate from 30 to 80%, why can't you get it to 100%? I'm just wondering if there are some organizations, companies that will never get this right?
PATRICK: Well, that's the challenge. Those that don't get it right, are going to find it much, much harder to manage their customer expectations, to manage their productivity, to manage growth. And those are all the things that drive shareholder value creation. And so increasingly they will become less and less competitive. And I think executives really understand that, which is why I think the executive world understands there's a race on here. And if you can get to be one of the successful ones, at 80% and above, you can then unlock a really exciting agenda, which is frankly, not available to those who have not built those basic digital capabilities.
GEORGIE: In terms of the more positive, the 30% that are currently getting it right, what are they doing? Give me examples.
PATRICK: Yeah, no, it's interesting. I mean, I talk about a 101 agenda and a 102 agenda. So, the 101 agenda to get right is about fixing the basics. I call it digital reengineering. So, it is making sure that your customer experience across all channels is good. Your operations are efficient, have high degrees of straight-through processing, that your data is managed in an effective way. This is sort of fixing the basics of the core business. They're complex, because they often involve a lot of process changes—people changes as well as technology changes.
The examples of the 102 agenda, though, are much more exciting. And these are the companies we refer to, as digital incumbents. So these are companies that have delivered a successful digital transformation and are starting to pivot beyond just fixing the basics, toward things like innovation. Innovation in the core business and innovation beyond the core into adjacencies.
So for example, you might see a telco that is using personalization in such a way that they know who you are and they know enough about you to suggest that you might be interested in an offer for a media value-added service. These are things that are really happening now, but what we're learning is that the companies that haven't mastered the 101 fix-the-basics agenda really can't address the 102 agenda.
And the 102 agenda is really where the value lies because if you look at medium-term, shareholder value creation, something like 60 to 80% of that is driven by revenue growth as opposed to margins and multiples. And so if you want to really get at the sorts of the shareholder value creation, that you're seeing digital natives achieve, you have to get to that 102 agenda. And that's what's exciting because we are seeing a handful of companies that are starting to realize this and are starting to focus on it.
GEORGIE: Can you ever, if you're a big legacy company, or you're a digital incumbent, keep apace with the digital natives and if you can't beat them, can you just buy them?
PATRICK: So good questions. First of all, we're...the old original internet paradigm, if you will, was that the digital natives were quick and agile and the incumbents were full of both legacy architecture and legacy behaviors. And therefore the dinosaurs were going to be killed by the nimble. That is true, and if the incumbents don't react, that will certainly be true, but what we are seeing and we have real hard evidence of this now, is that something like a third of the incumbents are really moving and are really starting to build digital capabilities that overlap with and rival those of digital natives.
And by the way, it's not plain sailing for digital natives because as they age, the risks of them building legacy technology and legacy behaviors increases as well. And so, there's a real overlap between the leading edge of incumbents who are focused on this and the digital natives. And if you have an overlap of those capabilities, and then you recognize the other structural advantages of incumbents, often being scale, customer knowledge, regulatory knowledge, distribution channels, all of these things, really give them an edge over the digital natives. I'm pretty bullish about a relatively small number of incumbents who get this right. I think there's a very exciting future for them.
GEORGIE: I do think that legacy companies as well, ones with the big names, the loyal customer bases, are already at a great advantage, in terms of branding, but also capital, that actually, they naturally should be able to surpass digital natives. What is the thing that would be stopping them?
PATRICK: Well, it's a long and complex journey. Many companies who are at the high-performing end of the incumbents have been on this journey for five or ten years and it does require real tenacity and persistence, from the executive and the board, to build these capabilities. You don't put workload in the cloud overnight. You don't create a culture of innovation, in which you test and learn and fail fast and move on, overnight.
Incumbents tend to be places where you like to minimize risk. Whereas what we're talking about here is companies that are prepared to experiment and fail pretty often in the pursuit of the innovation that takes hold. And so, these are big, big changes in organizations and they take many years, but the thing we're finding is you can create value in year one and in year two. And so you build the confidence of the organization and you're actually creating value. So, it's not like you have to invest now, for a return in ten years time.
And I think that's one of the challenges of companies, is to make sure that you're actually generating value as you go, and building the capabilities and extracting the value from those capabilities as you then focus on the next wave or the next dimension of this.
GEORGIE: I hear what you're saying about the benefits of changing into a company that can try something, innovate, risk failure. But I guess while the rewards are great in becoming a digital incumbent, the risks if you are a traditional company, with that great brand, that customer loyalty, the trust, the risks of getting things wrong can be enormous now.
PATRICK: Yes, and this is the dilemma for executives, because sticking to the knitting is not an answer either. Because what you'll see is you will be disrupted. People will be attacking your value pools. You can cut costs in the classical way for a certain amount of time, but that then becomes not a long-term strategy. So for me, it's inconceivable to have a long-term strategy that doesn't include some element of the digital agenda that I've been describing. Companies who are perhaps perceived of as being the least digital-- energy companies, utility companies, the public sector, all of these entities are saying, we have to do this. And so, I think executives are actually past your issue, but they're really focused on what you talked about earlier, which is, "How do I minimize the risk of failure and how do I get some runs on the board sooner rather than later?"
GEORGIE: The steps you need to take if you are a legacy company and you want to become a digital incumbent. So you're at the start of your journey. Where do you begin?
PATRICK: Everything starts with having a strategy and having a direction and having a vision and having a purpose. And so you then extract out of that: what is the digital agenda that will enable that strategy? So, it may be that your customer experience is poor and you need to focus on that, which for many companies is the starting point. It may also be that you have poor productivity and you've taken out functional costs, but you've not taken out end-to-end costs and really thought about how technology can enable that and advanced analytics can enable that. And so, you need to create a portfolio of initiatives that are digital, that reinforce the strategy. You can't have those two disconnected. That's the first thing.
The second thing is, you then need your leadership to be totally aligned. Because very often what you have is a technology agenda that is somewhat disconnected from the business agenda. And you hear very often business people saying, "If only we had the technology to be able to do something," and then you go to the technology group and you hear them saying, "Gee, I'm under a lot of cost pressure. I've got to deliver against cyber security. I've got to deliver productivity. I've got to keep the lights on for a bunch of aging systems. I don't have the bandwidth to start investing in digital."
So these are real issues that the leadership needs to deal with. And when I say leadership, it's really important that it gets down to middle management, because it's middle management who drives these initiatives and need to believe in them. Quite often, middle management again has the experience of the past and they project that into the future. And that's no way for success. The next part of the playbook is around a really, I call it agile governance. So, the way of managing a transformation, that is persistent and that is tenacious, and that is responsive.
Often companies get the initiative leadership wrong, or they get the cadence wrong, or they get the reporting wrong, but that's O.K., everyone fails. But, the governance is about saying, right what will we change? What will we do better? What will we do differently? How do we surface the big issues faster? How do we get the decisions made at the right level in my organization? And so, that's a muscle that needs to be built over time.
The fifth one is about measuring. You need to be real clear about what you're measuring. So, if it is a customer experience improvement, let's measure that at a very granular level and show that you're having an impact. If it's a return on a digital marketing investment, let's make sure we know how to measure that. If it's a return on straight-through processing, let's make sure we really understand how to measure that and there's one source of truth.
And then the last one is technology, and the really important thing about technology is that it be business-led. You can then design behind that, the things that technologists are excited about, things like cloud-based, things like modularity, interoperability, and opening up each of the platforms through open interfaces, so that you are not locked into, proprietary single-product technology stacks, which don't talk to each other, which is usually the starting point of most large complex organizations.
GEORGIE: I just wanted to ask you about the idea that, this isn't just a final destination. You've laid out what you need to do, to become a digital incumbent but technology's changing all the time. You need to keep apace. So, this is an ongoing journey, isn't it?
PATRICK: Yeah, I'm really glad you asked me that because there is sometimes a feeling that if a company does a digital transformation you go from an analog state, to a digital state and that's a steady state and then we can all relax, right? That is so not the case. And it's very exciting. So, I mentioned the 101 and the 102 agenda. 101 being fix the basics. 102 is about then starting to focus on innovation and growth and the sorts of things that digital natives are doing, which explain their high shareholder value creation.
But if you think for a minute, what's coming down the pipe in terms of new technology. We have the metaverse. We have web 3.0. We have things like decentralized finance. We have blockchain, we have things like synthetic biology. We have genomics. We have quantum computing and quantum technology. There are waves and waves of new technology, that are going to be available, but they're only going to be available for the companies, who have built the capabilities we've been talking about. And so, in a way if you don't get on this train very quickly and succeed, you are mortgaging the future of your company.
GEORGIE: Patrick, thank you so much. And thank you for listening. We'd love to know your thoughts. To get in contact, leave us a message at TheSoWhat@bcg.com and if you like this podcast, why not hit subscribe and leave a rating, wherever you found us? It helps other people find us too.
GEORGIE FROST: You want the best talent for your company, but where are you looking? Possibly not far enough. Reducing the obstacles to global migration and building bridges to opportunity for talented people regardless of where they were born and live might be a moral cause, but it also has a strong business case too. I'm Georgie Frost, and this is The So What from BCG.
JOHANN HARNOSS: The biggest cost, which maybe doesn't necessarily always directly show up in the accounting books, is the opportunity cost of not having these talents.
GEORGIE FROST: Today, I'm talking to Johann Harnoss, Expert Partner of Innovation at BCG and a fellow at the BCG Henderson Institute. Johann is also the founder and CEO of a social startup, the Imagine Foundation, dedicated to advancing global equality of opportunity.
JOHANN HARNOSS: What I truly believe in is that talent is universal yet opportunity is not. And I see that every day in the work that we do at Imagine Foundation, where we help folks out of Afghanistan, Syria, Pakistan, and many other countries in the Middle East find opportunity that they sometimes struggle to get within their own countries in Europe.
This is actually backed by a frankly shocking stat, and that is, if you take two human beings on this planet Earth randomly and ask yourself, among all of the observable economic differences that you see between those two people, where do they come from these differences? Is it family, education? Is it social economic status? Yes, all of them play a part, but, ultimately, two thirds of all of these differences simply come from one fact or one question, where have you been born?
And that truly shows me and others that the world is still a very, very unfair place. And if we can give people the means, the tools, and the inspiration to find their own destiny, and that can mean also moving across physical borders, we can make the world a better place.
GEORGIE FROST: So we know that there's a moral case, but what about the business argument? How does movement of people in this way benefit companies and therefore society?
JOHANN HARNOSS: Yeah, migrants tend to not have just on average a net positive effects for the societies that they join but also, ultimately, for their origin countries. Migration isn't just something that benefits some and actually harms others, but it can be something that we can structure as a win-win or even triple win. In this situation today, lots of companies need workers, not just so-called highly skilled workers that can do IT jobs, but also many other workers that can help them execute their operational and growth plans. And so I think the talent angle is, frankly, the very obvious one.
What is really interesting and, I think, totally overlooked by now by most is these global talents, if we put them into teams together with us, they bring in cognitive diversity that together our teams will be more creative, and, ultimately, there's a clear innovation boost coming from that.
So I talked to actually a former director at WhatsApp, and she told me WhatsApp was designed since day one as a global product. In fact, actually WhatsApp had been much more popular in Europe and wide parts of Asia before it had become popular in the United States. She was part of a super globally diverse team, and that diversity truly helped them have more empathy for a very global target audience and ultimately build better products.
And nowadays we take for granted that WhatsApp is one of the very few global messenger services, but back then, when they started, there was actually lots of competition. For her and for WhatsApp apparently, that global diversity was truly one of the engines that they used in order to succeed.
GEORGIE FROST: When you're talking about migration, you're not just talking about, for example, and there's lots of examples here, say, within Europe or even from Australia to America. You're actually talking from completely new areas.
JOHANN HARNOSS: Indeed, and if you take that argument seriously that ultimately this is about cognitive diversity, then, in fact, it doesn't help much if most of your immigrants actually come from neighboring countries. Ideally, you would actually say that you would like to diversify the inflows of talents and migrants that you have so that you really truly maximize the cognitive variety embodied in those people.
GEORGIE FROST: I can imagine that it's fairly easy, not necessarily neighboring countries. I mentioned there from Australia to America. I don't think they're next door to each other. But how difficult is it? And I've looked at the Imagine Foundation. I mean, you're talking about areas like Syria or Afghanistan. I mean, there's all sorts of structural, cultural boundaries to cross here.
JOHANN HARNOSS: Yeah, indeed. So, yeah, what is the Imagine Foundation? So we started that project nearly four years ago now. Initially, it was just a very small team here in Berlin, and, today, we're more than 150 volunteers dedicated to this one task, and that is to make it easier for folks predominantly from the Middle East to find new jobs and ultimately a new life in Europe.
What we found out is that, particularly for immigrants or aspiring immigrants to Europe and for folks who have acquired some university level education, it's actually not the visa bureaucracy, so to speak, that is actually the true hurdle, but it's access to jobs and cultural capital. And, as a result, we set up a fully digital remote coaching program, which basically helps aspiring migrants and talents assess their own strengths and weaknesses.
We get feedback on CV and on online presence, on LinkedIn and on other forums, and, ultimately, we make it much more likely that, through our support and through a jobs app that we have and through many other digital technology enabled means, that they find a job here in Europe. And, with this job offer in hand, they can then much more easily actually get a EU Blue Card and move over.
GEORGIE FROST: Forgive me, but it sounds as though you're still judging talent on some of the more traditional metrics. So education, where has that education been? It's very difficult, even when you're employing people within your own country, to actually get a right fit for a job. But when you are trying to get talent from a completely different country, completely different context, that's quite hard to do, so you're perhaps more likely to fall back on those traditional metrics. So, how can we really expand the talent pool genuinely to get those talents, the hidden talents?
JOHANN HARNOSS: You are hitting the nail on the head. Even today, it's so hard for employers, even well-intending ones that would like to broaden their talent pools, to assess those, let's say, they're often called non-traditional candidates. These candidates often, in fact, actually start with a disadvantage. So I talked to a recruiter, and she said, "Johann, I do not want to actively discriminate "against folks from those origins, "but, nevertheless, I have to admit, "simply because it's much more difficult "for me to assess their backgrounds and their skills, "these people," and it was quite brutal, I have to admit, "they start with minus 60 points with me "compared to other ones."
And that really shocked me, but, on the other hand, it really showed me the value of our program here at Imagine, simply because what we do through the coaching and the training is we vet people. They graduate as fellows. They receive a letter of recommendation from us that sort of certifies people's technical ability when it comes to certain digital challenges, how good is their English, and many other things. This is just the start.
And what I'm personally getting very excited about nowadays is that, because we have all of this data on these people, we can then much more accurately also support companies and tell them, based on these, let's say, successful talents who have come over, we can use those fingerprints of data, so to speak, to actually help you find more of these originally underrepresented folks.
GEORGIE FROST: Again, the moral case is there, but the business argument. If you're a company, how do you go global unless through your social startup it seems? 'Cause it's a lot of work involved in that, and I haven't even touched on language barriers.
JOHANN HARNOSS: Sure, so the good news is truly, while I'm very proud of what we've achieved at Imagine, it's clearly not the only way to access these talent pools. I mean, frankly, if you're looking for developers from Syrian background or want to give a hand and a chance to folks out of Afghanistan, there are not that many organizations that do that, but, increasingly, and this is well known, the world has become flat. There are lots of companies already doing active sourcing, as they call it, in specific countries.
And so you can meet interested candidates very easily through LinkedIn. So let me tell you how Douglas, increasingly not just a beauty retailer but also an e-commerce organization here out of Germany, how they did this for them. Initially, through us, but now also independently, what they're doing is they have fully digitalized their recruiting processes. So they do not require talent to show up physically for a final interview. And then, they also discovered that, in order to attract the best and maybe also retain them, you want to have better relocation packages.
So they introduced, and it wasn't easy for them originally, but they introduced a modest relocation support package, and that ultimately helped them not just attract but also retain the talents that they were looking for. And, ultimately, it helped them find talent from the Middle East, in this case from Pakistan, but also other countries, and they joined their digital teams. And, as you can imagine, as a beauty retailer in the last two years of COVID, digital really rose to the forefront. And, as I'm hearing, access to these talents has greatly helped them actually deliver on their pretty ambitious digital transformation roadmap.
GEORGIE FROST: We have great technology. Why do we need to move across physical borders?
JOHANN HARNOSS: Great question, and actually one that obviously we've also asked ourselves in the last two years. We will definitely see much more remote work and globally remote work, that's for sure, obviously coming from a very small base but clearly growing very, very fast. But, interestingly, it's not either/or. People get hired fully remotely, then they start working from their origin countries just for a couple of weeks.
Frankly, sometimes it's just necessary due to visa delays or just some operational challenges. But then, after a couple of weeks, it's not just the talents who would like to move mostly, also the companies. The classical operating model now these days is we give people two days, three days work from home. However, we also want to see them in the office, and that typically means that companies still do relocation, frankly, by my own estimates, more than ever, but they require people to move more closely to the headquarters or to the units where they're basically working at.
GEORGIE FROST: It sounds very expensive.
JOHANN HARNOSS: Let's think this through. So, in practice, the biggest cost, which maybe doesn't necessarily always directly show up in the accounting books, is the opportunity cost of not having these talents. Douglas was able to deliver on their e-commerce ambitions, roll out a platform that they didn't have before, in part thanks to the talents that they were able to get also on global talent markets.
GEORGIE FROST: Could you prove that they couldn't have done that without going global? Were the talents not available in Germany or surrounding countries in Europe?
JOHANN HARNOSS: Well, I mean, if you look at it simply empirically, then you see that they have done it, and for lots of good reasons and ultimately also equity, they're clearly paying these global talents the same as they're paying to the German ones. So there's not just some hidden advantage that they're leveraging when they're hiring global.
If you look at all available statistics for Europe, for UK, for the US, Canada, any country, then you see the typical vacancy rates. So, how many days do you have certain jobs open? In particular, for IT jobs, they're to be enormous. So there's clearly well established a huge talent scarcity, which ultimately means that certain companies, frankly, don't survive, and certainly that they don't grow as fast as they would like to. So that is the real cost. And, frankly, you got to weigh it against, let's say, relatively modest relocation costs, basically just a one-way airplane ticket.
We see companies paying maybe one or two, but, frankly, mostly the standard is one month initial rent. Now, look at visa and bureaucracy management costs. So they also have come down significantly, basically are quite manageable in particular when it comes to Europe, Canada, and still manageable for UK-based companies as well. Things are much harder for the US, for sure.
GEORGIE FROST: Why are they harder for the US for sure?
JOHANN HARNOSS: Well, the US is, as always, fascinating. So, on the one hand, if you look at the composition of their population, they're definitely an immigrant country, maybe the first original immigrant country, but what you read in the headlines is largely true. There are huge administrative issues when it comes to the Green Card process.
The US has a huge range, even confusing jungle of skilled visa categories. Many of these categories tend to be volume capped. There's a lottery. There's a high degree of unpredictability. Lots of lawyers involved as a result. Easily lots of costs involved. And, hence, trying to relocate a global talent that has not been working for your company is just prohibitively complex and expensive.
GEORGIE FROST: What will need to be done to make that much easier?
JOHANN HARNOSS: Lots of wise minds are thinking about this every day and, frankly, just spending a fraction of my time on the US. But, to some extent what the UK is doing right now with visa that are linked to universities, that can be an inspiration. I would certainly not suggest to just copy/paste what is currently happening more broadly on the immigration and visa front in the UK, but, nevertheless, it would be very a easy fix to simply say, we, as the US, we already have lots of international students coming into our world-renowned universities.
Let's define certain programs, such that certain categories of these international students, maybe in more digital or technology fields, can stay under certain conditions. I think that would be very easy, could be easily limited to so-called highly skilled talents. Let me make a side note. Not because I would particularly care about highly skilled talents. I think, from a human and moral case, we should care about the contributions of all human beings that they're able to make. But, nevertheless, from a political point of view, I think what I'm just outlining would be quite easily sellable in theory, but let's admit it hasn't happened yet. And so I think the topic is extremely polarized in the US right now to the extent where I, as an amateur political observer of the United States, I'm also skeptical that there can be any agreement between the two sides.
GEORGIE FROST: I'm wondering more broadly across the globe, not just the UK, not just Europe, not just the US, but across the globe. We are witnessing perhaps nations becoming more insular, certainly in this current climate. Are we witnessing a reversing or indeed a reshaping of decades of what seems unrestrained globalization? You speak about the practical difficulties of bringing global talent over, but there's also political. You mentioned political difficulties in giving, quote unquote, local jobs to people from abroad.
JOHANN HARNOSS: So the topic itself in particular of the freer movement of people has enormous tailwinds, and they come simply from the fact that the younger generations tend to be generally much more liberal even than I am, much more inviting towards more individualistic lifestyle choices, and, ultimately, they're also much more friendly towards more open immigration policies.
It is not clear that what we're seeing right now on the political domain is entirely reflective of the preferences of today's voters on average and certainly of the younger generations. And you can see this over the last 50 years of very good long-run data for the United States, but that also tends to hold more broadly globally. So that is a massive tailwind.
Frankly, in these times of high inflation and low growth, our societies all need a certain boost, not just a boost of growth but one of new, fresh ideas and innovation. Again, immigration can help here. And then, finally, except for the US and China that are indeed sort of closing off to the global flow of talent, you actually see many other countries, Middle East in particular, Europe, you can argue also the UK, go the opposite direction.
And even countries traditionally seen as more closed, like Japan, are doing some intensive soul-searching and are certainly also slowly but surely opening up to foreign talent simply out of pure necessity.
GEORGIE FROST: What do you think the wider implications of what you're witnessing with this two-speed world, if we can call it that, will be?
JOHANN HARNOSS: Ah, that's a great question. Maybe one that we should explore in future research. The idea that the world is becoming ultimately also a more peaceful place through the exchange of goods and services and through freer flows of people, even though it has been challenged now, still has some merit.
Even if the US and China are making it harder and harder for so-called expat talent or people to move there permanently, I think it will be very, very important that these countries both independently remain open towards, let's say, temporary flows, student exchanges, and ultimately also tourism, if we take the very broad view, right? Migration is much more than just workers relocating permanently. If you accept that as a premise, that we are in a two-speed world and we will remain in it, then there's an enormous opportunity for the UK, for Europe, and for many other countries to catch up in a race for the best talents globally that traditionally have gone to the US and increasingly also to China in the last decade or so.
And if you think about these debates about the future of AI, artificial intelligence, about semiconductors, and many of these high stakes technologies, they require a lot of capital but also a lot of latent human knowledge and ingenuity. You know, it might seem pretty obvious to state that, but that knowledge isn't codified in books, or not just. It actually resides in people. And so, if the UK, Europe, Middle East, and many other Asian countries provide much better framework conditions for those folks to join them, then there's at least some hope that we can catch the pretty massive advantage that China and the US have in those domains.
GEORGIE FROST: We've focused on the positives, obviously for individuals, for companies, and for those countries where those companies are based, but I want to perhaps zoom out and look at the countries where these talents are coming from. Now, we've mentioned Syria. We've mentioned Afghanistan. There are, of course, others.
What does this do for those individual countries? Because presumably you are taking the best of the best out of we've mentioned two troubled countries. There's a worry about a brain drain. Does this do much for social mobility if you're just creaming off the top? Is there perhaps arguably a better way to do that? Look to move businesses to those countries instead.
JOHANN HARNOSS: Absolutely, I mean, helping talents move out of certain places into others is one solution but not the overall solution that those origin countries need. And while it's life-changing for those migrants, it, in the very short term, leaves those origin countries actually worse off, but very, very quickly, there are lots of, let's say, ripple effects that, taken together, and this is well established, actually lead those origin countries to be also net benefiters.
So first is basically those migrants send back cash. It's called remittances. This isn't just some trickling. This is actually a gigantic river. And if you add all of these remittance flows up together, they're much higher than the ODA, the Official Development Assistance, as it's called technically, all of these funds being sent from the so-called rich north to those so-called developing countries.
So that capital flow alone is hugely beneficial, and not just because it's coming to those origin countries, but actually very often those flows actually benefit women and girls' education more broadly because they go directly into the families and hence have very positive effects for so-called human capital acquisition in developing countries. This can be shown.
Then, second, if you have folks that have acquired some education, if you have them move out of a country, they actually act as success stories and examples that education can be worth it. And, again, this isn't just anecdotal. Other researchers have looked at it. And so there are, again, net effects, right? So, to make it in numbers, you see one person moving, there might be maybe two or three others being inspired to actually also acquire more education. Not all of them make it and not all of them ultimately move, and, as a result, you actually have a net increase in the human capital in these countries.
GEORGIE FROST: Earlier on in the podcast, you mentioned about WhatsApp. What does it mean to build a global product, apart from having a team from across the globe? And, therefore, could you give me a blueprint for a company finally to go global?
JOHANN HARNOSS: So, indeed, we have a blueprint. In fact, we have an entire C-level agenda for the topic. So, basically, two things to it. First, we looked at the stage of adoption, of this topic of global diversity and the thriving of global teams across lots of countries and also lots of industries. And what we found, not too surprisingly, is that there are many companies that still struggle with even making the first steps.
But obviously, and in particular in the startup scene, there are lots of companies for which everything that we're discussing here is basically yesterday's news. They're doing it since day one. What explains this gap? And I think there's a cultural gap and basically just an execution gap. The cultural gap basically means we see that companies that are led by executives who are open to this potential and, frankly, ultimately believe lots of the science that we see on this topic, that they also tend to lead companies that are more open to towards globally diverse talents. Ultimately, it starts with very hard-hitting questions on your own companies and corporate culture.
What's your fundamental belief? Is global diversity truly value-creating, or is it just, you know, the fad of the hour or something that you have to do in order to please certain stakeholder demographics? So that's more the cultural aspect that ultimately drives how much strategic importance you are giving to that topic. Because, let's admit it, there are many other things executives rightfully have to worry about, so why also take an active stance on that topic of global diversity?
We see that those companies that then actually see it as a lever to grow and a strategic one, that they then basically execute on a certain playbook that we've defined. And we differentiate between a talent play, there's an ecosystem play, there's an innovation play, and a purpose play ultimately. The talent play basically means, do you have fully digital recruiting and onboarding processes? If you don't have that, then, ultimately, you will fail right from the start. So there are, let's say, very practical process topics that, if you solve them, and, frankly, it is not too hard to solve for them, you can already make a difference when it comes to the talent side.
So, on the innovation side, what you obviously want to do is then, when you have the diversity, that you bring out the best in those people. Frankly, managing a globally diverse team is not easy. And so, very practically speaking, I've seen one pattern of success, and that is obviously you don't want to and maybe you don't need to start bringing global talent in everywhere in your company.
So, very intuitively speaking, you want to start where you see the biggest bang for the buck, clearly, in particular if you're just motivated by the business case. And so what we see is that companies first start with their digital or their innovation or R&D teams, so, basically, those teams where you truly see a huge payoff from the added creativity that these talents can bring.
And you can either do this by integrating them directly into your existing teams, or you form smaller digital hubs or innovation hubs or R&D hubs. And so you basically create a smaller environment that attracts those global talents, and, frankly, also lots of folks who speak English, speak it fluently, and would like to work together in these types of environments. And so you start small from that base, and once you're comfortable there, once you've seen the effects of it and the business case, then you can start slowly scaling throughout the organization.
GEORGIE FROST: Johann, thank you so much for your time and to you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: Global health inequity is rising. Climate change, migration, and COVID have exacerbated longstanding problems, not just between countries, but within them. If the causes are manmade, the solutions must be, too. Business, including the global pharmaceutical industry, not only has a responsibility in promoting health equity, it has a big financial interest to do so as well. I'm Georgie Frost. This is The So What from BCG.
JOHANNA BENESTY: Health equity is not about charity anymore. It's not philanthropy, it's a necessity for us to continue to live the lives that we want to live. Just because our economies are so interconnected, we need all of the people to be able to fully live their life to their full potential to contribute to the economy.
GEORGIE: Today, I'm talking to Johanna Benesty, global sector lead at BCG for global health.
JOHANNA: So just to frame it, we're talking of inequities between countries like high-income countries, low-income countries. And also inequities between groups in a given country.
That's even for a, it's funny if you think of it, but the way we classify some of those diseases, we have a category that's called neglected tropical diseases. So it tells you a lot about the fact that some are neglected. So I can give you some examples of that complexity. When we talk about fragmentation, for instance, the first one. If you think of Africa. People often think of Africa as one big homogeneous market. But in fact, it's many different countries with many different regulations and different distributor networks and different health system structures and different languages.
And so if you want to address Africa, in fact, you really have to address 54 different countries and understand 54 different situations. And so that has a sort of transaction cost that you don't have when you address larger or more homogenous markets. The second is really the experience or the expertise because addressing those markets is quite different from the general markets like between the laboratory, where the product is conceived and the patient who will actually use the product, there are many, many steps needed that manufacturers, regulators, CMOs, distributors, etc., will have to work on to ensure the supply. That's one thing.
But there are also many, many steps that health care professionals, patients, implementers will have to work on and ensure so that there is demand for that product. So working with many actors on the supply side and many actors on the demand side. And that is a very specific expertise for those particular markets. That's why in the middle of this chain, you have international organizations helping.
The first one that comes to mind is Unitaid. What Unitaid does, because I think it's a good example of how to address these kind of challenges is that they identify innovative products that would help accelerate progress to some of the disease and the epidemics that they're tackling. Like tuberculosis, HIV, malaria. So they identify those innovations and they work with their partners to fund actions to remove those barriers to access one after the other.
And removing that means for instance, bringing the scientific evidence that you would need to write the right guidance. Forecast, developing forecast to encourage manufacturers, to set up the right manufacturing capacities; supporting the development of operational guidelines, to make sure that there will be implementation. It could be agreements with generic players, etc. And a number of things that are very diverse along this chain, just to name a few.
GEORGIE: But this is more than just access to medicine because you can put drugs into a country, but if you don't have the professionals there and the education to know how to use those, to implement those then, it's not useless, but you're not going to get the full benefit.
JOHANNA: Absolutely. So that's a super good point. So if you realize that for instance,
Let me take an example, simple one. If someone has HIV in a high-income setting, you would go to a specialist doctor that would look at what HIV type you have and define the exact cocktail drug that you need to better fit your specific disease and have the right treatment for you. If we were to do that in low resource settings, where we don't have the same ratio of health care professionals having 15 years of training in infectology for each individual, then the wait lines would be so long that you would never get the treatment.
So the thing that I mentioned before when I said like over 15 years, we've managed to put so many people on treatment on HIV, it was a combination of three things. It was working on the price and introducing generics. That's one. It was standardizing the treatment. So that in fact, in low resource settings, there is a standard first line course that you get. The treatment protocol has been simplified so that we could scale up more easily. So a health care professional will say, if you have that disease, then this is the treatment that you get immediately. You wouldn't have to be referred to a super specialized doctor.
And the third thing is the fixed-dose combination. It's all pills in one. Because that makes it much more convenient for the patient to take. So you see it's a change in the protocol, it's a change in the price and the full manufacturing setup, and it's a change in the product itself.
GEORGIE: How do you do that? How do you bake that into your design of a product? Who do you need to talk to? How do all the parts of this jigsaw need to fit together?
JOHANNA: It's clearly a part that is very difficult because you need to get close to the end users. Design thinking and all of those theories that we're using, you can apply that to pharma in a way. So who are the end users? The end users are going to be the patient. Are going to be the health care workers around that patient. The patient you have to take into account that we might be speaking of someone who has other conditions. Someone who is immunosuppressed for instance.
So think of who is going to use that product and make sure that you have the clinical trials and that you have a product that works for those specific groups. Then the other thing you need to think of is how is that person going to use the product? For instance, when we were doing focus groups in Uganda, people were telling us I'm not taking my medicines because I have to take them at noon. And it means I have to take them in front of my colleagues. If I do that, it means that I'm disclosing my status to people around me. And it's not something that I'm willing to do. I don't want to have that conversation.
You've had examples of people, of children, for instance, having to take drugs for multidrug resistant tuberculosis. A handful of pills that they have to swallow every morning. Well, kids don't swallow every morning handful of pills, that's just a nightmare. It doesn't happen. So you need this dissolvable formulations. So you need to fix those combinations. You need to rethink all of that to make sure that the people who need to take that product will take it.
So a number of things in the end-user perspective, then you also have the health care practitioner perspective because sometimes it's going to be a remote setting. It's going to be a mobile setting for instance. We've had that in high-income countries quite a lot that if you want to reach specific groups or populations, you can't be sitting in your super sophisticated lab and wait for people to come to you. It's actually better to be in the mobile clinic or something. But that means that the equipment that you need to conduct those tests have to be different.
Think of the COVID self-test that we have right now. It's much more convenient to be able to do it at home than to have to book an appointment to a lab or stand in the line in the lab.
GEORGIE: What's in it for every part? And let's start with a big global pharma company. What's in it for them to put money and investment into research and development, perhaps, into medicines that really a high-income country doesn't need?
JOHANNA: The people who don't have access to health medicines in the future are in new markets. People who don't have access to health products right now are a new market for those pharmaceutical companies. Now the question is how do you make that market a sustainable business model? And how do you make it profitable to the level of profit that you're willing to accept? Something like this.
I think a while ago, people were very much in the idea that access was a matter of charity with the philanthropy. And so the main actions that pharmaceutical companies would be willing to go for would be donations for instance, or trying to reduce the prices. And that would be the focus of what they would do. Experience from improving access in low- middle-income countries and around COVID has shown that it's not just that. There's much more that you can do. Why would you want to do it?
You've seen over Christmas, that people were panicked because there would be shortage of the products that they would want to buy for Christmas. Why that? Because of the disruptions in supply chain, Why that? Because in some parts of the world, people couldn't be at work the way that we expected them to be. And that's because they were sick and that because they didn't have access to the products that would help them to not be sick.
So just because of the level of interconnections between our economies, we're all in this together. And we have to all be super healthy and be able to live our healthy lives, to contribute to that economy. So that's a necessity for the lives that we want to live and for the sort of level of comfort that we are seeking for. If that was not an argument, a sufficient argument, I can say it's also an opportunity from a commercial standpoint. Because it's a new market, an additional market that that companies can extend.
And there is a lot of appetite from private sector, public sector, to understand where we're losing patients so that we can have actions that are triggered to really address those specific points. So is it because the diagnostic test was not available? Is it because the patients are too far from the center? Is it because the treatment was delayed? Is it because the treatment is so inconvenient that people don't adhere to it? With the data, you can start understanding that, and then you can address it specifically.
Whether it's going to be by commercial action, education action, changes in your product, changes in the regulatory space, a number of things, but that will help you unlock new markets in the end and expand access to health products for patients. So more patients being on the treatment and having access to the products they need.
GEORGIE: What role do public bodies, do governments, do global health care bodies have to play in all of this? Because it brings to mind the discussions around COVID and a fourth vaccine when there are countries in the world that haven't even received theirs. And you spoke about the fact that we are so interconnected, does the messaging need to be better, I guess, from governments and global bodies as to why it is so important to sort out health inequality?
JOHANNA: Yes, and I think the message is shifting from a question of fairness and fairness speaks to charity and philanthropy, to a question of really necessity.
So it's clear from an economic standpoint, it's a message that needs to be conveyed more and more strongly, in addition to the fairness message that is still very present. And that's why conversations are shifting. When you talk about health security now, it's shifting to ministries of finance, that economic sphere, and not just development agencies.
GEORGIE: You spoke about health inequity between countries, but I think it's fair to say that exists within countries and even within high-income countries. And that's, to my mind, been exposed by COVID having that disproportionately high impact on certain racial and ethnic groups, those on low incomes, and the vulnerable.
JOHANNA: Absolutely. I think we've seen that. And it it's something that is becoming a more and more hot topic these days. I think we've heard it a lot about like geography in the past, but now, it's becoming really obvious because we have data to demonstrate it about some minorities or ethnic groups that have more limited access to some products or receive different services and health services than others.
There's a conversation also about gender and how women don't have the same access to health products than men. It's been exposed by COVID, I think, because we had a lot of data and it was a hot topic and just the access and the coverage rate that we were reaching for was really top of mind for everybody and we were all looking at those numbers. What I found super interesting is that it's been the core of what global health institutions have been working on.
And when I say global health institutions, I mean international institutions like the World Health Organization, like the Global Fund Philanthropies, like the Gates Foundation, like a number of other foundations implementers on the ground countries, etc.
GEORGIE: In your experience and your role, and speaking to all these different players in this ecosystem, as you call it, what are the big stumbling blocks to finding a solution?
JOHANNA: I think first, we've made a lot of progress. HIV for instance. There was a 15-years gap between the moment where we had ART in high-income countries and the moment where the products were brought in low- middle-income countries and started bending the curve: 15 years. If you think of the COVID vaccines, it was just weeks between the moment where we had the first vaccines in high-income countries. And then we got to the vaccines in low- middle-income countries. Of course, the coverage rates are different and we're not there and there's a lot of progress to be made.
There are millions of things that you need to do at the same time. And that's why it's a bit daunting for a single organization to try and address that. Whether it's a pharmaceutical company or whether it's a government, because it's really an ecosystem play.
If you're a single company to trying to address it, it feels like wack-a-mole a bit, you feel that you are alone trying to fight against all of those things. Where in fact, it's more a Velcro strap that you try to unscrunch. And you need millions of things to work at the same time, you need to work on the product, on the price, on the regulatory aspect, on the adaptation, at country level, on the supply chain. You need to work on culture. You need to work on all of those things.
GEORGIE:
JOHANNA: I wish I could tell you how long it's going to take. And I wish I could tell you that it's going to be resolved. It's a long journey. There are targets to close the gap on well-known pandemics on TB, HIV, malaria, maternal and child health immunizations, which are like the usual suspects that the community has been working on for years. That would already be fantastic. But things like COVID and things that happen are putting a setback to these things. And then there is another wave of conditions that we need to address.
So if you're thinking of oncology, for instance. The prevalence of cancers in low-income countries in significant as well. And in high-income countries, in a number of places, but we need to work significantly on understanding where we're missing patients and what is the bottleneck and solving that by combining a new vision of the product.
Well, so we need to get the science right, and making all the progress that that is in their way. That's one. Once we know how to do that, we need to get the protocols right to fit the patient needs and to fit the needs of the health systems in those places, and then make it affordable and accessible to the people who really need it.
GEORGIE: Very diplomatic. You said there that COVID has held us back in some regards, but do you think it has spurred pharma, indeed, the whole global health system, governments, the public to pursue actionable efforts towards reversing health inequity?
JOHANNA: At least in the conversations that I'm part of, I feel a different momentum than a few years ago. It's a combination of raising awareness on equity in general, and the fact that there are different groups who have access to equity at work, equity in health, equity in education, a number of things. So raising awareness that we need to solve the inequities in general, in our society. That's one.
And then apply it to health and the impact that it has on the economy. I think that's the thing that COVID put spotlight on. And if you combine those things,
GEORGIE: Johanna, thank you so much. And thank you for listening. We'd love to know your thoughts to get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and lever rating wherever you found us? It helps other people find us too.
GEORGIE FROST: Imagine trying to stick to a shopping budget, but none of the goods in the supermarket have a price tag. or losing weight, but there's no information about portion size or nutrition on the food that you buy. How can you reduce what you can't measure? This has been the problem with reducing greenhouse gas emissions. They continue to climb and we haven't been able to accurately measure the climate impact of our actions. So does AI have the answer? I'm Georgie Frost. This is The So What From BCG.
DEXTER GALVIN: Over the next eight years we need to see climate solutions becoming "the thing." And if we don't see that transition then we're going to lose this battle. It's those technology companies, those winners in technology that are going to help us get where we need to go.
GEORGIE: I'm joined today by Dexter Galvin, global director of corporations at CDP, an international nonprofit organization that helps companies, cities, and regions disclose and manage their environmental impact. Joining Dexter is Charlotte Degot, global leader of CO2 AI Solution by BCG.
DEXTER: At CDP, we've been gathering data from companies for the past two decades, and we now have over 14,000 large corporations disclosing data to us every year. That's obviously a very significant challenge. It's a very significant technical challenge, in particular. And one of the things that brought us to BCG is that they have very strong capabilities in this space and a really powerful solution in CO2 AI. We've actually developed a new platform together called the Product Ecosystem platform which helps companies measure the life cycle impact of their carbon emissions across their product portfolio.
GEORGIE: Charlotte, Dexter has outlined there the problem with emissions being so difficult to measure but why are they so difficult to measure accurately? How far off do you think that some companies actually really are?
CHARLOTTE DEGOT:
So the data challenge to be able to collect all the data about all the activities that the company can perform to be able to access accurately a carbon footprint, is a massive challenge especially for large corporations and the corporations that have a big scope.
So emissions coming from their supply chain. Last year we did a survey with more than 1,000 corporations across the globe asking them their own assessment about the level of margin of error of their carbon footprint. And what they said themselves is that on average they think they have 30 to 40% margin of error on their measurement. So anything we can do to better measure more accurately, more granularly, is of course, more than welcome.
GEORGIE: Thirty to 40%, Dexter. And this is what companies are actually telling you. I imagine in some instances it's a lot higher than that. So is everything we've been reading so far has just been a load of rubbish?
DEXTER: Well, obviously I find that statistic a little bit depressing as the organization that's been gathering this data for 20 years. I think it is a reflective of reality though. I think there is a serious challenge of data accuracy. What we've seen at CDP is the evolution of reporting capabilities over time. So when companies start on this journey they understand how to manage their electricity bills. And then they start to understand how to turn that into carbon emissions data. And then they start to look at their own operations more broadly. And that takes a while, actually.
Some of the larger corporations that have been disclosing to us for a long time, they have emissions verification in place. So there'll be a lot of credibility in the data that they're reporting. But a lot of the companies, particularly in the supply chain that are just starting out on this journey, have really a long way to go to gather more accurate data. And that's the great thing about the sort of technical solutions that are coming into this space right now. Organizations like BCG have said, "OK, look, there's a problem here. Organizations are really struggling to gather this information. How are we going to help them?" Technology can really play a massive part of that puzzle and help to solve that problem.
GEORGIE: I want to get more into the technological solutions but you touch there on the supply chain. I mean, it's hard enough as a company to measure your own greenhouse gas emissions but then to factor in a supply chain. I mean, it must be nigh impossible.
DEXTER: Well, yeah, we often talk about this in terms of an iceberg. Imagine an iceberg, right? As an organization, you're accounting for your direct emissions. These are called Scope 1 and 2. They're quite geeky terms, but basically your direct and indirect emissions. And that's really only the tip of the iceberg.
GEORGIE: Charlotte, how were companies measuring it before? How involved was tech in those measurements?
CHARLOTTE: Very limited, close to zero until very recently. And that's part of the issue because as we were saying, it's a massive bucket especially the supply chain emissions. It's super complex to get access to the data. So it's a data issue. But if you don't have tools you end up in exile and you end up doing super big averages that gives you a first figure, which is good, right? It's a first step. And as Dexter was saying, it's a journey. So no shame in starting with something averaged. But it's important to get to a more accurate figure because otherwise there is no way you can really identify the right actions to put in place. And there is no way you will be able to measure the results of the actions you put in place.
GEORGIE: You touched there about the need to have accuracy to put the right measures in place, but surely ballpark figures would be good enough, would they not? I mean, who else benefits from accurate measuring? I'm asking you this, for you, just to explain to me for all the stakeholders involved, why accurate measuring is so vital?
DEXTER: At CDP, we represent over 590 institutional signatory investors. Some of the world's largest investors with $110 trillion of assets under management. So more than half of the world's invested capital is interested in this data.
CHARLOTTE: If I can add something about, it's not accuracy for accuracy, it's really accuracy or so to be able to drive action. And when you get into the details and you take precise examples of what can change, the accuracy value can be massive. If you take a wine and spirits company. Usually a big bucket of emission is coming from the glass they buy for the bottles.
If they just take an average number for the emissions of all the glass they buy, independent of the color of the glass, the country of origin, the supplier, the type of production they have for the glass, the recycling content in the glass itself, et cetera. They are going to end up with a super average number. If they go into the details the difference can be factor two or even more sometimes depending on those parameters. So it's really about identifying what are the drivers behind the carbon emissions to be able to identify where to act. And then of course, when you have done the action, being able to measure the progress.
GEORGIE: OK, Charlotte, this is where AI comes riding to the rescue, is it?
CHARLOTTE:
The second thing is once you've collected all this data and you can do a much better job in terms of accuracy of the calculation of emissions from the activity you have covered. The ultimate step is all the decision making support that artificial intelligence can enable. For example, enabling simulations of decisions about multiple scenarios and helping corporations make the right decisions for their trajectory in terms of net-zero roadmap. Doing some forecast of what is going to happen in the future, depending on what decisions they are making for their business and what abatement levers and actions they are implementing to reduce their carbon footprint.
And how does the full picture come together? And is it positive or negative? There is also the field of optimization, just directly using algorithms to recommend to users, employees, the best decisions to make. For example, in factories, just putting process parameters under control and helping reduce carbon emissions by making better decisions in day to day.
GEORGIE: Dexter, with your two decades of experience with this, how exciting is this a prospect? What's your assessment?
DEXTER: Yeah, I think this really improves the way companies are going to gather this information. We've always been of the belief at CDP that we need the companies to build the capabilities internally and start to understand how to gather this information and really understand where the impacts are across their organizations. So that that then drives emissions reductions. That's the reason we ask for these sort of disclosures every year. It's less about giving them fish and more about teaching them how to fish. But these tools are the fishing rod. It's really helpful and it helps speeding up the whole process for the company to really accurately identify where the emissions are in their organization.
GEORGIE: Charlotte, you did say there were big gaps in the data. How can AI fill those gaps? I mean, surely it's working on inaccurate numbers anyway. There's always going to be a margin of error until we can get much more accurate figures from source.
CHARLOTTE: Instead of keeping a gap because you don't have the data, it's better to identify first the wrong information because that also happens a lot today in systems and data-sharing, that they are wrong data that are shared. And artificial intelligence can spot and help improve the quality of the data that is shared or fill in the gaps, by doing some extrapolations, et cetera, et cetera. And because we are on a journey of identifying hot spots and improving the accuracy along the way, this is super important to avoid to leave just some gaps because we don't have data.
DEXTER: Yeah, I think filling in the gaps is pretty important because that then helps you understand the relative impact of different activities. So that's really important. I'm very cautious about us relying on emissions factors.
And as we start to gather more granular product level data around the world, that's when we can start really using AI to its full effect to say, "Actually, we thought a glass bottle was 20 grams of CO2. But actually, with all of this primary data that we've been able to put into the system over the years, we've actually identified that it's 22 and a half grams of CO2." And in fact, that might drive somebody else's decision to go, "I'm not going to use a glass bottle in this case I might use a carton." And so it can really, really drive meaningful emissions reductions activities on a product level, which can be super powerful.
GEORGIE: Dexter, getting the data is one thing but how we choose to act on that data is another in terms of the more holistic global target of reducing greenhouse gas emissions. Where do regulators and governments come in?
DEXTER: Regulation is absolutely critical. I'm a big supporter of the market taking action on this topic, of course. And it's one of the key MO's of CDP.
What companies are crying out for is clarity around the regulation that's coming in on this topic. When we were coming into the Paris negotiations, back in 2015, we set up our science-based targets initiative where companies are saying, "Yeah, we're willing to make this really ambitious science-based target that's going to reduce emissions in line with the needs of science." And then we were able to take that to the governments and go, "Listen, governments, all these big corporations are making commitments to reduce their emissions. Now you guys need to set really ambitious targets at Paris."
And so there's this virtuous loop, this feedback cycle which is really important. So yes, the corporate world and the financial markets can make significant advances, but they can only do so with regulatory certainty. Because without regulatory certainty, you can't make long-term investment decisions.
So we were looking at some of the emissions reductions activity disclosed by companies in China recently. Sixty percent of them had payback periods of less than a year. So you've got those quick wins early on, but then you have to start making significant capital investment. And that is a challenge without regulatory certainty. Without knowing that in a couple of years the carbon price is going to be this, or there's going to be taxation on this, or there's going to be a mandatory reporting requirement on this. So the two, the market mechanism and the regulatory environment are absolutely critical.
GEORGIE: Charlotte, before we end, let's go back to the technology and look to the future of AI. What does it look like in this space? When I talk to you in five, ten years time is this going to be absolutely 100% perfectly accurate? AI has saved the day.
CHARLOTTE:
And then if I look forward more to the next ten years et cetera, we could speak about, I think, for 30 minutes about potential ideas of what we can do. I mean, it's a data issue. It's a massive issue. Artificial intelligence has a lot of techniques that can help. For me, the angle is really driving action and acceleration of the action. And there are tons of things that can be done. Again from measuring better but also helping on the decision making. Doing some better recommendation on action, optimization on the ground of tons of things that can be better managed, leveraging a algorithm. Just a side note. That does not mean that we should not measure and track the emissions related to artificial intelligence itself.
DEXTER: I think this is critical.
We need to see that same transition in the climate space over the next eight years. So in a shorter amount of time we need to see climate solutions becoming "the thing." And if we don't see that transition then we're going to lose this battle. But I think it's there. And the great thing is it's those technology companies, those winners in technology that are going to help us get where we need to go. So we have to lean in on every possible solution in the market. And AI is one of the really key tools that we can lean on to help us in this transition to a better world.
GEORGIE: Dexter, Charlotte, thank you so much for talking to me and to you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you liked this podcast why not hit subscribe and leave a rating wherever you found us, it helps other people find us too.
GEORGIE FROST: Technological progress and automation is infiltrating and altering every facet of our lives and the lives of our children, and soon their children, and their children's children. But in many ways, education in the current system of learning hasn't moved on very far from Edwardian times. Is it time for new progressive era of education? But what would that look like? And where do values sit in this digital world? I'm Georgie Frost, and this is The So What From BCG.
LEILA HOTEIT: If we get this right, education would become the great equalizer, and it would lift up the whole of society.
GEORGIE: Today I'm talking to Dr. Leila Hoteit, a specialist in human capital topics and global lead of Boston Consulting Group's education, employment, and welfare sector.
LEILA: If you look at a drawing of education classrooms at universities centuries ago, and you look at universities or classrooms today, they look very similar. It's very much teacher-centric, people sitting in rows, and looking at the teacher, and listening to the teacher, so very much true. Now we see so much change happening very fast, led by technology, by other trends, and education has to innovate, has to catch up, and I think it is going to start to happen at a very fast pace.
GEORGIE: What will that look like? You said it needs to innovate, it needs to change, and it is strange that it's one of those areas in which it really hasn't, and yet it is so fundamentally important to communities, to society, to the world.
LEILA:
The second one is befriending technology. So technology is not the enemy. How do we befriend technology so that we can use it as a tool for equity and progress and we mitigate the risks that come with technology? And the third one is lifting each other up and working towards better social equity through education and learning.
GEORGIE: To achieve those three points then, the right skills, befriending technology, lifting each other up as you say, what levers do you think we need to activate?
LEILA: So if we think about the first point around making sure we armor ourselves with the right skills, when I think about education, it's key to prepare people to unlock their new potential. And when we talk about education or certainly when I talk about education, I'm not thinking classroom and campuses. I'm thinking very broadly about education and learning inside and outside the walls of education institutions and across all age groups, children, but also adults. It's all about life-long learning today.
GEORGIE: How do those two things marry up? When you talk about the way you think about education inside classrooms and campuses and outside, do you see there's a time when there is no space for classroom, it's all going to be done remotely outside?
LEILA:
GEORGIE: So you've spoken about where learning happens, but what about the type of learning? So much focus now is there on coding and technical skills. But what about the so-called softer skills, the values, those sorts of things that we tend not to emphasize so much with education and yet, I mean, maybe I'm wrong here, but seem to be more important in society than ever?
LEILA: Absolutely. So when we talk about the future of work and the future skills that you will need to be able to work in the future, you're hearing a lot about STEM skills, you hear a lot about the importance of teaching coding and things of the sort. And while it is important to teach technical skills, for our kids to have technical skills, with technological advancement, what we're witnessing is, by the time our kids graduate, the skills that they've learned are already obsolete.
On top of that, what you see is that most fields of work are becoming increasingly intersectional. So there's no domain of knowledge that is standalone today.
And if I take just a single example, the Stanford marshmallow experiment. So in this study, a child is given a choice between either one small but immediate marshmallow that he or she can have now immediately, or two marshmallow rewards if they wait for a certain period. So this is all about a skill called delayed gratification. Are you able to wait to get more? And what was found is that though the children who are able to wait for a longer period tended to have much better life outcome. So whether on educational attainment, but even in other life measures.
So how do you make sure that you teach at a very early stage in life such skills such as delayed gratification?
Another example when we talk about social-emotional skills, if you look at existing jobs today, like the job of being a doctor. Today, the physician is supposed to be the single source of truth on everything to do with your body, with your health, and that's what makes a good doctor mostly. It's about how good he or she is in terms of really understanding human biology and all things to do with health care. But tomorrow, Gates was talking just the other day, that you'll have an electronic tattoo on you that will be capturing all of your health care data 24/7, and you'll have the machines telling you all the diagnostics.
So as a patient, you'll be extremely well-informed. And the doctor then, the good doctor, will become the one who has the emotional intelligence to be your thought partner, your emotional partner, and make decisions with you about your health.
What we see is that these skills are becoming incredibly important to be successful in life and to contribute to society. We look at employers, and they're looking for workers who have very strong skills such as resilience and professionalism, and they often report shortage of such skills more than they do on technical skills. On the other hand, when you see employees are also looking for more empathetic and more collaborative employers, and now you see a whole great resignations phenomenon because of that exactly.
GEORGIE: I want to go back to the marshmallow experiment because I'm not sure how much it was taken into consideration the background of those children, the environment they grew up in, the support of their parents, their education level before they did the experiment. But do you think that the current framework for our education system support skills that perhaps aren't technical but no less important in our future?
LEILA: This is a very good question, Georgie, and it's about the nature versus nurture debate. When I was younger I used to think about school choices for my kids, and I used to think I really want a school that's very strong in mathematics, very strong in science, and in languages, and everything, all these core subjects and literacy where they have to be very academically rigorous. And now I really think very differently about the choice of school and what's important in terms of the skills that the education institution has to incorporate.
Do I think in general we do enough even from the youngest age in terms of parenting techniques? But then in education institutions, kindergarten, and schools, do we do enough? No, but certainly good schools are evolving to really incorporate these skills and in their curricula.
GEORGIE: Where then do values and principles sit when we're progressing so much, when automation is inevitably going to come into education? You're going to have what you were talking about earlier, perhaps not that classroom structure in which these values and principles can develop. So how do these sit do you think in the future of education?
LEILA: I think they need to be incorporated across the curriculum. So I'll give you a simple example. If it's a language class to very young kids and we're reading to them and discussing with them "Little Red Riding Hood," a simple story like "Little Red Riding Hood." But this time, instead of just telling the story and it's black and white, and there's a good person and a bad person in the story, the teacher would try to show it or to discuss from the perspective of the wolf and try to ask the students why the wolf might have acted the way that he has.
Maybe he was hungry. And that if he was hungry, what would you do instead? What should the little girl do instead? maybe she should just get him some food and he would have reacted differently. It might sound like a very funny example, but this teaches kids critical thinking. It teaches them empathy. It teaches them also how to control emotions to think of better solutions, and we can see in the world today how important these skills are for a better world.
GEORGIE: How would you measure that? Is it important to measure it?
LEILA: So measurement is extremely important. And I remember in a class, in an MBA class, one of the first things we were taught, was you get what you measure. So if you really want to get an outcome in education or you get an outcome at work, you have to be able to measure it. So being able to measure these skills also gives a signal that these skills are important. And you look at all the organizations that do standardized tests, international standardized tests, like PISA. They are trying more and more to measure skills like collaboration, so collaborative problem solving, creative thinking, etc.
GEORGIE: Where did you go to school? I'm talking secondary and primary school.
LEILA: I grew up in Lebanon, during the war, and then I left Lebanon at 18.
GEORGIE: Very different to me. I was born and raised in Norway before moving to school in the UK. I ask you this because in conversations around values and principles, inevitably, the future of education will turn to a universal framework for education. Is it possible to even have it? Is it possible to have it when we have such differing values and principles?
LEILA: There's a lot of organizations that have tried, have put a lot of effort into trying to develop a single universal framework for skills.
GEORGIE: What would be the benefit of that though? What is the benefit of having a universal framework? Before we even look into whether it's possible, why would it be a good idea?
LEILA: The benefit of having a universal framework, when you think about the global citizens, when you think also about machines and the need to provide the machines with our set of values, so that they can make the decisions that we want them to make as humans, we need to all agree on what are the right values.
So these are just at a very quick, very high level of important benefits of having a single universal framework for skills. And so organizations like the World Economic Forum, like OECD have tried to do that and to standardize. And to some extent, you can try to converge and agree on some specific set of skills. But there are some where you would start to disagree at the cultural level on very basic things where you'll be quite surprised.
I'll take one example. If you ask me about one of the key skills that I would like my children to have, that would be, and that most people would like their children to have, that will be curiosity. So you can explore, and investigate, and learn. And then when you look at certain cultures, like Japan, for example, they ascribe less value than we would to unstructured curiosity, and thy would put much more respect and much more learning from the experience of the elderly. So it's very difficult to get to a single universal framework of skills and of values because there are a lot of cultural differences.
GEORGIE: I'm actually listening to both of those points. Both have great merit, respecting your elders and being curious. It would be a shame to try, and then do we have to prune some things out to have a universal system that actually...? Could we work in another way, a hybrid system that we can still have some kind of universality, but we're still keeping those amazing qualities that each culture and society brings?
LEILA: We should definitely try to work to converge, and respect, and celebrate the differences and incorporate that into what makes a global citizen. At the end of the day, a global citizen is one that also is very in tune with cultural differences and very tolerant of cultural differences. Where we need some form of decisions, if you will, are when you come to, for example, the need to control technology as I was saying.
So I'll give you a simple example. When you think of the example of the trolley problem, which I'm sure a lot of us are familiar with. But instead of trolley, you think about the driverless car. And a simple example, if you think this car can either hit a child or an elderly, what would you choose if you could code the car? The Japanese people might decide that the elderly can then teach and share their experience with many more, every old person with a hundred children. Whereas in other cultures you might think, he or she has his whole life ahead of him. So in this situation, we would need to try to come up and converge to a set of values because we need to control technology before technology controls us.
GEORGIE: You said at the start, befriend technology for progress and mitigating its risks. Tell me more about that.
LEILA: Let me start with the befriending part that you mentioned. Technology has and continues to solve many societal problems. It's a key enabler, if you want, to deliver innovative education. So one example we're seeing is more of the use of artificial intelligence to deliver personalized learning, learning that is customized to the need of every single student. And today we are even talking about hyper personalization in education where you're really personalizing to every single aspect of a child.
GEORGIE: How does that work? What would that look like? Children are developing and changing all the time. It's the beautiful nature of childhood. You'd have AI that can adapt with that child?
LEILA: Yes, children change, but technology is also very adaptive. So whether it's AI, and also you see genetics, brain science, technology more generally, all of these fields are intersecting and will be adding a lot of value to education. So a simple example, there's a lot of research and scientific experiments to support autistic children in learning better by measuring their attention through various devices that they place to measure how the eyes are focusing or not.
This same technology can be used with a larger population to see whether the individual is attentive, whether they require additional support to grasp a concept, to measure the cognitive load and see how much that child can understand at this point in time, and what factors are affecting his or her absorption of learning. So the number of hours of sleep, etc. And you can imagine optimizing all of that and mapping content that he or she is learning to cognitive development levels.
Genetic testing can also be used to see, to understand to explore the student genetics and understand how best they learn. So you can imagine how science can go extremely far to create this super child, super human. Now how much of that do we want is also a good question. Does this become the equivalent of the performance enhancing drugs in sports? Where do we draw the line? Those are all ethical questions that need to be posed and agreed on universally by everyone so that education moves in the right direction.
GEORGIE: Glad you mentioned that because I was going to talk about, as a parent yourself, just looking at the risks at the moment, that being online and being in a digital world for children, pose--online bullying, and we can go very dark and very deep-- troubling for a parent? How can you mitigate the risks? It's one of the eternal questions, isn't it? How can we get the most out of technology and the advancements? Because they've transformed our lives in many wonderful ways, but there's always hanging, as I said, those dark, deep risks.
LEILA: There are indeed these dark, deep risks, and we need to change our education systems in a way that teaches kids how to navigate technology, how to protect them from online bullying, from inappropriate content, from digital addiction. There's all these digital competencies that our schools are starting to teach the kids. They tell them how to behave online, what to share, what not to share online, etc. The solution cannot be simply on the children obviously. Parents have to play a role but also other actors. There's currently a generational digital divide where parents don't know how to educate their kids on safe practices regarding the use of technology because they grew up in a very different world. And beyond parents, there's a whole ecosystem that needs to be activated to protect children online, including the tech companies, law enforcement, child support services, the schools obviously, and international agencies. So this is a very urgent and critical issue that needs to be addressed head on.
GEORGIE: I know that people get kind of nervous when we talk about business involvement in schools and education, but do you see a positive role?
LEILA: I think the role of businesses is critical in making sure that education evolves in the right direction. Innovative for sure, but also preserving the right values. So whether it is to make sure that children online are kept safe, the role of business is extremely important there, whether it is to make sure that we don't stretch too far when we think about augmented intelligence, etc., that we are still keeping our humanity and are doing the right things, whether we are developing education in the metaverse, and we need to make sure that the developers there and the businesses there are working closely with educators to ensure that the education that's going to happen in the metaverse is the right one. These are just three examples of where we need to make sure businesses play the right role to ensure education evolves in the right direction.
GEORGIE: Before we end the podcast, I want to go back to the start if that's all right, when you spoke about what we can do to thrive, and your third point, and I like this because I think it's a quite nice, hopefully uplifting, end to the podcast when we've spoken about perhaps some of the troubles that lay ahead, but you said it could lift each other up working towards a better social equity. Talk to me about that.
LEILA: So this is where education can be a great equalizer if you may, and technology is a great enabler to this. When we think about access to internet or access to data, it's now viewed as a basic human right. So when we look at refugees, for example, and we think about access to water, access to food, making sure that they are safe, now we also say access to data and access to internet is a basic human right. Because with access to data, you have access to education, to knowledge, but also data to jobs, to health care, to social services. And we recently worked on a paper on bridging the digital divide in the US. Basically, what the conclusion is, with full digital connectivity and permanently closing the digital divide, this is critical not only to achieve educational equity, but also to accomplishing all sorts of endeavors to promote equitable, economic, and social opportunities.
GEORGIE: What a lovely point to end on. Leila, thank you so much. And to you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. If you like this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: Not too long ago, supply chains were relatively straightforward, but the world's changed. So how do you lead your company to success in the face of rising inflation, global shortages, and conflict in Europe? By putting suppliers at the core of your business and by making procurement a leadership imperative. I'm Georgie Frost, and this is "The So What from BCG."
DANIEL WEISE: It's probably what every CEO dreams of. You will actually increase your sales and profitability, and you will actually have cost savings available to refuel your innovation pipelines once again and invest the money.
GEORGIE FROST: Today I'm talking to Daniel Weise, global leader of Boston Consulting Group's procurement business line and author of "Profit from the Source: Transforming Your Business by Putting Suppliers at the Core."
DANIEL WEISE: For the last 50 years, the Iron Curtain fell down. We had WTO supporting us with free trade. We can go to China. We have a billion of people helping us to produce stuff. All of this was available. There was no scarcity in supply, and it was always getting cheaper as well. It was paradise.
Now, the world has changed. We have a pandemic. We have a war in Europe. The US-China trade conflict, and many other things. And I think the new Iron Curtains we are seeing, they will not actually go away again. They will last. I don't think there's a way back to source in Russia quite soon. We will see how the US and China will go on.
The chip supply, for example, is also scarce, amplified by the Ukrainian situation. Last year, 10 million cars did not get produced. This year, we thought it was five, but it's going to amplify because there's neon gas shortage out of Ukraine. So potentially, another 10 million cars don't get produced.
That's a complete paradigm shift.
GEORGIE FROST: So basically for the past decades, companies have been resting on their laurels, and they find themselves very quickly, perhaps over the past two or three years even, with a situation that is incredibly difficult. What do you do as a company when faced with such a level of uncertainty? And bear in mind, this has not been your priority largely in the past.
DANIEL WEISE: I think, and that is what we see. You have to dramatically rethink. You also cannot afford to make it hypothetically or theoretically. There's no benefit in chasing black swans. We don't know what will happen, but there are those gray rhinos.
We know from the Spanish Flu that the pandemic is not happening for the first time. We cannot prepare for everything, but we need to have a fact base ready that if something happens, you know what to be doing and potentially can even take action before.
And we see some companies doing this better than others. There are companies who are still producing. There are companies who can deliver goods in time. And then, of course, there are others where they are actually losing market share because they have not invested in preparing their supply chains. And we see this a lot.
GEORGIE FROST: We'll get more into the role of the CEO shortly, but I just want to know, and you were right. I was a bit unfair by implying that every company have been resting on their laurels for decades. I don't think that's the case. In fact, it's definitely not the case. What are the benefits of the companies that have prioritized procurement?
DANIEL WEISE: There's, for example, a simple study with it. We took a look at the S&P 500 in the US, and out of the top 150 companies, one-third has actually a chief procurement officer on their board and/or part of the leadership team. That one-third actually outperformed the S&P 500 in the last 20 years by 134%. So that's some evidence.
When you take a look at certain industries, for example, in the tech space, where procurement is actually owning the innovation process, where a CPO becomes a CEO, take a look at Tim Cook following after Steven Jobs. Those are examples where you can see really benefits when people who are savvy about procurement and supply chain take actually an office and can lead a company to success.
GEORGIE FROST: And you know what I'm going to say. Correlation does not imply causation. So while that looks very good, what other evidence is there that actually by putting procurement first, as it were, that you will get the benefits, you'll reap the benefits?
DANIEL WEISE: There's another thing.
And I think in those times we live in, when, yes, there is inflation, you potentially can do still cost savings. This is not good enough anymore. We talk about multi-currency procurement, where we want to come to a place where we reduce CO2. And this only works when you work with your supply chain. We want to de-risk supply chains so we want to have the goods available you can produce. We want to have good quality and speed.
Think about a vaccine in Europe. If you have smart people thinking something through, you need still a home where you can manufacture that vaccine. That is what happened with BioNTech and Pfizer. That's procurement. And that is what we're arguing, that those times are over when you have a simple focus on getting something in for cheaper.
GEORGIE FROST: Is that where it's been just on cost-cutting?
DANIEL WEISE: I think cost-cutting is not anymore the paradigm of procurement. It is still important because we still need to finance innovation. Everyone will take a cost-cutting, good, accepted, but it's not good enough. We have to be completely different in thinking through, for example, where we want to make trade-offs.
GEORGIE FROST: I'm wondering about those companies that have prioritized procurements. Is it a certain type of companies that have, tech companies, perhaps where it matters more?
DANIEL WEISE: I think you're very right. Tech companies, probably, that cluster of, at least in our of thinking, companies which are more most advanced in procurement. I mean, it's not only rare that the CPO becomes CEO. That's the Apple example, but take a look at Dell and Apple and also Tesla. It is the supply chain and the procurement guys who own to a large extent the innovation engineering cycle. It is them who have a say in where to produce, what to do, and how to actually make those supply chains resilient.
And that's a difference to many other clusters. Take a look at automotive, for example. In automotive, engineers tell the procurement team what to do. Procurement team is tasked to get it in for a good price. But at the end of the day, that is not working out anymore because we don't have the full supply ready.
You're operating in scarcity. You're operating in inflation. And you have to actually achieve the sustainability targets, assuming you want to be leading in the sustainability piece. If you only have a cost focus like in some of those industries, this will not fly. And I think there's a lot to learn from actually the tech cluster.
GEORGIE FROST: You make a lot of claims in the book about how your company, if you do make this a priority, you lead the way, competitive, innovative. If it was so beneficial, why have companies not prioritized it? Why are CEOs only spending 1% of their time thinking about it? And if it is so vitally important and the benefits are what you say they are, or have they just been caught with their pants down, basically, over the last couple of years?
DANIEL WEISE: I think there are two reasons. One is, for 50 years everything was available, and it was not a need to focus on procurement. You just found the stuff, and you bought it. But now with the shortages there, the pandemic being there, with so much uncertainty, this is not good enough.
Those are the negative events, but there are also positive events which are changing the world like the push for sustainability. And that is then something where we need to rethink, I think, supply chains and where companies potentially too late understood on how very much they can benefit from supply chains.
If you take, for example, the CO2 footprint of a car, 60 to 65% of the emissions come from the supply base. So if you want to come to CO2-friendly cars, you have to work with your supplier. You have to put new teams behind. You have to put new teams behind with a different skill set. And that is what we are completely missing at the moment.
GEORGIE FROST: You mentioned that it starts, I guess, with CEOs. CEOs have a fundamental role to play. Why do you put so much emphasis there at the top?
DANIEL WEISE:
Why? Because you need to be talking to your important suppliers, and offer something. And offer something means co-investment. It means certainty in demand. It means so many things, but those things, nothing a procurement professional can offer. That's a board decision. That is true partnership for the important suppliers.
So we think that only a CEO and the board can make that happen because if you leave it to the people stuck in corporate Siberia, they don't even have the mandate to take those decisions.
GEORGIE FROST: Okay, where do you start then? Where do you start to build this emphasis on procurement into your company? Obviously, it starts with the CEO getting on board with the idea. Then what?
DANIEL WEISE: The next thing for us is to actually change the company in itself.
One push is invest in digitization, make the company as much as possible bionic. Why? Because we want to get all the effort out of the transaction operational stuff, free up the people's time to become creative to work on the strategies.
Second, have human folks own the lifecycle of the problem, at least co-own it, and make sure that whatever we learn from supply chain gets embedded in the way we source the product.
In our thinking, yes, of course, costs savings also in an inflationary time still matter. However, we need to have a focus on CO2, human rights, on the sustainability agenda. We need to think about speed, getting goods early enough to market to be able to sell it. We need to think about quality. We need to go out thinking about risk. In times when supply chains are unstable, in times when we have shortages, we need to have an emphasis on resilient supply chains and availability of products. So that is, I think, what needs to change, A, within the company, and, B, also what we ask from our suppliers.
GEORGIE FROST: Transform the company sounds quite a large undertaking. That's what it takes?
DANIEL WEISE: We think so. At the moment, many companies tick internally, and you can do so many cost-cutting efforts and so many pushes in R&D. But if you understand, if you typically take your 20 or 30 biggest suppliers, they typically entertain R&D teams 20-, 30-, and 40,000 people available. They could be working for you if you partner with them rightfully and do something together with them in a meaningful way.
And that is where we think it is a transformation because we need to become a lot more focused on the supplier and allowing partnerships to happen. And I think that's a dramatic shift from the way we operate today within the boundaries of your company, so to say, but really extending that, leveraging your global supply chain.
GEORGIE FROST: Can you do that without breaking the bank?
DANIEL WEISE: We think so, yes, because by all honesty, that sustainability and all the other dimensions are important, cost will always matter in a supplier relationship. And we have seen those investments in suppliers truly paying off because if you give them stability and security, if you invest in longstanding partnerships, you will get also cost benefits.
But we don't think that is reducing profitability. It's actually the opposite.
GEORGIE FROST: Is the ultimate to get to a stage where almost you factor procurement into the design of products, if that's your business, obviously?
DANIEL WEISE: I would clearly say yes. Take a look again at Apple. Procurement is in the design process, early on involved. It's their job to get innovation insourced from the supply base. It is their job to actually have global capacity available, then to produce those products integrating those innovations. And that is different to many other industries where procurement only comes involved very close before the start of production.
GEORGIE FROST: Should every company have a lead in procurement then?
DANIEL WEISE: I'm not sure if everyone needs one. There potentially are industries where procurement is not that competitive or is not creating competitive advantage, I don't know, for some more service-oriented companies who basically only buy real estate or an office or IT infrastructure. But for all those companies where there is a physical product out, I would clearly say yes.
GEORGIE FROST: Mm. It is great having, if that's what your company will need, a lead in procurement to have your, as I said, the CEO on board, and start to build this emphasis on procurement. But then how do you take it to the next level to maximize it, to get the best partnerships that you spoke about with suppliers?
DANIEL WEISE: By doing it differently. I don't think it's enough to say, hi, here's my new email. We are going to change the world we have been living in for the last 50 years.
No, you need to reach out.
If you really want to make breaking decisions, both CEOs, the client and the supplier CEO, need to be involved. And then of course, they can delegate it back at one point of time to the teams, but it's a true change. It is not coming from procurement. It is, or it has to come, from the CEO in changing the way you have interacted before.
GEORGIE FROST: What can suppliers do to help companies to position themselves into greater advantage?
DANIEL WEISE: I think one of the most important things suppliers can do is understand your client's strategy. Reach out and offer on how you can help. reach out to those people who make decisions in the company. Get heard. Be very clear on what you can offer to those companies and be selective. I don't think, and that's not what we are saying, you can be friends with everyone.
You cannot partner with everyone, but pick those, that number which is relevant and feasible for you where you can partner and then reach out and do it. But I think that is what many times the relationships become very, very transactional. That is, I think, what is missing most.
Why don't you reach out if you have something in your innovation pipeline which is great and do a cool innovation partnership? Why don't you secure early on selling on that stuff? Why don't you even pitch it? And I think that is a change we are now seeing in certain industries, but it's truly not the case everywhere.
GEORGIE FROST: So if you were to give companies then a blueprint to leave us with as to how you would do this best, what are the key takeaways?
DANIEL WEISE: I think I don't know any company who does it perfect, not even the tech cluster. Potentially they need to improve a lot more on sustainability and putting their supply base into action also on this topic.
And lastly, escape the mono-dimensionality of procurement. It is not only about cost savings anymore, but equally important is sustainability, is the resilient supply chain, is quality, is speed, and is innovation. And if you put currency behind that, incentivize the procurement team to not only deliver on the cost basis, but also on a CO2 basis, on the innovation basis, that is, I think, the best advice we can give because if you put emphasis on it, people typically start to act.
GEORGIE FROST: And if you do that, spell out the benefits for me.
DANIEL WEISE: I think it's probably what every CEO dreams of because you will actually increase your sales and profitability because you have those products, A, available in those times and, B, hopefully a lot more innovative than those originating from their competition.
And lastly, you will actually have cost savings available to refuel your innovation pipelines once again and invest the money. So the benefits are quite numerous, and it's not only cost line which we can drive out of procurement. It's truly the top line.
GEORGIE FROST: Daniel, if you and I are to meet up in five years' time and do this podcast again, let's hope we do, what sort of things do you think you'll be telling me? What will have changed?
DANIEL WEISE: I hope that we will move to a lot better world. Potentially, we have advanced on the sustainability topic, and it becomes again a priority. Potentially, we have left some shortages behind, but for sure, we will have not left some geopolitical conflicts behind.
So I think ultimately what has changed, I would predict a lot more focus on risk management, a lot more emphasis on sustainability. And I would hope some companies have actually put suppliers at the core and are really benefiting from still working supply chains.
GEORGIE FROST: Thank you so much, and thank you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us, too.
GEORGIE FROST: If you've ever hidden anything significant about your personal life at work, then you know how exhausting it can be to lie. We aren't performing at our best. Perhaps you're going through a divorce, received a cancer diagnosis, started IVF, or you haven't come out to your colleagues yet. But creating a culture of openness and acceptance is not only beneficial for the welfare of your staff, certainly, but also for your bottom line, and for designing policy suited to attracting and retaining the best talent. I'm Georgie Frost. This is "The So What" from BCG.
DAKOTA SANTANA-GRACE: It's because it's the extra mental labor to navigate that identity that it's important that people feel comfortable. Now, they don't need to share anything about their lives, but they shouldn't spend time thinking about what they're not sharing as they talk about it.
GEORGIE: Today, I'm talking to Dakota Santana-Grace, BCG principal and expert in e-commerce package delivery and leader in BCG’s Pride team.
DAKOTA: Every year my Instagram fills up with people talking about how stressed or agitated they are by all the companies with their rainbow flags and their policies that don't actually support queer people or their funding of lobbyists or politicians that are actively homophobic.
I wouldn't tell anyone not to do it, but they should be asking themselves, is it matching what they're actually doing for their employees and what they're actually doing when they are influencing their external world? Are they also supporting those employees from a broader social context?
GEORGIE: What they're doing for their employees, you talked about policies. Just explain what some of those might be.
DAKOTA: Yeah, so I'll break it up, right? You've got your culture policies, which is how you bring queer people together, build allyship, make people feel included. I think back to my first time hosting a large Pride festival in our Boston office, and I brought a drag queen to the office.
Everyone was completely startled at the thought of a drag queen walking into a consultant office. I was not the first to do it. New York had done it the year prior. And it still sits with people. It sits with people who were allies, how exciting it was. It sits with people who were members of the Pride or LGBTQ community, how cool it was that the office wanted to experience part of their culture that's a little bit more niche.
But the only reason that that was worth anything is because there were policies to back it up.
And you know, very personally for me, do you cover Truvada, which is an incredibly lifesaving medication that actually prevents the transmission of HIV AIDS. So it actually essentially creates high level of resistance for people who want to take it proactively to avoid getting HIV AIDS.
GEORGIE: I don't know if you have the stats to hand, but do you have any idea of what percentage of companies in North America, where you cover, have policies like that in place?
DAKOTA: I don't, but I'm comfortable with saying too few.
GEORGIE: Right, that's fair enough. That's fair enough. What would it take to get those policies in place? How do you build them? Where do you start?
DAKOTA: Listen, I think it always starts with listening to the employees and what they actually need and what they're looking for. In most companies, assuming there's not a breakage in values where they actually don't want to support their LGBTQ employees, at which point I can't help them, but for those that do want to and I hope that's a majority, it comes down to actually listening to what the employees are looking for.
I still remember when we were advocating inside of BCG for shifts in our paternity and maternity benefits and shifts in our adoption benefits and surrogacy benefits. And those have evolved over the past two to three years. And they've meant a lot to our employees. And that's how it came forward, though. It was actually just listening to people and where they are and what they're prioritizing.
GEORGIE: Obviously, it's wonderful to have those sorts of policies in place for your workers to make people feel included, but there is also a great business case for this as well.
DAKOTA: Yeah, I think if we decide that we want to have the strongest employee base and you decide that you want the most diverse and capable employee population that you can build, and there's tons of research around the value of diversity in the workplace that we don't need to get into. Almost every executive will have read it. How does this translate then to the importance of retention and attraction of LGBTQ talent, I think is the real question. And the reality is that queer people are 13 times more likely to quit a job if the culture isn't right.
GEORGIE: Culture isn't right. Explain to me, what do you mean when you say the culture isn't right, for example?
DAKOTA: Yeah. Not just policies that are right. Places where there's open discrimination.
GEORGIE: Obviously.
DAKOTA: Places where there's not consequences for implicit discrimination, and places where they don't feel comfortable being out is one of the core drivers. And that's also a core driver in how we attract talent. The reality is we're seven times more likely to not go somewhere because of a culture, a perception of the culture.
Now for me, I've been very lucky, right? I sit back and I think, well, these questions are so obvious. I feel very supported. I walk around in four-inch red stilettos on a Friday occasionally, and no one bats an eye, which I find actually offensive at this point. I'd like someone to bat at least half an eye.
And I have mentorship across the country and world of queer leaders that I really respect. So for me, it's always been there. But when I think about the conversations I have with dozens and dozens of queer recruits every single year, this comes up, and it's a reason that they don't look at other places. And it's a reason that they're prioritizing coming to us. And it's something that I'm really proud of, but it's something that I would encourage any company to be stepping up to focus on, because it's the only way you're going to pull in as diverse of an employee workforce as possible.
GEORGIE: Dakota, we live in the real world, you and I, most of the time. I am offended by the four-inch heels purely because my back could never handle four-inch heels and I'm jealous. [laughing] But no, we live in the real world and we live in a world where people are quite easily offended by certain things. And there will be people who don't appreciate seeing you going around the office, I don't know if you go around the office in four-inch heels, but if you do...or a drag queen.
DAKOTA: I do.
GEORGIE: Well, there you go; take care. Or a drag queen in the office, that might offend people as well. So are we swinging too far in one direction to appease one section of society or one section of the workforce while risking offending the others? Or do you say, well, boo-hoo to you?
DAKOTA: Well, I would love to talk to the person who is emotionally wounded by my heels, and we can have a conversation for how it harmed their self-perception and identity. But on the front of the drag queen being in the office, it's well announced; it's optional attendance. You don't need to go. I think the reality is unlike 40 years ago when it was a boys' club in a cigar room where I would not be invited, we did invite everyone. And you can opt in or opt out of that journey of your own volition.
GEORGIE: I have spoken about this on BCG podcasts past, that bleeding of private and work life. And I think the last couple of years where everyone's been on Zoom and you can see in the background pictures of my family, it's become much, much more intertwined. Too much so? There might be some people that argue, why do you need to say what you do in your private life in your workplace? Just get on with the job.
DAKOTA: It's a fair question. And I think the question comes from a place of I always say that a lot of our questions on these topics come from blind spots, not necessarily from malice, same with where companies have policy gaps, right? I think it's a blind spot, not an intentional choice.
But the reason that it matters is because there's so many times that the person who asks me that question about why does it matter that I can talk about my personal life also mentioned their opposite gender partner, talked about their kids, their family commitments, all describing their weekend within the past few days.
And the minute you have to start filtering, we call it covering, covering pieces of yourself as you're working through it, describing your weekend, say, it's the week after Pride, do you mention that you went to the Pride festival? If you're covering, no. Now you have to come up with your Saturday story. But then you just bumped into your straight colleague who didn't know you were out while you were on the street because they went to witness the coolness of Pride, and now half of the people in the office have heard about how they saw you on the street and now you're covering again. And so it's because it's the extra mental labor to navigate that identity that it's important that people feel comfortable. Now, they don't need to share anything about their lives, but they shouldn't spend time thinking about what they're not sharing as they talk about it.
GEORGIE: Well, for different reasons, I'm sure that many people will know what it feels like to hide things at work and that weight of having a secret, whether that's you're going through a divorce or IVF or cancer treatment, as I said, not the same thing, but you can understand that trying to hide what's going on. And it impacts obviously on you mentally and possibly physically, but also the quality of your work. To put it bluntly, you're not going to be performing at your best when you have things on your mind that you can't get out.
DAKOTA: Yeah, I mean, from a pure corporate value perspective, right, it is materially worse if you have some of your queer employees spending the day worrying about what they say about their weekends. I mean, we all understand basic professional norms. I'm not saying that you need to hear every detail of every single Saturday evening I've had. I'd prefer that you didn't.
But I am saying that I shouldn't have to think about whether or not I give the top-line narrative that I went out to a restaurant and then swung by the Pride festival, or that I swung by a gay bar for two seconds, or if I happen to name the bar that I went to and it is gay, that I'm not somehow jarring the world by saying that, and that I didn't have to spend time making up a restaurant name.
Because it's actually a very natural question when someone says, "Oh, where'd you go out this weekend?" You might actually answer that question. Now I'm in DC, so the answer's probably Number Nine, but that's a gay bar. Now if I'm trying to cover, now I have to spend 20 seconds quickly choking on my words as I figure out where I went out.
That is exhausting to do, and I've done it, right? I went to a client, and I've always been out with my clients, and for whatever reason, this client I felt was conservative. And I work largely in industrial goods and package delivery. I work with a fairly conservative base of clients as it is, and I've always been out, but for whatever reason, and I've never had an issue and I've been very lucky there. But for whatever reason, in this instance, I felt the need to hide it. And I was stressed. I was more stressed than I had ever been with a client. I was stressed in meetings. I was stressed coming in on Mondays. I wasn't having a good time, and that was rare.
I actually like my job. I was just sitting there wondering three weeks in. And I was lucky one of my best friends was on the team. And she looks at me and was like, "Well, it's because you're not out right now." And it was dumb stuff.
And I'm coming from a fairly privileged position here. Right? I am a largely white-passing Latino gay man, which means that I get many of the benefits. I don't pass as straight, to be very clear, but I get many of the benefits accrued to men in society. And I'm neither trans nor a woman, right? I am on, of the spectrum of discrimination that I face day to day, I probably face some of the lesser within our queer community. And my trade-offs are different when I do that math. But for me, I really was materially more stressed, more tired because constantly in conversation, I was adjusting the words coming out of my mouth and I did not enjoy doing it; it's tiring.
GEORGIE: And how was it received by the client?
DAKOTA: There was a soft smile on this man's face as if he was happy that I had finally come out. And again, like I again have sort of the joy and curse that I mean, I really don't pass, right? People have screamed explicit phrases at me on the street just walking home from friends' weddings. And I live largely in the New England area. So this is not the most homophobic part of the States. And I still get heckled and cat-called and insulted on the street regularly, over the past two, three years, probably five, six times. And I got chased by a man maybe four weeks ago, screaming "You're giving us all HIV AIDS." So discrimination is real and it happens. But for me in my corporate setting, I don't live it and I don't pass as straight. So I have given up ever trying to hide my identity.
There's one other story if you'll let me tell it that I think will be helpful. I was in a client meeting, and I always say this is one of the best moments of allyship. Allyship is about meeting people where they are, and that's all it is at its very simplest.
And when I left the client meeting, I was probably in my second year at the firm, and one of my closest mentors now, we were sitting at an airport. Our flights had been delayed and he says, "Hey, like we haven't done feedback in a while. Can we quickly chat?" So we're chatting and he said, "Hey, I just want to mention, like you deepen your voice in meetings. Why do you do that?" And I said, "Oh, well, I'm trying to hide my gay voice."
And in this moment he had choices. He could have said, "You don't need to do that." I would've been really annoyed because he doesn't know what it's like to try hiding your queerness. Instead he said the most honest thing he could have. "It's not working and you're less effective."
GEORGIE: How did you respond?
DAKOTA: I was so happy. He took a risk in that moment to say those words. And he took a risk that he knew that I would perceive them honestly. And it was super important because I never again spent time trying to sound super straight because it just wasn't worth my time, and it was making me worse at leading my meetings. But it's simple things like that where I have tons of energy that was getting totally bogged down by trying to deepen my voice because I thought that's how I needed to sound when presenting.
GEORGIE: I'm glad you mentioned that story because I do think it's really relevant. Because earlier you were talking about blind spots, unintentional discriminations, and I think it's twofold. It's one, the blind spots obviously that we can't see, we don't know are there. We can't do policies for people that we can't understand what they're going through, etc. But also it's the, am I allowed to say this to him? Will he think I'm being discriminatory if I say this?
DAKOTA: It's so, I don't even want to write it off as easy, right? It's so hard.
And that is why mentorship, openness, and the reality is, I also personally was sending out signals that gave openness to do that. And he read those signals accordingly and it was helpful. It's a hard line. It requires judgment. It requires, I always joke the best allyship is very close to an HR violation because you're talking about really personal topics about someone's identity and helping them navigate it in a professional setting. And that's hard. And that's why leaning on allyship is just as important as leaning on fellow queer mentors who implicitly have a bit more license to go there with you.
The problem is just by statistics and the realities of our corporate world, a majority of senior people are not queer, by a huge margin. And so we do need to figure out how we navigate that gray zone. And it starts with intent and it starts with an understanding.
And you don't have to go right straight to "You still have gay voice, right?" You can go softer into it like saying you shouldn’t deepen your voice, and he didn't need to say it's not working. He could have said, "Well, let's talk about how you could be more comfortable because you're more effective when you're emoting as your full self." He had other ways to go.
The reality is we had a relationship where he felt super comfortable shooting the straight shot on that. There are circular ways to arrive at that same outcome, just would've required a ten-minute conversation instead of a three-minute conversation and a chuckle.
GEORGIE: How do you know though if you're getting it right or wrong as a business leader, with all the things you've spoken about: policy, language, culture?
DAKOTA: Well, I always say in any of these topics, anything that has to do with diversity, the first assumption I always have is we're probably not doing it right. In some place, somewhere, somehow, we're probably not doing it right.
But the way that you know that you're doing the right thing, I guess I would say, is one, is this on your agenda? Is this something that you are thinking about from a leadership C-level and minus-one-level perspective? Because that matters. If those people are thinking about it, that cascades. Are you present as a leader with the communities?
I actually find it...I'm planning a Pride conference right now. It'll be our first one back in person, and leaders are scrambling to be invited to this conference. And I have to now navigate that, which puts me in a fun position, but it is because our leadership understands the importance of their visibility. And that's the second thing.
So that's what I would say. Is it on your agenda and is your agenda visible? Because if those two things are happening, everything can flow from there and there will be animated, excited people to help work with you.
GEORGIE: Does language matter? Does it matter if you say homosexual, gay, queer, LGBTQIA+?
DAKOTA: Oh Lord, it's a fun one. This is going to have a variable answer.
GEORGIE: I had to ask, I'm sorry.
DAKOTA: You have to ask. No, you have to ask; it's right. Because I mean, I can jokingly say like I mean, we'll debate if we cut this, I mean, I can jokingly say like, I can barely track the letters if we went the whole way out.
And we would debate what Q stands for. If you set members of our LGBTQ community together in a room, we would still be debating what the Q stands for. Questioning or queer, who knows? I think it's queer. And what's the plus? And so listen, that is such a real question, and it's important.
The first thing I would say is each region of the world's going to have its own journey here. So I think it's important to figure out what is right for your local community and for your employees.
For me, personally as a queer person, I find queer makes my life a heck of a lot easier because it is super inclusive of gender identities, of people's different sexualities. It's a very inclusive term. That said, it makes people who are not queer cringe to say it because it has been historically a derogatory term.
So I've generally driven people towards LGBTQ+, LGBT+, something that just signals the inclusion. If you can get comfortable with queer in a lot of spaces, particularly in the United States, that can work well. But it's going to vary, so I'd say listen to people, but that language does matter.
Most people actually don't want to hear homosexual. It's fairly clinical and reductive. I rarely see it actually existing in an actual term, how we all refer to ourselves. And it matters because words have historically shaped this community. Queer was reclaimed, and those words shape how people identify themselves, how they relate to others and how they want to see themselves within the world. So figuring out how to be as inclusive as possible is really important. I think that words matter.
GEORGIE: The words matter, but listen, and respond to what people are telling you, how they identify.
DAKOTA: Yes.
GEORGIE: Dakota, thank you so much. And thank you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us. It helps other people find us too.
GEORGIE FROST: When you're buying something, what stops you from making the ethical choice? Is it time, price, cynicism, or is it transparency--you simply don't know enough about the product? Despite grand pronouncements and targets by governments and businesses, progress in encouraging consumers to buy sustainable and ethical products is slow. Could a big part of the problem be that too often people are left out of the equation? I'm Georgie Frost, and this is "The So What from BCG."
SHALINI UNNIKRISHNAN: This is a test of leadership for many of the companies, of their boards, of their CEOs, of their C-suite, and of their shareholders to make these moves.
GEORGIE: Today, I'm talking to Shalini Unnikrishnan, global lead for societal impact in the Consumer and Social Impact practices at BCG.
SHALINI: If you think about people-centered design, what you want is to really dig into what are the motivations, what do people really care about when they're using that product. What makes them happy? What is giving them satisfaction from that product? Then thinking about, well, how do I create that experience sustainably? And putting that at the center of the innovation process, of the marketing process, of the pricing process, of every part of how I'm taking that product to market.
Here you can take the example of Tesla, for instance. Before them, there were plenty of car companies that came and said, well, I tried electric vehicles. Nobody really wants them. They've failed. People don't want to pay the premium, etc. And fast-forward, we've seen what design that people really want, features that people really want that happens to be green and electric, can do, and it can fundamentally disrupt an entire industry.
GEORGIE: Isn't it at a price point that people want as well, particularly with Tesla?
SHALINI: It is at a price point that people want. We are seeing, though, that if you look at the data, let's say in North America,
GEORGIE: A bin bag is slightly different than an electric car, though. I think a lot of people might be a able to stomach the 15p or 15 cents or whatever it is, extra, but when you're talking about things that are worth a little bit more, but there are also, there are other elements to, for example, an electric car, charging points, availability, those sort of things I imagine you also need to factor in when you're designing this people-centered approach.
SHALINI: Absolutely. Absolutely. I think one of the key things is no product has to address every part of the market, right? So that's an age-old consumer segmentation theory. In the same way, the innovator, the Tesla, doesn't have to appeal to every single consumer in the market, but what they are doing is proving a business model. What they are doing is proving demand. And now we have the Chevy Volt that goes with the Tesla as well, right?
And so over time, that creates the ability to have a wider range of products in the market. So we don't have to constrain ourselves just because it hasn't solved all the problem yet. And then we get to, of course, none of this can work by purely innovating cool products. It has to happen in the right ecosystem.
No one company is going to be able to solve this. No one government is going to be able to solve this challenge. And finding new friends, finding new people that you're going to collaborate with is going to be a really important part of this journey.
So you can take the problem of plastic waste. You'll have the consumer company put up their hands and say, well, I've made it recyclable. What else can I do? You'll have the downstream players talk about their challenges. You'll have upstream players talk about their challenges.
I was recently working with a very large consumer company, and they'd spent a year looking at what it would take to meet their sustainability goals. And they have bold sustainability goals, not just around being net zero, but around nature and being nature-positive, around equity and inclusion. They went through the process of identifying lots and lots of things they could be doing. It was an entire company process to identify all the little initiatives they could be doing, tweaking their own product, the packaging, the production, the energy mix, etc., etc.
And at the end of the day, they were 25% of the way through the journey, and that's it. That's all they could find within their business and even within the core suppliers that they have. The remaining 75% of the answer needed to be fundamental changes to their business, to who they're partnering with, how they're sourcing their entire procurement structure, suppliers, all of that. So we have set out on a very big journey here. I think at some point we have to realize that it's not going to come with little tweaks and changes. It's going to be big things that need to be changed.
GEORGIE: I always have to caveat this, but I do think this all sounds absolutely in the direction that we should be going. Who doesn't want us to be more sustainable, more ethical, more green? However, as a business and in a capitalist system that works on quarter-to-quarter growth, you would be looking at those sorts of stats and thinking 75% of my entire business model needs to change. And we're in a situation we mentioned earlier about consumers. Do consumers really want it? Do consumers really want to buy green and ethical? When companies are shown very clearly by the media, very publicly to be doing the wrong thing, people are still buying it. And what I think of immediately is things like fast fashion. How then as a company, as a leader of a company with shareholders, do you then get everyone around a table and say 75% of our business model needs to completely change? They're not doing it over there. That company there aren't doing it. I'm not entirely sure our consumers are really behind this either, but I think we should do it for the right reason.
SHALINI: It's not easy. Let's start off there, right? If there were easy answers, we would've done this by now and moved on. It will require some companies to step ahead of others. There is now mounting evidence five years ago, 10 years ago, some of these even longer, some of the leading companies already stepped out. Patagonia already stepped out, Unilever already stepped out, even before some of this evidence was mounting. They've had great value created from this.
As I mentioned before, sustainable products are small, but they're the biggest part of the growth. I'm doing this to capture the new pockets of growth. I'm doing this because there is a sustainability scarcity that will emerge for many of the commodities that I am going to need as climate change begins to have more and more effect on agricultural outputs and other outputs. Some of these commodities are going to start fluctuating. There's much more risk in the system, and this is about creating resilience. This is about creating access to scarce commodities, making sure my business is strong for the future. So it's preparing for growth, ready to capture growth, and it's preparing for resilience and for the risks that are coming.
And by the way, in that process of getting growth and getting resilience, capital markets are shifting, and there's a large amount of capital that is looking for sustainability targets. And I can take advantage of being a first-mover and capturing that. It's more efficient. It can save me money. So, more and more and more arguments building up for businesses that want to tell that story. It's not without risks. It is not without getting uncomfortable. You've had a certain business model that's worked for a really long time, and this is a disruption. But we've seen over and over again that any time there are big disruptions, whether that's a digital disruption or all the way back to industrial revolution, the companies that get going and that start and that ride that wave are going to come out more successful and more resilient in the long run. So this is a test of leadership for many of the companies, of their boards, of their CEOs, of their C-suite, and of their shareholders to make these moves.
GEORGIE: Where do you start?
SHALINI: I start always with the purpose of the company. What are you trying to accomplish for whom? Who are your stakeholders? And for each of those stakeholders, what's the value that you're creating? Climate action, sustainability action, equity, diversity, any of these agendas are anchored in purpose, and they are core to the company rather than something that is being done to the side of the business. That is much more likely to succeed. And to me, that is the simplest but most important starting point for a business.
GEORGIE: But what if your company's purpose is to find fossil fuels, to do massive shipments across oceans, to make petrol cars?
SHALINI: Yeah, this is a great conversation to have with that leadership. Is the purpose to find fossil fuels, or is the purpose to provide energy that powers mobility? Is the purpose to identify energy that powers the production of products that create value in our lives? And if that purpose is understood and described properly, these companies that are facing some of the biggest challenges will also be able to make their transition to a resilient and profitable future.
GEORGIE: All of this seems to start, go forward, and end with people, people-centered designs, people in leaderships who are willing to take risks. What happens to companies that don't put people at the center?
SHALINI: Yeah, I think what you end up with in that situation is potentially great technical answers that really struggle getting adopted, with having the energy and the momentum of the organization to make it successful.
So we have seen many examples of products, solutions, services, business transitions, etc., where companies have had great ideas and great products, but they never take off. And there's lots of reasons for them, but I strongly believe one of those is not really thinking through the people aspect internally, or your consumers and your customers, etc. And by the way, this is not just about the person in the grocery store picking up products, right? That's not the only people part of it. It's the other end of the spectrum. If you are a company, I don't know, making bags of chips, the people to think about are also the farmers that are involved in producing that crop who are about to go through probably the greatest transition since the green revolution if they do change to regenerative practices and so on. So it is a people transition up and down that value chain throughout.
GEORGIE: And yet we live in a digital era where tech is being advanced, automation, algorithms. How does that marry up?
SHALINI: Could we do this all in the metaverse, right? Well, digital, I think, is the most powerful enabler on this journey. It's going to be very exciting to see that intersection of digital and sustainability and how that's going to create the solutions that we need for tomorrow.
I'm personally very excited in BCG for the team that has been working on leveraging artificial intelligence to help companies dynamically understand their very complex carbon footprint and be able to run scenarios and simulate their business decisions and democratize sustainability throughout the organization because digital is creating different interfaces to that very complex data to different parts of the organization and helping them understand and grasp and make decisions with sustainability data in the same way that you would with financial data.
To me, that's one of the most powerful tools we are going to have as we move forward, is where can digital create a dialogue at the intersections? Because the value is not in silos anymore. The value's going to migrate to the intersections. How does digital help us talk across these boundaries that we've created of: you work in this sector, and I work in that sector, and you are my competitor, and X and Y? Digital is going to be powerful at helping conversations and partnerships and collaborations to happen at intersections and boundaries.
GEORGIE: How do you see this in the future? In this ideal—silo-less, everyone connected—how would it look?
SHALINI: I think you would still have, absolutely have competition and the innovation that competition spurs and the advancements that competition spurs. None of this is meant to be anti-competitive. It's not meant to be some fuzzy, theoretical approach. It's meant to have us rethink some of the boundaries and find new sources of advantage.
At the core of this, sustainability is a source of advantage. This is not about a "kumbaya," let's all the good to each other and be happy solution.
It's going to come from new collaborations. You see pharmaceutical companies, airline companies, across the board you're seeing companies come together pre-competitively and co-investing in solutions, where actually instead of every one of them designing sustainable aviation fuel, they are co-investing to create that technology that they can all benefit from. They will still compete to get you and I on the cheapest and best way to our wonderful island vacation in the summer, but that doesn't mean that they can't generate advantage from pulling in their resources pre-competitively.
GEORGIE: You mentioned there about engaging with your consumers. How can companies best do that?
SHALINI: I think the first step is to listen. A while ago, we did this piece of work where we were trying to understand why there were so many financial services products aimed at the small-business holder. So think of the corner shop in Indonesia or in Nigeria or the small shop in that's in rural Tennessee, a lot of financial solutions aimed at helping them digitize, helping them save, so on and so forth. The adoption is very low. Sometimes they try it out. The stickiness to those solutions was very low. So we went out and did this anthropological kind of survey. It wasn't about asking them about financial services.
We actually asked the shop owners, men and women in Indonesia, in India, in Nigeria, in Mexico, etc., what's money for? What's happiness to them? What's a good day? What's a bad day? What do they do with the extra money? What does happiness mean, so on and so forth. From that, we uncovered an incredible set of rich insights.
We talked about who do they trust, why do they trust who they trust. So what you could discover for product design for this company from those insights was actually what really mattered to people, what kind of incentives would motivate them, who the message or the marketing message should come from because those would be the more trustworthy individuals, etc.
It starts from listening and really understanding what lies underneath people's motivations and why people act the way they do. And then I think the other side of it is it comes from narrative and storytelling and recognizing that just creating the solution doesn't mean that people can get it. We're surrounded by a cloud of information right now.
GEORGIE: It's one thing to listen, but I imagine a lot of what people say is very different. So you're listening to lots of different messages. And I haven't read your research on this, but I imagine from Indonesia, India, Nigeria, rural Tennessee, I think that the responses and cultures will be very different and will reflect different responses in people's answers. So if you are a company that has to factor that in, that is something that will be quite difficult to measure or not?
SHALINI: It is. The simple answer is you have to customize. We customize products all the time. Why not customize technical solutions? Why take a solution that's worked and been designed in a city in the US and try to make it work in a developing country? We have to customize, and it's not always going to be a transfer like it was in the past of a solution created in the West and then taken to developing countries. We're going to need innovation and solution design happening everywhere. We are going to need collaboration to happen and solutions to be traded across.
So the simple answer is yes, and that's OK. Let's actually work with those cultural needs, etc., and design something different. But maybe there is also a point to be made, as we looked across these countries, there's plenty that's similar as well. At the end of the day, there are a lot of values, and there are a lot of things that are quite common across people no matter where we are. We all have aspirations that are common. There is value around family. There's value around safety. There's value around well-being and health and wellness of my child, etc. There's just so many values that are common that I don't think that it's as complicated as we may think it is.
GEORGIE: I was listening to another podcast that was talking about barriers. Now, there was a bed company. and a lot of people, a lot of customers, kept going onto this site, designing their own bed. And when it came to the purchasing, they stopped, and the company couldn't work out why until they did a bit of research. And they found out that the biggest problem was people didn't know what to do with their existing bed. So, as part of the process, they said, "We'll remove your bed for free." And as a result, you can imagine, sales went up. By that, I mean, do companies focus a little bit too much on trying to push products without thinking about what is holding people back? And this feeds back into that argument about sustainability. If we want consumers to be more sustainable, are we focusing enough on the reasons why we're not, what is holding us back?
SHALINI: Yeah, I think it's a great point. We see it over and over again, that if we can get rid of simple barriers that we all are actually quite willing to change our behaviors.
There's a toilet paper company. It's actually quite successful. They're called Who Gives A Crap. They don't do plastic packaging. The loo rolls are wrapped in paper, and they're made from sustainable materials and so on and so forth. All that's great, but the simple thing that they do is they deliver loo rolls to your door on a subscription service that works for you.
And over and over again that we see, you take Patagonia, for example, yes, they've got sustainability deeply embedded in what they're selling and the products they create. But they have tied that very closely to a central thesis of their marketing positioning, etc., which is quality. They say fast fashion or clothes that are disposed of are part of the problem. We want things to last. That's better for the environment. We design for things to last.
I don't know if anyone has done the disaggregation of how many people are buying Patagonia for just the fact that they're green or just the fact that they're higher quality or the intersection of both, but those two are actually very closely linked. And it is a sustainability argument to have a higher-quality product as well as it's a value argument. If I'm paying this higher money or this larger sum of money, it should be a higher-quality product that lasts me longer. So, it's a great point. There are important ways in which we need to understand the barriers for people to buying products and what appeals to people and not make it just about, I've created a better widget, and, therefore, people will just buy it.
GEORGIE: Thank you very much to Shalini and to you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us, too.
GEORGIE FROST: Every company wants to unlock more value and growth, but how much bias is being allowed to creep in? Biases across your business, but especially from leadership in the recruiting process, can seriously stunt those aims. Acknowledge and compensate for them, boost your business, or ignore them and risk letting competitors steal a march on you. I'm Georgie Frost, and this is "The So What from BCG."
NAN DASGUPTA: Bias is everywhere, and it's everything that might seem small. And then it's big bias. It's unconscious bias, and then it's pervasive systemic bias that's been built into what we do.
GEORGIE: Today, I'm joined by Nan DasGupta, a lead in BCG's People & Organization practice, and an expert in people and organizational strategy.
NAN: Oftentimes, you have a direction in mind. You want to achieve certain outcomes. But the real question is how do we get there? Gender equity and inclusivity is one of those big areas where, actually, we know we need to do better, but we simply don't know how. It seems a little bit too big of a problem. So companies are looking for, we are all looking for, ways to move the needle and actually make progress on that really good ambition.
GEORGIE: Don't worry, Nan, we're going to solve this in the next 20 minutes, aren't we?
NAN: Right.
GEORGIE: Let's start with unconscious bias. How big an issue is it in the workplace and how do you understand it?
NAN: Well, I think bias is a big term, and it's pervasive. I mean, it's certainly in the business context, in the corporate environment that we work in, bias is everywhere. And it's everything that might seem small, and then it's big bias. It's unconscious bias, and then it's actually fairly pervasive, systemic bias that's been built into what we do. And if I were to describe, Georgie, how I think about it, I mean, fundamentally, this may be a provocative way to say it, but our business world, our context, was made by men for men, and it works for men.
GEORGIE: How? I like provocative, and that's OK, but it's a sentiment that we hear quite a lot, and I think it needs some qualification. What is the evidence of that and how is it manifesting itself?
NAN: Well, I think the evidence in that is how we make decisions in the context of recruiting people into our talent pools.
GEORGIE: While we will have unconscious bias of some sort, to varying degrees, that individual bias can filter through a company, from a leadership level, to become that systemic bias that you spoke about.
NAN: I agree. I agree. And I'll give you a couple of examples where I see this at play.
GEORGIE: Are we not in danger here of putting women in a box? Should the emphasis be less on encouraging companies to perhaps accommodate these more, quote-unquote, "traditionally female" ways of working? And more on the men themselves, getting men to want to, to take up some of those caregiving roles?
NAN: For sure. I think that's why it's important that we focus on the act and the work of caregiving and not just the act of making the workplace equitable for women. Honestly, that is a bias that impacts men in a very dramatic way as well. I think, I believe, I know, there are many men in this day and age that actually get tremendous purpose, reward, satisfaction, joy out of caregiving. And yet biases prevent them from really dedicating themselves more fully to that role in their family, whatever their family might look like. So yes, we have to break that stereotype that caregiver equals women. It does so happen, though, that in today's day and age, in most societies, women are carrying the massive load of caregiving, if you will, more so than men. So that is the way it is today. And that's why that bias against caregiving, the fact that we don't recognize caregiving as valuable, we often don't pay for it, or we underpay for it. All of those biases are impacting women in a very, very dramatic way today.
GEORGIE: Actually, this can be a lot smaller, a lot more pervasive in the way that people think about the way that women react to certain things. There's a famous chef here in Britain who has made a comment about why he prefers to work with men, because they deal with pressure better, because women are too emotional. A famous scientist once said, "One of the problems with women in the lab is you fall in love with them, they fall in love with you, or they cry." Right, those are two examples of very stereotypical ideas of women being emotional. My first question would be, what is the damage of that? And two, what's wrong with emotions?
NAN: I think that's the right question, right? So of course we have so many stereotypes, and those examples are excellent ones. I'm not saying that there are no differences between men and women or between people in general. We have so many differences between us. The problem is how we've been ingrained and trained and systemically biased ourselves to thinking emotion is bad, right?
GEORGIE: I'm curious, you and I both come from backgrounds in industries that are heavily male dominated. Me, before finance, which is heavily male dominated, I was in sport, and you in engineering. How did we manage? Was there something that we can do better or differently, or did the rules not apply to us? Or did they, we just didn't realize? Saying that, I've got lots of examples of sexism that I could talk to you about, but this is only a 20-minute podcast.
NAN: We'll do that another time, Georgie. You know what, Georgie, I don't know about you, but for me, as I grew up loving science, loving sports, participating in sports, it actually never occurred to me this was unusual or I shouldn't. It just didn't occur to me. And I credit my parents. Absolutely I credit my parents. At no point in time did they ever reflect to me that, "Hey, wait a minute. That's a weird path. Don't do that." They weren't thrilled that I was playing soccer, because I was injured a lot, but it wasn't because I was a girl. I think somehow the truer you are to yourself and have the confidence, that self-expression is valued, the more you're able to sort of filter out some of how others are perceiving you in that field. But I'm not trying to diminish the impact of being the lonely only or always the minority. You do feel it. It does take lot of resilience and resolve just to say, "You know what? That doesn't really matter. I know what I bring to this party."
GEORGIE: That's made me think of two things. One, do you think that we, to a degree, internalize that? Some of the comments that are made: "you're emotional," "perhaps women shouldn't be in sport." It's already within us. We've just for some reason chosen to ignore it. But also the importance of role models, because my parents played a very important role in me deciding that I could go into sport or I could do anything I want to. Because, well, my mom was always the main breadwinner. She was always the one out at work. And so that's the role model I had growing up. How important are role models in business?
NAN: Incredibly important, in my opinion, I mean we hear all the time, and I certainly felt this way, moving up through the ranks in my corporate career that it's very helpful to look ahead and say, "You know what? I can see myself being that person. I can see myself following that success pattern." And it's troubling when you look ahead, and there's no one that you can relate to. You just feel like you have to forge a path. You have to blaze a trail. You have to prove to everyone that you can do it. So role models are very important, and we're stuck in a numbers game right now where we don't have enough role models. So there's an additional ask and tax and burden on those that we have to really make sure that they are able to have the impact on all those following them.
GEORGIE: How do you solve that problem in a business context?
NAN: Well, ultimately,
GEORGIE: Now how much can and, indeed, should we force change? Because on many levels, women are smashing it. I mean, girls in the UK are doing better in school than the boys. In the US, women reportedly make up almost 60% of all college students. I only need to look at my own old profession, sports journalism, and see how far that's come. Shouldn't we just wait? I think there's an argument that says, "Look, it's going to happen anyway, and actually we should pat ourselves on the back for the speed of that change and where we are now."
NAN: Heck no, as my daughter would say. Heck no, no. I mean, look, I don't feel like we're smashing it. Look at the representation alone of women, the CEO ranks, and the board tables, the important decision-making tables in politics. We are dramatically underrepresented. And that doesn't make sense. That's not right. I mean, with all due respect, as a society, as a human race, I don't think we're crushing it. I don't think we're crushing it. We have a lot of things that we can do better on. And I have to believe that giving other voices a greater chance to weigh in on how we do things, on how we lead, on how we drive society is going to make us better as a race, as a human kind, as a planet. We have to keep reminding ourselves that, you know what? We don't have equality in the workforce, certainly, in society as well, in many societies. And yes, we do have to push that conversation.
GEORGIE: To go back to the unconscious bias conversation we were having before. There's obviously unconscious bias with leaders and how that filters down into a company. Of course it does. But what about, I speak as women here, our own unconscious biases, perhaps toward ourselves, our own ambitions. Is there something that we could do as women to put ourselves in better positions that we could feel more comfortable in the workplace?
NAN: Yeah, I think first of all, unconscious bias is in everyone.
GEORGIE: I want to ask you, because actually it's something I've been focusing on a lot at work, about menopause. Seems a strange start to a conversation, but I think it shouldn't be. I think it should be a conversation that we all have. There's some research in the UK from our trade unions saying that one in four women have considered leaving their job due to symptoms of menopause. And yet only 19% of businesses say they have any policy toward menopause in place. This is something that is affecting 13 million women in the UK. And it is something that doesn't seem to be considered by businesses. Why is that?
NAN: Because nobody wants to talk about menopause, Georgie, let's face it. I think it's a great question, right? And it is such an interesting point that menopause occurs in a woman's stage of life where they're probably at that very senior stage of their career where they might be in consideration for something bigger, where they are asking themselves, "Do I really want something bigger? Because right now I'm not feeling it." It happens at a very, very particular point in a typical career life stage. And nobody wants to have that conversation, right? Nobody really wants to talk about it.
GEORGIE: But why is that? I mean, technically, menopause is just one day, but perimenopause can last over a decade. It can affect women in their late 30s, 40s, 50s. These are key periods for women building a career and trying to reach the top. And I'm wondering if the reason that it's not talked about or considered in company policies goes back to that idea that you were talking about right at the start of the podcast of the business environment being created by men for men. Can, should, businesses do better here?
NAN: Absolutely. Absolutely. But to be honest, because there are so few women in those positions that might be asking the questions that you're asking, Georgie, it doesn't get brought up, right? It does not get brought up. But it should be, it should be. And honestly,
GEORGIE: Exactly right. I mentioned menopause much as we mentioned caregiving, having children, taking career breaks, all things that that affect women, largely. If you were to talk to, as you do, you go into businesses regularly to discuss these sorts of things, where do you start as a business leader?
NAN: Well, to me, the starting point is always when you look at representation, when you look at just the raw numbers: Is that right? Or is that wrong? And you have to fundamentally believe that we have to change it, right? We actually aspire to more balance and complete balance, complete equality, if you will. Every part of the organization. That has to be the aspiration. I think as long as you think that, "OK, well, this industry is always going to be skewed this way, or it's always going to be challenging for a woman to devote herself to her career the way men do." As long as you keep those beliefs at the back of your mind, I think we're stalled. We're stalled. So I think that's the start. So the belief and just the general acceptance that there's got to be a different normal is the starting place. Then I think it's systematically looking at all of the processes that we have in place, all the practices that we have in place to grow our talent and our organizations. Everything from who are we recruiting? Where are we recruiting them from? What is our message to them? What are our belief systems about? What "fit" means? What experience you need to have. Being willing to challenge that with the overarching North Star in mind that, you know what? It ought to be equitable in the end because that's actually what normal should be.
GEORGIE: Do you believe in targets?
NAN: I believe in ambitions and goals. I think quotas and targets are dangerous if applied in too crude a fashion, right? I think what's important is setting an ambition that is a good ambition, a bold ambition, and then really keeping yourselves accountable to making progress and doing the right things to drive that progress.
GEORGIE: What if it's a choice? What if women want to get to an age and have children and leave the workplace and not have those sort of high-pressure jobs? And what if that's what, not all, of course not all, but what can you do then as a company, if you're trying to not necessarily fill targets but certainly have a wider diversity of thought?
NAN: I think these are all individual characteristics, choices, preferences, priorities, and values. So absolutely there will be women, and I would argue there will be men, who would actually prefer to devote their lives to their children, for example, who would like to step out of work at an earlier age. Absolutely. I think at the moment, the forces out there are making those predominantly choices that women feel they have to make because they don't really see a good path outside of that choice spectrum.
GEORGIE: Is there an argument though that, yes, to a degree, you could say that the way that industries and work are structured in businesses is not conducive perhaps to women wanting to push themselves to leadership roles, but could that also just be society? Aren't businesses just playing a role, which is very difficult to change when society has those norms and expectations?
NAN: Well, I think, obviously, there's a big societal question here, and societally, we need to change and make progress. But I disagree with business's role is small. Actually I think business's role is huge. And if not business, then who? If businesses aren't actually declaring that, "Look, we actually aspire to something better. We know we will be a better company. We'll be more innovative, we'll drive better results. We'll be a better home for the best talents if we are more inclusive. We know this and therefore we will work on that and we will do better. And we will actually move the needle." If companies don't do that, oh my gosh, this is going to be so slow, right? Society moves slow. I mean, absolutely parents play a role, institutions play a role, governments play a role. Absolutely. And a lot of the pressures and the stereotypes and the biases are really driven by societal factors. But every company can control their culture.
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GEORGIE: Nan, thank you so much for joining me. An absolute pleasure. And thank you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com, and if you like this podcast, why not hit subscribe and leave a rating wherever you found us. It helps other people find us too.
GEORGIE FROST: Right now when it comes to climate, business leaders are watching each other carefully. There have been big promises and big commitments, but the world is a volatile place. If you're a CEO, you're focusing on threats to global trade, the Great Resignation, and your customers' tightening belts. So is it better to let your competitors move first on climate policy and learn from their mistakes, or be out in front investing early? Or is treating climate like an oncoming storm for your business exactly where we're going wrong? I'm Georgie Frost, and this is "The So What from BCG."
RICH LESSER:
GEORGIE: Today, I'm talking to Rich Lesser, former CEO and now global chair of Boston Consulting Group who led BCG's presence at COP26.
RICH: While this COP overdelivered against the political backdrop and incoming expectations, it still underdelivered against the science. We need to be on a pathway ideally to 1.5 degrees, if not that, as close as we can get. And while this was the targets that were put forward were meaningful improvements, we're not yet on the pathway that we need to be on.
GEORGIE: The desire from businesses and business leaders is clearly there, but if the systems and structures aren't in place yet with which to meet that demand, how can we hope to achieve what we've already committed to, let alone even more?
RICH: First, getting to the commitments that have already been made will not be easy, and frankly, in the very short term, what we're seeing with the war that's going on, the implications for energy security that many parts of the world are feeling, let alone even worse challenges like food security, but even on the energy side, we face near-term challenges and we face, you know, broader medium-term challenges to realize it.
And some of it is working with governments to put good policies in place, policies that encourage decarbonization, ideally, including a price on carbon, policies that encourage investment in new technology, because while we can make enormous progress with the technology that exists today, we will never get to the net-zero goal unless we bring down the cost of advanced technologies that'll be critical to go after--the harder to abate parts of our global economy. So we do need action from government. But it is also true business can do a lot even with the mechanisms already in place. And what we see in working with clients across many, many sectors is that you can actually take out more carbon than you realize, not just in your own operation, but with your business partners, more than you realize with the technologies that currently exist. It does require a change of mindset, it does require reprioritization, it requires some investment. It's not easy, but it is doable.
GEORGIE: Rich, how did you as CEO of BCG reach your own climate commitment?
RICH: I was fortunate. When you're at BCG, you have very smart, passionate people around you. It's just part of being here. It's one of the privileges of being here actually, and I was fortunate to have a number of colleagues, who felt like the world was not acting fast enough post the Paris Accord, so this is in the 2017-18 period. We weren't seeing the actions that we had thought might come out of the Paris Accord.
That was true across the full economy, and frankly, around the world, and that BCG was in a unique position to have impact in accelerating progress, because we have this privilege of working with businesses and governments around the world. We know how to make really hard change happen; we know how to solve hard problems, and while we were working in this space, we weren't working at the level we needed to, and if we were going to be credible to work with others and advise others, we had to walk the walk ourselves and our own commitments, while we had green initiatives in place in different offices, but we were not doing what we needed to do to show our own commitment to being net zero, let alone then have the credibility to walk into somebody else's office and say we can help them. When you first hear tough messages, I think we all have a tendency to maybe put up antibodies at the beginning to, to resist a bit, but--
GEORGIE: Did you?
RICH: [laughs] Yeah, for a bit, you know, I'll send a video to the entire partnership of how we are not doing enough, whatever. You know at first you say, wow, you know, really? But then you say, you watch the video and you say, OK. And I was just entering my final term as CEO, you also start to think about your legacy. And I feel like this is like a really important thing, and if I don't do this, I'm not meeting the responsibilities to our partnership, to the world, to what BCG lives, tries to live in our own purpose statement. But I think at some point I said, I really just thought they were right and I was wrong to have...not ignored it, but not taken it at the level of seriousness that it deserved to be treated.
And so I told the partners that. I said, we are going to change the way we act, but we're also going to realize that our biggest impact-- that we do have to get better ourselves-- is to help our clients, because we work with clients across so many sectors of the economy, get tons of emissions across our whole client base, and how do we help them improve? And for some it'll take longer, some will go further, some will go less far, but we should be a force for good and a force to help drive positive change and do what BCG does best, which is help our clients understand how they make changes they need to make and do it in a way that leads to sustainable and lasting advantage for them, and that we are uniquely positioned to bring those kinds of insights and then to also contribute to the world through our Social Impact practice. So then you get to work.
GEORGIE: With so much volatility in the world, are we in danger of taking a step back perhaps from the commitments made in Glasgow? I say this because I was at a financial services event last night actually, and there were a people there who were saying to me, do you think consumers really care about green anymore with the cost of living crisis, inflation so high, a war going on in Europe? I mean, it's also been argued the Ukraine war spells the end of globalization, yet this is surely a global problem and a global solution is required. Do you sense that some of that momentum from COP26 is being lost and actually, given the current situation, could seriously be dented, or are you more hopeful than the people last night?
RICH: Both. War--when it leads to energy issues that are going to raise energy prices, and food security issues that are going to raise food prices, and people worrying in a way they haven't about security and all of those pressures--how can that not take up a high share of mind? So in that sense, I think those concerns in the very near term are justified. We're all hoping we'll get beyond this before too long. And I won't try to project how that's going to evolve, but we just have to remember we're in a 30-year battle here.
To your point about consumers, I think it's a fair observation, not in every sector and not every consumer, but many consumers in many sectors are currently unwilling to shift behavior, or pay premiums for more green products, at least not high shares of them. A few, a small percentage will, but not enough. But frankly we're making it so hard for consumers right now. There's no consistent labeling. The messages of what it means to be green aren't clear because the measurements aren't fully transparent. At one level, it's easy to say consumers don't care. It's another to say it's our job, as business leaders and government leaders, to create an environment where consumers who are committed will make smarter choices on this just as they hope we will in other aspects of their lives and where we invest to educate consumers on what it means to make smart choices.
And very little of that has happened. And so to write off the consumer over a ten-year horizon I think is both wrong and dangerous for a business who thinks that way because they could really miss the boat. As we've seen on what's happened on electrified cars and how fast that market has taken off versus what people were projecting five or ten years ago, that will happen in other categories. But it's also underestimating the consumer. Yeah, if I make it really hard for people, of course they won't do it to the extent we want. We need to make it easy for people to make those choices.
GEORGIE: I said at the start, a business leader balancing their responsibility to their company with that of the planet, but do you think there is that sort of split, that you can only do good for your company or for the planet, or actually we're at such a stage now that if you don't consider the planet in your business planning, you're not considering your business?
RICH: believe it's that logic, of it's one or the other, breaks down for two reasons. One, just in general, companies that live purpose, companies that come at things with a multi-stakeholder mindset, yes, of course they have to deliver value to their shareholders and their owners, but they also deliver you to employees and society and customers and doing the latter is essential to being able to create long-term value for the investors. We've seen that over and over. And what, in BCG parlance, it means the total societal impact and total shareholder returns are synergistic rather than in conflict with each other, if done well, if done with strategy and thoughtfulness and good execution. It doesn't mean one automatically is synergistic with the other, but it means it's very possible to make that.
The second thing specific to climate and sustainability:
To not think that it's in your business's interest to figure out how to align with that tailwind rather than to argue for the status quo and to face that as a headwind, as a business leader, (I heard Indra Nooyi, the former CEO of PepsiCo, talk so passionately about, the first starting point for good strategy is look to align with tailwinds rather than try to run your business against headwinds) if investing in climate and sustainability, when the world is going to spend trillions and trillions to do this, and governments and customers are going to change their behavior, sometimes faster, sometimes slower, if that isn't the kind of tailwind you want to align with, I don't know what is.
Now, does that mean it's easy, does that mean it happens in every business at the same time? Of course not, and it doesn't mean you can do everything that the world might want you to do all at once. It does mean, considering this is a core part of how you develop strategy and then not just how you could develop the strategy, but then how you actually act on it, how you engage with society more broadly to be an enabler for good rather than a resistor. I mean, I think all of those things take on great importance.
GEORGIE: There is also tailwind and headwinds within moving forward in this space and trying to reach net zero. Do you want to be a company that just goes with the easy approach and tinkers around the edges, does the minimum of what you need to do to get to where you want to go, or do you want to be a business that stands out in front, that perhaps makes bolder moves, bigger investments, or is there a first-player disadvantage here?
RICH: It's going to be some of...and part of the job of leadership is to figure out how to do that which is right in the right way so that you can also be successful as a business, so that you can thrive, so you have reinvestment capacity, so that you can take market share and then double down with winning strategies that are aligned with our planet and climate and sustainability, and other priorities. I would argue diversity and equity and inclusion would be another one of those. It's not the only one. It's just the one that touches all of us globally in such a huge way. I think that's the responsibility.
But if you know that the right change is a really hard change, government policy that forces everyone to be transparent, that allows it to be easier to show that you're differentiated if you're outperforming, because others can't obfuscate it so easily, that force everyone to incur some level of transition cost to a lower carbon economy, so if you're the one making the investment, it doesn't seem like your costs are going up and no one else is, everyone else has a cost advantage, I mean, those things are in your interest.
And I use the business to government example, but I could say that for companies in the same sector. Imagine being a supplier to four different companies downstream of you and each one of them sets different standards of how they want to measure, of what data you need to submit, of all those things. Imagine how complex you made it for a supplier, which might just be a mid-sized company, to try to live up to its customers' expectations. So when sectors align and say, we're not going to align on our plans, we each make our own plans, but we are going to align on the kind of data we want from our suppliers, the formats we want it in. Sectors aligning on things like that help everyone.
So while I do think individual actions of companies need to be bold, they also need to be thoughtful about how we move together in ways that make it easier and less risky for all of us to move and don't have the ones that go a little faster feeling like they're really taking risks in terms of their near-term performance in ways that will scare off their investors or put more pressure on them to not take those kinds of actions.
GEORGIE: You spoke a lot about engagement, so engaging across industries, engaging with sector leaders. It seems that messaging, communication, engagement, collaboration are absolutely fundamental.
RICH: I completely agree. I would argue that engagement strategy will be different for different companies and different sectors, but is critical everywhere. I think almost every leading company needs to engage across its supply chain, should be engaging with others in its sector to align on standards, to talk about initiatives that they can move together on that will make it both less risky and more impactful than each company trying to do it alone, to engage across industries on things like breakthrough energy catalysts, where companies from across sectors try to fund new technology or do other things to ensure progress, and of course, of course, with the public sector, to try to get smart government policy that can allow us all to go further, faster, and to still have a very productive and growing economy in the process.
That engagement strategy is absolutely essential, and every CEO needs to think carefully--three things: Commit, act, engage. Commit, you do as an organization, or as a leader and as an organization. Act, you have to mobilize your team and figure out how to make it real.
GEORGIE: Rich, you finished your final term as CEO of BCG very recently, but are you still personally as committed as ever to the climate cause?
RICH: Yeah, so I stepped out of the CEO role at the end of September. It was a big change. I'd been doing that role for a long time, and honestly, I didn't know what I would do next. Even a year ago, I wasn't sure what, where my time would go. But as it turns out, it's probably about 60% to 70% of my time now is working on climate- and sustainability-related topics, partly helping BCG, because we've started this new practice under my successor who formalized it as a practice, and I'm so excited about that. So I try to contribute to that team in any way I can.
Some of it's talking to CEOs and other business leaders. Some of it's helping a few clients specifically because I have to stay on top of what it takes to do this; and the real problem...it's easy to talk theoretical, it's hard to be on the ground, actually making it happen. And then of course, to contribute to society, meeting our COP delegation as senior advisor, to the WEF CEO Climate Leader Alliance, you know, and in other societal ways where I can contribute and make a difference.
I feel like I have this privileged position where, having been a CEO who had to step up to these challenges myself, and as I said, wasn't the first person to realize that, you know, I had to come along on my own journey to get to talk to leaders across so many businesses and across society, and to have the time now to really engage, whether it's in the science of new technologies or the operational challenges of changing supply chains, or CO2 AI and how you put a whole new measurement and AI infrastructure in to make this better. I've got this privilege of time and now it's my job to use that privilege in the most productive way I possibly can.
GEORGIE: Do you think this situation makes the job of a CEO much harder, or is it just another challenge to be faced, and actually there's a real opportunity? As you said, I mean, just one aspect, to leave a legacy, to leave a very positive lasting legacy on a company and on the world.
RICH:
Yes, it is a harder job. It is also a more privileged job because I think a decade ago when you stepped into the CEO role in most companies, BCG was a bit different because we're a private partnership, but I'd say for most companies, the focus really centered around the shareholders and investor returns, and that was the one yardstick. I think what we've seen over this last decade, where purpose has come much more to the fore. There's so much more emphasis on how do you articulate purpose? How do you live it, how do you tie it to your history? How do you use it as an engagement tool within your company and in the world? It's a privilege for a CEO to have the license to do that versus just thinking about like what they're going to deliver over the next year or two in terms of performance.
And then the other thing, I'd say, the tools that are at our disposal to make a difference. I mean, what's going on in technology, and not just the technologies we've already put in place, the ones that are coming, offer enormous opportunities to build a deeper relationship with customers, to have better data to make smart decisions, to have new tools to create better offerings for customers. I mean, it's an extremely exciting time, but you know, with excitement comes stress, and there is a lot of stress too.
GEORGIE: Rich, thank you so much. I really appreciate your time.
RICH: It's really been a pleasure, Georgie.
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GEORGIE: And thank you too for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit Subscribe and leave a rating wherever you found us. It helps other people find us too.
GEORGIE FROST: How do you feel when you wake up on a Monday morning? Invigorated at the start of a brand new working week or full of dread? Here we go again. When it comes to employees, most leaders focus on their thoughts and behaviors. But when it comes to creating the right culture, feelings and emotions are just as important. As our work and home lives become ever more entwined, and more of us reassess our work life balance, is all this about to change? I'm Georgie Frost, and this is The So What from BCG.
GABI NOVACEK: We don't quit jobs always because somebody's going to pay us better or there's a better benefits package. Absolutely, that does shape decisions, but a lot of the times we quit a job because of how it made us feel.
GEORGIE FROST: Today I'm talking to Gabi Novacek, a core member of Boston Consulting Group's, Consumer and People & Organization practices, and a fellow at the BCG Henderson Institute working to advance diversity, equity, and inclusion in the workplace.
GABI NOVACEK: I personally have been on a little bit of a roller coaster and it actually started before the pandemic began. If I rewind to March of 2019, my wife was diagnosed with stage four colorectal cancer. And I mean, it's a traumatizing piece news to receive. And at the time when I had to figure out like, how was I going to balance dealing with this incredible kind of crisis together with a job that I love and I am passionate about, but it is incredibly all-absorbing of your time and energy? I had to really rethink how I was going to make it all work.
And I started to reconfigure my work life and I started to drop leadership positions and step away from things, but it was really the pandemic then that was the next big inflection point for me. And it was all of a sudden finding myself- I was at home and I was on Zoom or I was at my computer and I was doing work, but there was so much going on behind the door in that personal life, and
And I found myself a really reprioritizing where I spent my time at work on the things that challenged me, that delivered impact, that that allowed me to continue to learn, to influence others. And if it didn't do that, I dropped it away. And now, we're 18, 20 months into the pandemic. I'm continuing to work part-time, which I never thought I would have done, but I it's really become kind of my new normal as I look to balance things in very different ways.
GEORGIE FROST: Your role in the work you do with diversity, equity, and inclusion in the workplace to me feels very much driven by feelings of emotion. Had you ever looked at it in the same way that you do now? Having that experience, has it impacted on how you look at your role and how you approach trying to find solutions?
GABI NOVACEK: I can't even begin to describe how much it has. I mean, I think there's one- there's an inner level of that, which is, I'm not a mom. You know, I had never taken maternity leave. I had never had to figure out how to balance work and kids. And I think there was one slice of this which was just taking on the role of caretaker, completely reshaped my understanding of what it is that folks are wrestling with every day.
But I think at a more profound level, it really prompted me to step back and say, we spend so much of our energy on DEI work, doing- it's profoundly critical, the efforts to say, how do we address issues of pay equity? How do we address issues of equity and promotions and hiring and the like?
And as we think about a way to drive that next big step change of diversity, equity, inclusion, there's a big missing link, which is every one of us is going to make a choice. We're going to make a choice to get up, to feel happy, to feel motivated, to want to stay in the job. Like how do we actually tap into that? You know, and as somebody who's gone through crisis and has had to make that choice, what is it about the job that says, "I still want to keep doing this. I still want to get up, I still want to engage. I still want to put my energy against this." It's such an important part of the equation.
GEORGIE FROST: I want to talk about the way that that we think about work. And I'm wondering if we've got it all wrong in a way. You only have to look at children to see that the best way that they learn and develop is through stories, through narratives, through play, and we still love play. And you just have to look at some of the astonishing figures coming out of how many hours we played Fortnite, not me included, during the pandemic, many, many hours. And yet of us get this sense of enjoyment, this sense of achievement through playing something like Tetris. You can tell how old I am. Satisfying though nonetheless pointless, than we do from our work. Can businesses, can leaders incorporate that mentality, that play more into our work so that we can get more of a sense of purpose, more of a sense of motivation on Monday morning?
GABI NOVACEK: I think we can, and I think it can happen in two ways. So one is when we research the underlying drivers of what really motivates people in the workplace every day, I think we often confuse this idea of advancement with achievement. And there is this real sense among a very large proportion of the workforce that I come to my workplace every day and I am motivated, I am happy, my brain lights up because there's something that I'm doing that is challenging. And I'm interacting with others in order to do things that solve a problem or get to something different, or allow us to tackle something that's complicated. And it doesn't matter what job role you're in.
And I think it feeds into that idea of play a little bit, you know, which is this notion that we're not always motivated by the next big job title or the award.
And I think the second piece that we've really seen throughout the pandemic is as we have been pulled apart from one another physically, it's been so fascinating to me, as we think about coming back from the pandemic and what is the time that we spend together? What is it best used for? It is when we need to connect, to affiliate, to play, to find joy, to creatively solve problems together. That's actually when we are best when we work together.
GEORGIE FROST: So how then do businesses respond to that change?
GABI NOVACEK: So I think we, just at a fundamental level, we need to get away from talking about emotions as something shameful. You know, like I can think about times when I have broken into tears in the workplace and sitting in my office and trying not to be seen through the glass wall that everybody can see. You know, we've all had those experiences. And I think we've all been trained and coached to feel like that is something shameful and that's something to hide. That's not really what I'm talking about when I talk about emotions.
When I talk about emotions, what I mean is that we are all prompted to make decisions every day based upon a set of things that are going on inside our brain that transcend the functional. So my mom wouldn't let me eat sugared breakfast cereal as a kid, and now when I'm walking the aisles of the supermarket, I pick the one that has the most colors and the most sugar imaginable, not because it makes any kind of rational nutritional or economic sense to pick that box, but because it triggers that emotion that 40 years later is saying, "You know what? I'm going to stick it to mom and get that cereal, right?"
I mean, this is everything from frontline retail to the executive suite. It's like a collective post-traumatic growth experience that we're all going through at the same time and actually really evaluating the calculus by which we make these decisions, and some of those factors are starting to play a much bigger role than they ever had in the past. And so businesses are not recognizing that the people who I depend upon to be successful, I mean, we're at the point where restaurants are not opening because there's nobody to serve the table. I can't possibly have a successful business if I'm not thinking about my talent in a way that includes a conversation about what is it that they're looking for when they come here beyond just the paycheck?
GEORGIE FROST: Is it as simple as saying this great resignation is due to the fact that we've all had a pandemic, we've all sat down, we've all been at home and all realized that actually there's more important things in life than earning money and working, or is it something else at play?
GABI NOVACEK: Think it's multifaceted. I mean, I think there is a very fundamental set of issues that are going on in that we have had massive segments of our labor force who have not had wages that have kept pace with economic growth and inflation, who have not had security when they come to work.
When we talk to certain segments of the workforce that are more hourly in nature, or perhaps were more in the frontline roles during the pandemic they talk a lot about this idea of security and that of course gets manifested in things like I have an employer that doesn't respect my health, welfare, and safety when I come to work. I have an employer that doesn't provide me with health security in the US market where we're dependent upon that from our employer. And so there's some very fundamental issues that are going on, which are just about equity in the workplace.
But there are now also these broader questions as individuals have retreated into these workspaces in our homes and said, "What is important to me?" You know, I think the simple fact that I'm an executive in a fairly intense job, and I haven't worn business casual from the waist down in 18 months, right?
GEORGIE FROST: When I'm having a bad day or something is on my mind personally, I love going to work. I love the fact that I don't have to think about what's going on in my life. I don't want the two bleeding across. What would you say to people, businesses, who say this has all gone too far, this wellbeing, this diversity and inclusion, all of them are wonderful things to have, but have we not just gone a bit too far? Is it not just go to work and do your job?
GABI NOVACEK: Yeah, it's funny. I don't know if you ever watched "Mad Men," but there was this great scene where Don Draper is mad at Peggy, and but I he's like, "I pay you, I pay you the money." You know, like that's it, like you have the job and I pay you the money. That's what I owe you, you know?
GEORGIE FROST: I sure there's a lot of bosses that think that, right?
GABI NOVACEK: Yes. There's something to be said for that, and I think at the end of the day, we are businesses and we are in business for a purpose and we need to fulfill that mandate. That is what we are here for. I think the challenge that gets presented by that though,
And you depend upon that human capital to generate the things that drive the business. And when you struggle to hire your fair share of talented people in the market, when you struggle to keep them employed and staying with you, when they come to work distracted and unmotivated and unhappy, they don't generate the types of work and thinking that you would hope. And there's a very, very real impact on the ROI that you get from those human beings. And the world is becoming more complicated and it's becoming more diverse, and it's simply a cost of doing business is to be able to actually see a diverse group of human beings be successful inside of your environment if you actually want to be a successful business.
GEORGIE FROST: Agreed. And we're talking about sort of inside your environment, the things you control. I was reading about a company that asked their employees at the end of the working day in the lobby to press a button, smiley face if they're feeling happy, frowny face if they feel sad. I don't know about you, it sort of reminds me of service station toilets and how clean they are, but anyway, somewhat crude and maybe a little gimmicky. Of course, it depends what you do with that information. But there's certain things that businesses can control. You know, the quality of your work. Is there some bullying going on, those sorts of things? But they can't control what happens outside. So where do we draw the line? How, as a business, are you trying to measure, trying to promote satisfaction at work with the things that you can't actually control?
GABI NOVACEK: So we have focused on the things that we can control, but we haven't been broad enough in what we understand that to include. Like I talk a lot about we focused upon what happens to people when they come to work. Am I experiencing kind of unconscious bias from my manager, or did I get left out of a promotion opportunity because there was something that was perceived about me, did somebody use language that was offensive?
Like, there's a lot of things that happen to us that are squarely in the realm of businesses to say I need to create an environment that's free of discrimination and bias and the like. But I think there's a broader aperture to that.
Or do I actually need to say, I actually want to motivate them to be innovative, I want to tap into their desire to be successful, I want to find a way to give them the mentorship that they seek, because for them it's really important to feel like they have role models? Like I'm actually creating a broader environment that breeds success in the workplace environment. I'm not going to solve everything.
You know, I think there's been a lot of very well intended work on topics like racial equity and the like that have been trying to bring a lot of discourse into the workplace, and it's really interesting and it's really important, but at some point you start to say, "Okay, is that book club, is that going to be the thing that actually changes the outcome for somebody at work?" Like, yes, it might make them feel better, because somebody's listening, but is it really going to change what they experience day to day when they work in a team?
Is it really going to change whether or not they get that opportunity? Does this tap into their motivation to do work that has impact? Maybe, maybe not. And I think that's where we start to run into trouble is we don't always compute what the intended outcome is of where we're focusing.
GEORGIE FROST: Some of the argument that's been thrown up about diversity, inclusion, wellbeing, been viewed as actually causing divisions between people, the mothers that are allowed to work flexible hours and then other people saying, "Well, that's not fair." Could some of these things create divisions? How do you make sure that that is not the case?
GABI NOVACEK: Oh, absolutely, absolutely. And I think we're seeing it in the data as people talk about in our survey and research work, their perceptions of the value of DEI programs and whether they benefit from them or are harmed by them, etc.
GEORGIE FROST: Do they explain why?
GABI NOVACEK: So we follow up survey data with focus groups and interviews to try to understand and what it boils down to is this sense that, and I'll make it sound academic, but it's a little bit of there is a fixed quantity of power, resource, and opportunity available, and when you disproportionately allocate some of that to people who have been identified as marginalized, I lose out.
The reality is those disadvantaged groups have missed out. You know, we actually are righting what have been intensely discriminatory and unequal processes that have manifested through time, and we are trying to reshape behaviors and outcomes such that they reflect what should be sort of everybody getting their fair share at the end of the day, and that is very painful.
But I think the there's another piece of it, which is you can focus on how do I better allocate a total quantity of things or you can say how do I actually make that quantity of things bigger and more substantive and more kind of inclusive of everybody? And so one of those things might be to say,
At the end of the day, we have to actually deliver on our jobs. We have to do what the work output is that's demanded of our role, but I can actually step back and say, "I can re-craft the rhythms, the rituals, the routines of the day in terms of how we work together to get that done so that more people can be successful in delivering that."
And what you're doing is you're taking the conversation away from: a target has been set and I'm not part of that target and I'm going to lose out, and instead, what we're saying is no, we're going to reshape how we think about kind of the nervous system of the way we work every day, and we're going to rebuild it in such a way that we're actually expanding the breadth of who can be successful in that context, in that environment and who can tap into the things that matter most to them. It's a win-win when that happens.
GEORGIE FROST: You spoke about humanity. I'm wondering if you have optimism that what's happening at the moment, whatever you want to call the great resignation or the pandemic or whatever, is actually making a seismic shift in the way that we view work, all of us?
GABI NOVACEK: I really hope so. Before I was a consultant, I was a PhD in the social sciences and so much of the work that I did was studying through these great inflection points in human development. And I would love to think that this is one of them.
But now I look and I say, "My God, like we've got this generation who is growing up in the middle of this and saying the constraints that defined how we work are gone, that defined where we need to live are gone. I can reshape how I make decisions in ways that look really different. What I value can now look really different. The pressures I can put on kind of my workplace and how I want that connection and relationship to look can be different."
GEORGIE FROST: Gabi, thank you so much. And thank you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com and if you like this podcast, why not hit Subscribe and leave a rating wherever you found us? It helps other people find us too.
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GEORGIE FROST: There aren't many businesses or industries that have gone through the pandemic unscathed or unchanged, but there is one that's been continually buffeted by COVID and whose future looks more uncertain than most. What will the lasting impact be on the travel industry, and what do leaders need to do in the face of such volatility to ensure their businesses not only survive, but thrive? I'm Georgie Frost, and this is The So What from BCG.
JASON GUGGENHEIM: Consumer behavior is one that I think will shift and has shifted. And then I think a use and a willingness to use technology to disrupt their own models and processes to get better, quicker, more reactive.
GEORGIE: Today, I'm talking to Jason Guggenheim, global leader of travel and tourism at BCG.
JASON: Historically, many companies, including travel companies have used history as a guide to the future. So what did the previous three years look like, the previous five years? And within reason, you could leverage that as a means to plan, what do the coming year or two or three probably look like. And I think what COVID has done is created a world in which you can't rely. History is no longer necessarily a lens to the future.
GEORGIE: Which of course leads me on to the question, Jason, of how do you as a business leader predict the future with such volatility and just explain to me the importance of doing so, the short,- the medium-, and the long -term.
JASON: Yeah. Many travel players, not all but many are still quite fixed capacity, very asset-intensive businesses, whether it's land and buildings, in the case of hotels and resorts, airplanes, cruise ships, etc.
I think in terms of the need to do that more long term, so if you move beyond medium term and say where do I think we'll be in three years or five years, I mean, those are obviously really hard questions given just the volatility in the short term. And sometimes we are seeing that short-term volatility actually in some ways being quite crippling of executives' willingness to look three or five years out because it is so uncertain today and tomorrow. But again, I think executives have a duty and onus to drive value. And so I think thinking through business models that will be more resilient to this type of volatility, the next, who knows what that will be, pandemic, etc. There's just an onus to think both in the short term to survive, but also in the long term to ensure that their business models are resilient enough to thrive in whatever gets thrown at them.
GEORGIE: I'm wondering whether many of the patterns of change to the industry that we're seeing now were already put in motion, already set and likely to continue after this disruption. That's in no way seeking to minimize the impact of coronavirus. I'm just curious about how fundamental some of the changes have actually been as a result of coronavirus.
JASON: I think some of the patterns were set. And look, I think some will probably continue. And one of the things also, it was interesting when you started to see the results of COVID show up in travel, you saw very different outcomes starting to emerge across the world. For example, you saw Europe was much slower to come back and has been slower, where domestic US certainly on the leisure side is pretty much back to where it in 2019. Some of those patterns will come back. Some models that relied on types of travel that have been more affected, more threatened, more reliant on cross border, etc., I think maybe slower or may come back in a different form. People will choose alternative behaviors, right? Whether it's video, whether it's hybrid, whether it's train, etc. And so I do think there are some adjustments into how businesses will be run.
GEORGIE: Coronavirus is of course incredibly impactful. We've seen the impact of it already. It won't be the only factor and hasn't actually been over the last couple of years the only factor in influencing this industry. It's important not, I guess, to be blindsided by it and forget everything else. Climate change of course is the one thing that I'm thinking about here and one of the biggest ways, of course, that we can reduce our carbon footprint is to stop flying.
JASON: Yeah.
GEORGIE: You spoke about predicting the future, but before I get you to tell me ways in which you can do that using data and technology and building resilience, I want you to tell me what you think, crystal ball gaze now, what you think the future of this industry will look like. Let's say I'm the CEO of a travel firm. I come to you. I want to know what I should be doing, what will my consumers want in the future.
JASON: Yeah. Let me maybe take that from two different angles. So one is the consumer, as you mentioned. Then I think the other pillar around which I would build a prediction of the future would be technology. And so let me take consumer first. I think there is going to be a huge onus on travel companies to truly understand behavior going forward. We're all working differently; hybrid models, flex models, people in offices certain days of the week, at home other days of the week. It's going to fundamentally disrupt our travel patterns. It also has and will I think fundamentally disrupt the way we take vacation. More shorter trips, more trips that are combined work and leisure, more trips where I may be socializing with my coworkers as opposed to actually only meeting with my coworkers at meetings and events, etc.
GEORGIE: Do you really think that's the case now that we're in the Zoom era? Why do we need to make those business trips anymore?
JASON: Yeah. So when we do research and talk to executives, but also talk to leaders of companies, travel managers and companies, we see a few things. One, culture, human connection amongst employees is still a critical part of collaboration. People want to know who they're working with. And yes, you can get to know somebody, so to speak, over technology platforms, but really you don't create the sort of bond and trust in many cases that you do when you're at an event team building, training, etc., where you're live in a room and you're having the proverbial water cooler conversations about what you did that weekend. A lot of that disappears on Zoom, right?
Zoom is incredibly efficient, but it's not very effective at building bonds and relationships amongst people. I think we also see when you talk to leaders that their belief is, and I think you're even starting to see this now in travel behavior, you will not replace the connection between, let's say somebody selling something and somebody buying something, those client relationships in whatever form they take, right?
So I think that's part of the onus on travel companies is to try and understand how that affects their product, the way they market, the way they price, the way loyalty programs recognize those who used to travel maybe 50 weeks a year and no longer will, but that doesn't mean they're no longer the most loyal. And so how do you adjust a lot of the things that you have within your business? There had been a lot of talk and there has been a lot of talk about data, big data, AI and the use of it.
I think in travel, one of the things that I've seen both amongst my clients, but more broadly amongst the companies we spend time with is an acceleration of how companies are using and looking to leverage advanced analytics and data to in some ways predict or sense the future, whether that's looking for signals from consumers that help them better predict who's going to show up on a website to book or taking what used to be robust processes, so to speak, like the long tent poles in the business model, it may take me three months or six months to sort of, in an airlines example, build a network, schedule, assign the fleet, get the crew assigned. But in a world of volatility, I may need to learn how do I do that now instead of in 180 days in 15 days. And so you're seeing technology combined with humans really try and dramatically reduce the time taken for what were historically in some cases, very long, very manual, very linear processes in big complex operations.
And so I think if I had to sort of think about the future, consumer behavior is one that I think will shift and has shifted. And then I think a use and
GEORGIE: Human brute force?
JASON: So if a change happens, historically it took a lot of just human hands to push that change through the business, right? Whether that meant repositioning aircraft, repositioning ships, etc. I think now with the use of technology become less reliant on a lot of people making things happen and some combination of technology and people to make it happen more quickly. And in many cases more accurately, right? Faster and more accurately.
GEORGIE: On that theme, the companies that seem to have been the most successful during the pandemic are those that have been able to pivot their business models, be flexible, adaptable, move quickly, find opportunity perhaps where they hadn't looked in the past. A really simple example perhaps would be, I don't know, a beer company that makes hand sanitizer. For many in the travel industry, and I'm thinking big airlines, for example, where do you see their space for that sort of adaption? They seem so linear and not just linear, they work within an ecosystem that is large and seemingly so immovable. How do you square that circle?
JASON: Yeah. That's the billion- or trillion-dollar question that many of them are asking. I think some of it will start as we were talking, with innovating and being willing to sort of really change some historic ways of working and processes and challenge the way things are done in order to get faster and more agile, that both allows them to take costs out, maybe make costs more variable than it had historically been, which allows them then to react to changes that happen just with more agility, right? Less fixed cost and more agile. I think some of it is also going to require executive teams to think differently about value and where does value come from? Obviously, in many of these businesses, there are still going to fly people or sail people around put people into beds, but
And so I think you'll see some creativity around business models that could emerge maybe initially as adjacencies to the core travel business. A great example of this is Qantas down in Australia, not driven by COVID, but driven by other sort of threats to their existence from other competitive entrants, etc., went down a path of creating a data business, a loyalty business that really had a robust currency. They pivoted that into a health care insurance business based on the data and customer set. And so they thought differently. They thought about assets beyond just a steel tube and a network. And so I think hopefully those that are innovative will look to do more things like that to find pools of value that historically hadn't been tapped within the business.
GEORGIE: Where do you think collaboration will fit in in the future? With that, I mean, companies that work within the same space, perhaps two airlines, as well as those companies that work within complementary areas such as hotels, airlines, insurance firms.
JASON: Yeah. I think that's a great question. I mean, over history, you've seen collaboration often become the key to solving some really big industry challenges. So over the arc of my career, if you go back, one of the early things I worked on was Orbitz, right? A collaboration between the major airlines in the US back over 20 years ago in creating an online web-based distribution challenger to the others, Expedia and at the time Travelocity. And so I think collaboration can certainly play a role when any individual player, whether it's airline or other on their own was unlikely to solve or really make a dent in that problem. I think more recently you've seen ACT come into being with two plus global airlines or aviation climate task force where we as BCG were sort of instrumental in coalescing airlines to collaborate on sustainability, alternative fuels. Our view is no individual airline will solve this on their own. There's very little, if any, competitive advantage for one airline solving it and not the other. It's a global problem, it's a problem of humanity, and so why not collaborate? Ten or 15 or 20 or 25 airlines working together to fund technology and innovation, alternative fuels regulation, is far more powerful than all of them trying to do it individually, sometimes pushing in the same direction, but sometimes pushing in 20 different directions.
So I do think there is a role for collaboration in solving some of the structural and other problems that exist in the industry. Another example is four or five years ago, we had a thesis that there was a better ability for data to flow across people's travel journey. And so today your airline data doesn't talk to your hotel booking, doesn't talk to your car rental booking. And so we helped with some partners sort of create a business by the name of Journera that really looked to create a safe, well-governed data platform that travel players—hotel, air, and others—could plug into in order to better serve their customers by knowing more of out their travel journey to knowing that I was going to get on a plane, but then I had a hotel on the other side. And so should I get disrupted, why not let the hotel know that I'm actually not going to arrive when I was meant to arrive? And so I do think there is a role for collaboration, for sure.
GEORGIE: Is the future bright for the travel industry?
JASON: Yeah. I think there's opportunity. I think the opportunity is finding those green shoots, those places where the consumer is going to be optimistic. I think leaning into leisure, finding opportunities for how the new business model, like how new businesses will meet and gather. I think it's probably too early to say it's bright. I think there's opportunity. I think there is still more strain to come, right? As the latest variant showed us and the numbers very quickly dwindled, those flowing through airports. But yeah, I think, look,
GEORGIE: Jason, thank you so much, and you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us. It helps other people find us too.
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GEORGIE FROST: Businesses and organizations have been working toward greater gender diversity for decades. Some are moving faster than others. Women account for just 16% of senior-level tech jobs and 10% of executive positions. So why is an industry that looks so far ahead falling so far behind? Has anything been learned from the way we've been working during the pandemic that could change all that? I'm Georgie Frost, and this is The So What from BCG.
NEVEEN AWAD: What happens is oftentimes women get dissuaded and frustrated by having to convince, challenge, and repeat the concept of where they see the future going multiple times before it's taken seriously.
GEORGIE: Today, I'm talking to Neveen Awad, a core member of the Technology Advantage practice and leadership team at BCG. Neveen also leads the Women in Technology Initiative in North America.
NEVEEN: When I graduated with a degree in computer science, I was the only woman in my graduating class. I originally got involved because I grew up in a house where my dad was an engineer, and he always had these early computers, and I thought they were so cool. He was always in front of them. So I wanted to understand these devices that he was really obsessed with.
Then when I got to college, I mean, I think it was a mix of I didn't really like memorizing and so I thought I wanted be a doctor, but I didn't like biology. Then I started understanding how fun it was to make a machine do something. Put together a bunch of code that really made no sense to lots of people, but that actually structurally broke down a problem into a way that you could sort things, you could figure out patterns.
Honestly, to this day,
Or you'd walk in and people would be talking about things that you were just totally uninterested in. I always kind of felt like, "OK, well, it's OK. I'm different, but that's fine because I like what I'm doing, and I have the people that are like me outside of this role." But it did, I will say, when I first graduated college, I didn't want to just become a programmer.
And a lot of the males who graduated with me just wanted to go work for Microsoft and develop Microsoft Word or...well, there was no Google at the time, but I'm sure they would've loved to go to Google. But that wasn't what I wanted to do. I wanted to be at the interface of the technology and communication because I felt like I was uniquely positioned at that place. And maybe I was, or maybe there was a part of me that was like, "I don't know. Do I want to be sitting in rooms with a bunch of males just grinding away at computers for the rest of my life?" Maybe not.
GEORGIE: I'm curious, Neveen, how that feeling has continued as your career has gone on and what you've seen from the experiences of other women as well. Because we do from the outside, speaking for myself here, no offense intended of course, we have this view of those who work in tech as a lot of guys in dark rooms playing with computers. It's interesting you say that as someone from the inside. Do women have a different role then? Are we advertising those roles enough? Are we employing our own bias here by even suggesting that?
NEVEEN: Yeah. Now, some of the most innovative people in the field are women and you see what they do and you see that there's so much more to it than the technology.
What's very critical for any organization that wants a diverse leadership board is to see that there are different ways of getting from point A to point B, and for enabling those different ways to occur. So that once you get to leadership, which is point B, there's people that got there from lots of different trajectories and then therefore see different paths forward for the organization.
The companies that have the most diverse leadership do that the best, and then therefore they're more economically resilient. They see better profits. There's been research that their margins are higher.
GEORGIE: I'd suggest it's more than a shame. [LAUGHTER] When you think about the industry that you work in, perhaps like no other, is shaping our future in our society. We hear a lot about inbuilt biases in creating technology such as AI. Is that a legitimate concern?
NEVEEN: I think if you look at the places where people have been really successful on changing society, like how we search, how we take car rides, how we buy things, it's been a lot of men that have charted those.
There's a lot of flip side to technology in terms of, yeah, there's wonderfulness of connectedness, etc., and progression, but if we were seeing all this stuff about the Facebook whistleblower and everything else where if things are handled incorrectly, there's a real downside to humanity. That's where the checks and balances, the different thoughts, the different ways of like what this could mean is very important if we're actually going to further our society right.
GEORGIE: And not to the exclusion of a big sway to society.
NEVEEN: Yeah.
GEORGIE: It brings to mind a book called Invisible Women that looks at the gender data gap. This world literally built by men for men. How the absence of sex disaggregated data in things like medical research, in transport, indeed in the size of our mobile phones is having a real-world impact on women, sometimes tragically so. Are we in danger of repeating this with AI, with machine learning, the metaverse even, that inbuilt bias? Or will it be so good, the technology, that it will learn not to be biased?
NEVEEN: Well, you hope it will learn not to be biased for sure.
So both last year and this year, we've done research with women leaders in tech. So over 1,000 minority and nonminority, senior, mid-level manager, women in tech, and there were just so many fascinating things that came about. A really clear difference of perspective for the senior women and how much agency they felt in terms of whether it meant rebalancing what was important to them in a job they took, whether it meant switching jobs because they just didn't want to be in a big organization and they knew they could get something at a small organization, and whether it meant just taking some time off for a period of time.
Middle-manager women felt much less agency in that. However, they felt much more value came to them from being in an environment where everyone was remote and so it was all balanced. So now you come back to the question you had asked me about the impact of making sure that men, women, everyone have similar impact in terms of how technology is used for the future, how it's used for society.
One of the things that's so important for organizations to figure out is how to create environments where there really is equal agency and equal voice. What that comes down to honestly, one, is making it very clear that differences are celebrated, not squashed [LAUGHS], which sounds so basic. But if you actually look at how every type of large-scale organization is run, it's often the case that there are few very key paths to success.
How do we create more paths to success that are just as quick but allow different levels of engagement? That's kind of one. By doing that now,
The last thing I would say is that the other thing that's super important is how do you get access early? Not everyone wants to be in STEM or it's we're not getting the diversity. We're definitely not getting diversity in tech that's racial, and we're getting more gender diversity, but there's an opportunity for more. So why is that when you look across our early systems, everything from like the Lego programming to building the robot. And you analyze the bulk of the people on those different teams, they do skew to non-minority boys. And so how do we encourage everyone?
GEORGIE: I'm interested to go a bit more into this research that you did, but because you did it in the two years that we've been obviously having the pandemic and the impact that that's had. You talked about things like paths to leadership. What will those paths to leadership look like when we don't even know what the world of work is going to look like? It feels like someone's ripped up the rule books, thrown it in the air and waiting for the pieces to land. They may all land together as they were, maybe go back to normal and everyone back in the office, etc. But I sense that's not going to be the case. So how do we navigate this "new normal" to the benefit of women?
NEVEEN: The first way we navigate it is to acknowledge that we don't have the playbook of what it looks like in the future and to try and just say, oh, in April, we're going to go back to what we looked like in January of 2019 is clearly not optimal for anyone. We also, the second way we navigate it is to say what the future of work looks like for Georgie may be different than the future of work for Neveen may be different than the future of work for Jack, etc. And as organizations, we have to figure out kind of what our parameters are of what we think needs to be, you know: these are how we want the team to work together, but then we don't necessarily dictate what that means for each individual person. So that may mean for some people being completely back all the time. That may be for some people hybrid and that might not actually affect productivity by any stretch and that now the teams have learned really how to work across these different environments.
The third way that we go back is we acknowledge that there's a couple of things that are very clear in terms of trajectory of diverse leadership. One is
GEORGIE: Do you mean bringing in that promotion quite soon? Is that what you're suggesting or is there something else to it? You have a big promotion, have more responsibility?
NEVEEN: Exactly. OK. You've done this job for a year, even if it's not officially, like you went from level seven to level six, like is it that you take on something, you take on managing a part of the team where you hadn't been before?
GEORGIE: Don't leave someone languishing.
NEVEEN:
GEORGIE: So if you are a business leader listening to this podcast, because you don't have to be in tech, this is across the board in terms of diversity, but what can you learn from this?
NEVEEN: Yeah. I mean, it's a great question. One thing that we didn't talk about and I know everyone knows, but just the research really shows is that women have borne greater number of hours of the ecosystem of the household than men. And actually for minority women, for non-Caucasian women, what that has looked like has been different. It's been kids and family versus just kids, for example. So that creates different types of pulls. So why do I say that?
As an organization, as an employer, understanding that and understanding that that's part of the reason you have to create different work models, different paths to success, different journeys through the organization is because actually those people can bring in a very valuable perspective that may be different than someone else's perspective and therefore will make you a more effective organization is really critical.
So with that as context, key lessons for organizations moving forward. So one is in the vein of the ecosystem. People like men, women, everyone, are looking for work life balance. And what that balance means is very different for everybody. That's why creating different ways for people to take step-backs in careers and making it more normalized.
Second thing is that there's been a lot of learnings around the value when you're in the middle of your career of feeling equal voice and equal space. So how do you structure interactions, meetings, your operating model, etc., so that you make sure that you're giving equal voice, equal space, same manager attention, same manager and coaching and guidance across your entire set of mid-level and junior people, because that's actually really important in their career trajectory. The third thing, just kind of thinking again on like the value that the manager plays.
The fourth thing would be, as you look at your work models, as you look at like what it means to come in and then advance, look at how much you enable people to chart their own course, how much that's encouraged, how much there are examples that you can show. So those would be the ones I would say are kind of very critical. All that comes together to basically create an environment that feels inclusive and supportive and enabling to everyone.
GEORGIE: One of my big fears, Neveen, is this move to working from home that we've seen through the pandemic will potentially set women back. What seems liberating and make no bones about it, for many people, this is liberating. I work from home and I'm enjoying the benefits that that brings.
But I also have a fear of not going into studio, not going into the office, not speaking to people, not being present and in people's faces. For all sorts of things, for creativity, but then also the material impact of that. Will I get promotions? Will I get pay rises? Those sorts of things. And also this idea of reinforcing old gender stereotypes, because all of the research shows so far that women are still doing much of the housework and caregiving, regardless of whether both partners are still at home. I just worry.
NEVEEN:
So that's one thing. This other thing I would say that has come out of interviews and research very clearly is take on things that are different, take on things that are challenging, stretch into places that are uncomfortable in a positive way, because that's expected in a career of everyone. And then communicate when you've done that successfully and you've had wins because everyone communicates their wins and there's nothing wrong with it if you communicate in a way that's like productive to the organization and the team. So I do think just as organizations have responsibilities, we have responsibilities too.
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GEORGIE: Amazing, Neveen. Thank you so much. And to you for listening. We'd love to know your thoughts. To get in contact, leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us. It helps other people find us too.
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GEORGIE FROST: "Imagination is more important than knowledge," so stated Einstein. "For knowledge is limited, whereas imagination embraces the entire world, stimulating progress, giving birth to evolution." But how can we understand and shape the murky mental territory that leads to good ideas; that realm of imagination? I'm Georgie Frost, and this is The So What from BCG.
MARTIN REEVES: Companies don't shy away from trying to harness other complex aspects of human affairs, like consumer psychology, or team motivation, or team composition. So, it's really rather strange that we shy away from having a handbook of collective imagination.
GEORGIE: Today I'm talking to Martin Reeves, chairman of the BCG Henderson Institute, BCG's think tank dedicated to exploring and developing new insights by embracing the technology of ideas. Martin is also the author of a new book about imagination in business called The Imagination Machine.
MARTIN: Imagination is something every five-year-old can do, but CEOs complain it's very hard for their companies to do. And every company is founded on an active imagination, but we don't have a handbook for it. And then if you're successful at imagination, you're likely to get complacent, so that could be the beginning of your demise. So we thought the world needed a handbook of the imagination, and to play that up a bit the fact that you can actually bias the odds in favor of imagination, we called it The Imagination Machine. Because in the long sweep of history, we really do believe that companies have changed the world as much as any poet or visionary. They're in the business of taking ideas and turning them into new realities.
GEORGIE: You said that any child can be imaginative. Is that why, perhaps, we don't take it that seriously in business, or is it taken that seriously? Maybe I've got that wrong.
MARTIN: Well, I've been working in strategy for longer than I care to admit, and not much has changed on some dimensions. But there's been one absolutely huge change, which is what's called the competitive fade rate—that's the time period over which you can enjoy leadership—has gone from about ten years to about one year. What that means is, it was perfectly reasonable in the past to coast on your previously successful business model, because it would probably last at least ten years. Now it won't, on average, across all public companies. Therefore it's reasonable, I think, to say that companies are in the business of constantly reimagining themselves. You could say that imagination is the new execution. If you don't constantly reimagine yourself, your advantage will decay very quickly.
GEORGIE: Is there an argument that you can imagine too much, too often? Is there any argument to, I don't know if it's resting on your laurels, but sticking true to what your principle was? Is there a danger that we are all trying to be too innovative?
MARTIN: Theoretically, yes. I mean, you could imagine being so hyperactive that you have lots of ideas and you execute on none of them. I think that's sometimes visible in startups. I remember looking at an oncology startup that was spending a lot of cash to develop a new cancer drug, and they found one. But they were so interested in the science, that instead of commercializing that one, they went on to run out of cash by developing many more ideas. So it's possible, but in large companies, it's almost exactly the opposite is a much more common scenario. Which is, you don't have enough ideas or a big enough portfolio of future possibilities so that you renew yourself. The proof of that is we can measure something called vitality, which is the future growth potential of a company. And it declines on average by three percentage points for every doubling of the size of the company, or every doubling of the age of a company. If you call that the gravity of size and age, essentially you could describe the competitive struggling business as defying the gravity of size.
GEORGIE: Why is that? What stops large companies from being imaginative as they grow?
MARTIN: Well, there are a number of things that stop them on average, but fortunately there are many exceptions. I mean, one of them is just the sheer physics of size. If you increase the size of a sphere, then the surface area to the volume decreases. More and more of the mass is internal, and the same thing's true of a company. Companies become more and more introverted. And the one thing we know about the neuroscience of imagination is it's based on surprise. If you're not seeing the surprise in the world, which is the trigger and the inspiration for imagination, then you're not going to imagine anything new. So, that's one reason.
I think a second reason is what some people call the success trap. Which is if things are going pretty well because you successfully came up with an innovative business model in the past, then you don't feel that hunger, that sense of danger that an entrepreneur feels every day, and you relax. Now, the problem is that the financial indicators may all be in the green, but that's because they're lagging. You need to constantly reinvent yourselves.
And then the other one is, the procedures of yesterday's business model often restrict thinking about tomorrow's.
GEORGIE: Tell me more about surprises that spark imagination.
MARTIN: Well, one of the unique things about humans is that we have mental models in our heads of reality, and we change those mental models. We reimagine reality in response to a surprise if something doesn't fit the pattern. That surprise can come in different forms. It can be an anomaly, which is: Most of the points look like this, but then this customer is doing something different. Or it can look like an accident: I was trying to do this, and then this other thing happened. Or it can be an analogy, which is: That's a bit like this. What if it were more like that? These are the ways of encountering surprise and triggering imagination.
GEORGIE: It brings to mind when I was at university a very long time ago, Martin, and I took part in a psychology experiment of a housemate. I asked them about my response to it. It was all about whether a certain chap was a good or a bad person. Lots of different things about this guy that I had to read examples, but his behavior was so erratic. One day he was good. One day he was bad. I said, "You can't decide." So I just put a big line through the middle and just said, "Well, that's it. I can't decide either way." And I said, "What happened to that?" And he said, "Well, it was anomalous, so we threw it out." Do you think that happens too often in companies? Could I have been actually telling them something else there?
MARTIN: Well, one of the greatest simple-but-powerful mathematical inventions is the average. Companies have to measure and manage vast amounts of information, and so they use averages and aggregates. That is very efficient, but it suppresses the visibility of the points that don't fit. But sometimes those points that don't fit are actually the beginning of a new trend or the seed of a new idea. So it's very important to think like a novelist, and not an accountant, for the purposes of imagination, and to look at the particular.
GEORGIE: For example? Any companies?
MARTIN: Well, there's a great example of a company called Brooks Automation. It was a leader in semiconductor manufacturing equipment, and it was maturing, so it actually deliberately set out to be surprised. So it created a map of all of the people that were using its patents, and all of the people that were referring to those patents, and essentially asked the question, "What's surprising in this picture?" They found that amongst the more predictable electronic companies that were quoting their patents, there was a group of bioscience companies that were using their patents, and they didn't really understand why. They went out into the field, and they investigated, and they saw that biological tissue handling was extremely primitive relative to the sterile, precision, computer-controlled way in which semiconductor wafers are handled. They imagined that, "Well, this could be a new industry. The biobanking industry. The biological materials manipulation industry." So in fact, they created that industry. Became a pioneer in it. And then just a couple of weeks ago, in fact, they sold the previous core business. And now their core business, the new core business, is actually this business that was imagined, triggered by a surprise that they deliberately went out to seek. So, it can happen very practically in very down-to-earth companies.
[Note: In late 2021, Brooks Automation changed its name to Azenta Life Sciences after divesting its semiconductor business division to focus exclusively on the life science business]
GEORGIE: So how do you spot those surprises, those anomalies, those changes? Because, of course, by the time you can see them, it's almost like it's become a trend and it's not going to spark certain imagination and drive in certain directions to give you a competitive advantage.
MARTIN: Well, if you're talking about a trend, by the time something is an established trend, indeed, it's probably too late. It may have been arbitraged away by competitors. It's no use at this point in the evolution of COVID in business to say, "You know what? I've got this great idea. There's a trend towards home-working using video conferences." Well, everybody knows that. That's too late. But incipient trends, nascent trends, anomalies that could become a trend, are quite important. Now, the difference between an anomaly and a trend is manifold, actually. One of them is, it's much earlier. Another one is, it's not a slam-dunk. It's before something becomes an established trend.
Also, it's not an inevitability. It requires shaping and nurturing by the company, and the data may alert you to the possibility, but the possibility has to be imagined. When the company I gave an example of, Brooks Automation, was looking for surprises, the data didn't say, "You must create them via banking industry. There's an opportunity here." It simply said, "This is the way that people handle samples, and it doesn't appear very good relative to the semiconductor industry. Let's think about that." "Well, I have an idea. Let's create a new industry."
GEORGIE: Do we have a case where an anomaly is just an anomaly?
MARTIN: Yes, absolutely.
GEORGIE: Like my psychology experiment that should just be chucked out.
MARTIN: Well, an anomaly, we often throw away the anomalies in a chart, don't we? We say, "That's an outlier." Sometimes that's right. It was an experimental error. It was a freak, one-in-a-million event that won't be repeated. But when you see an interesting anomaly, you can do a couple of things. You can say, "Well, let me look at that from a couple of angles. Is that robust? Do I see it again?" You can look for momentum. Is that anomaly that you're seeing, growing? You can imagine how you might shape it so that you can actually create your own fate. You can say, "Let us do an experiment to see whether in fact there is an opportunity here."
Another example is a company called Turo, which is a company that rents out private cars. It creates a contract between the private car owner, often a luxury car, and the person who wants to rent it for a couple of hours. So they thought they saw an opportunity, and they tested it by handing out postcards saying, "Would you like to hire this Porsche or this Bentley for a few hours at this price?" They handed out a couple of hundred postcards, and the response told them that there was a shapeable opportunity there. They could have got the opposite result. They got a very positive result.
GEORGIE: Well, that's an important one, because imagination is just a step. It's what you do with that.
MARTIN: Right. So we outline six steps, and I just described them briefly. So the first one is, we call it the seduction. It's when the anomaly seduces you to look more closely and to imagine the trigger. The inspiration, if you like. That's all about looking out of the window. Seeing and caring, basically. Caring about what you see. The second stage, we actually call it the idea, which is the art of working an idea. So, it goes from being a one-liner to a fleshed-out model that you can test.
There is a well-described skill of counterfactual thinking, imaginative thinking. But most of us haven't been taught it since kindergarten, so there's some skills that one needs to build there. And then the third step is what we call the collision, which is when you collide the idea with the reality, maybe in an experiment or by handing out postcards on the corner. Of course, one thing that's going on is, you're validating the surprise, the idea. But another thing that's going on, because most new ideas fail, is that you're actually triggering new surprises. The fourth stage is what we call the epidemic, which is the spread of the idea. Ideas tend not to spread in large corporations, and if they don't spread, then they remain private fantasies. The fifth is the codification of the idea so that the success can be replicated, which is much harder than it sounds. And then the last stage is called the encore, which is not falling into the success trap, and having successfully imagined a new business model, doing so again and again. Not being caught in the trap of the assumptions underpinning your own success. So, it is an entire process.
GEORGIE: When you talk about imagination in terms of business models, and what you were describing earlier about how companies do need to change and to innovate regularly, more regularly than they used to. They can't sit on their laurels. Do we have to reimagine the entire business model, or can imagination just come in little, little steps?
MARTIN: Yes. Well, it comes in little steps and big steps. And the longer you postpone it, the bigger and riskier the steps that you have to take.
GEORGIE: Forgive me. If imagination is just thinking, and we do it all the time anyway ... hopefully that's what we do when we're at work. We think of ideas and ways of doing things, and hopefully ways of doing things better. Why are we measuring it? How can you measure it? Isn't it just obvious?
MARTIN: Well, it's obvious to a five-year-old, but that fade rate that I talked about implies that it's not obvious to large groups of people that are trying to renew their advantage. Which is why we think we need a handbook for collective imagination and for the harnessing of collective imagination.
Now, that may sound unreasonable, because this is a conjunction of the word machine and imagination. Some people say, "Well, we don't need to have a guidebook, and we can't have a guidebook for something so mystical."
GEORGIE: And then apart from reading the handbook, obviously, what do you do as an organization? Do you fill your company with polymaths? Is the traditional division of labor idea dissolving, and if so, is that welcome?
MARTIN: Well, there's a number of things to do. I think the first one is to make sure you have a balanced portfolio. So you have some new possibilities in the portfolio, as well as some things that are delivering cash. That sounds obvious, but if you're using current financial metrics, metrics of current financial performance, you may miss that because they don't measure future option value very well. I think the types of people in the companies is very important. I mean, I think in recent years we've seen the rise of the specialist, and I think there's a role here for imaginative types, for generalists.
GEORGIE: Such as what? How would you find those people? Where would you look? What sort of people?
MARTIN: I think you can measure people in terms of their response to novelty. So Alibaba, for example, the Chinese internet company, has been rather successful--measures not only tolerance of change, they actually measure liking of change. They measure energization by change and new possibility in their recruiting, and they try to fill the company with those people, because those are the sort of people that the company needs right now.
Another interesting thing that you can do is, because often...we all have the capacity for imagination, the other side of this, are we utilizing that in the workplace? Another idea in the book is actually harnessing play, because play is a very serious business. Biologically, play is de-risked, accelerated, spontaneous learning. We play when we're small because it's a lot safer and a lot faster than waiting until opportunities for mortal combat. And we don't find that large corporations are very playful. So there are 16 executive games in the book, which are designed to have people loosen their assumptions.
GEORGIE: For example? Give me a couple. What games can we play?
MARTIN: Let me give you two. So a good icebreaker game is what I call the anti-company game, where you list on one side of a piece of paper all of the core assumptions, all of the sacred assumptions of the business model. And on the other side of the piece of paper, you list all of the things that you would never do, you would never contemplate doing. You reverse of columns, and you create the best business case for the anti-company. Now, it's often humorous. It breaks taboos, but out of this humor emerges some ideas and a flexibility to go on and play a more detailed game.
So a more detailed game, for example, is, we have a game called the pre-mortem game. Where essentially you assume that you're in a press conference in five years' time apologizing for the failure of your company, and you're describing exactly how it happened, and thinking through exactly how you might go off the rails is a very good way of underlining the case for imagination.
GEORGIE: Where does imagination fit it in an ever-increasingly digital world?
MARTIN: Ah, well, that's a great question. So probably over the next decade, we're going to see the substitution of many human managerial activities for machine learning. Many routine cognitive activities will be taken over by machine learning, and the experts are largely aligned that the response to that should be for the humans to focus on more uniquely human capabilities. The three obvious ones are anything to do with empathy—dealing with other human beings—anything to do with creativity, or anything to do with ethics, that machine learning can't do. But it raises the question "Well, is that safe too?"
Well, eventually we have artificial general imagination, and we believe, based on our research, that that is very far off indeed. So, no we won't. But technology, traditional technology, doesn't oppose the activities of imagination. There's a synergy between the two. In fact, we've already discussed one example today, Georgie. The example of Brooks Automation, where they used network mapping software in order to analyze their second-order patent map in order to see the surprises, which triggered the thoughts about creating a new industry. So the new analytical tools can help us to imagine, and throughout the entire process, the six-stage process we talked about, there are tools to that we can use that can power that process.
GEORGIE: Is there an argument then that actually an increasingly digital world will bring out more of the human in us? We get more imaginative?
MARTIN: I think so. Some people lament the demise of routine work because of employment insecurity, and so on, and there's a certain aspect of that. Will we be able to employ the same number of people in companies in the future, or will it require some sort of universal basic income? I see it as a sort of liberation from drudgery, actually. The imperative to emphasize these more uniquely human aspects of ethics and imagination and empathy, I think should lead to a re-humanization and a revitalization of the workplace, which personally I'm very excited about.
GEORGIE: So then where can leaders start?
MARTIN: So, I think they can start by accepting the need for imagination.
We have an example of a wonderful company in Japan called Recruit, which actually has an entire personnel system that's based around the celebration of entrepreneurial activity. They have these hero entrepreneurs that they say are the most important people in the company, and they have a festival where they celebrate new businesses, and anyone can start a new business. Providing one other person wants to join their team, they get first-round funding automatically. And they don't separate the ideas from the initiators of the ideas. They keep them together, because they're interested in creating heroic journeys and a lot of excitement around entrepreneurship. And they have been, in fact, a very successful serial business model innovator.
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GEORGIE: Well, thank you very much, Martin, and thank you for listening. We'd love to know your thoughts, to get in contact, do leave us a message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
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GEORGIE FROST: In 2020, the Black Lives Matter movement sent shock waves across the world. In response, grand pledges were made by governments and businesses to move much faster towards a more inclusive society and economy. Yet the financial wealth gap when it comes to race, gender, and disability is still huge. So how can we make sure that these promises translate to action and progress?
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GEORGIE: I'm Georgie Frost, and this is the So What From BCG.
KEDRA NEWSOM REEVES: Being inclusive is an active commitment. It requires action because it is not our norm.
GEORGIE: Today I am talking to Kedra Newsom Reeves, a partner at BCG who focuses on financial services and social impact. She leads the Center for Inclusion and Equity and guides governments and businesses on how they can address inequality.
KEDRA: I think when we look at COVID, whether we're talking about the US or North America or globally, if you look at any ethnic minority, globally, COVID certainly had a greater impact in terms of infection rates and in terms of deaths for ethnic minorities. We think about that in terms of loss of livelihood, for those that were ill and may have long COVID. We think of that as loss of treasured family members and the emotional impact of that on people and in the families.
And then certainly as we look at, outside of those that were affected by the illness directly, those that were affected by the shutdown of industries, as we tried to stop the spread. Which, I think was necessary in terms of stopping the spread of COVID, but certainly had economic and financial impact for individuals in terms of the service industry shutting down. If we look at—whether it be food service or home health care aids, etc.—many of those industries have a much higher percentage of minorities in the US certainly, of women certainly. And so when we think about those spaces sitting down in the unemployment, that it caused, that certainly was another factor that again decreases the income and the ability to grow wealth for families. And so certainly COVID has exacerbated the gap if you will. That that gap was already incredibly large and quite challenging to begin with.
GEORGIE: How big is this task and closing the wealth gap, because as you said, it's been something that's been around for a very long time, and it crosses so many different demographics. How do we go about closing it and just explain to me what exactly do you mean by the wealth gap?
KEDRA: Certainly. So, I mean, I think firstly, we measure it simply by assets minus liabilities: your assets, your home, your cash, your retirement accounts, minus whatever debt you might have. When we look at that for Black Americans versus white Americans, it's a 10X gap. For Latinos versus White Americans, it's I think at 8X gap now, and it probably has been exacerbated. We don't know the results of COVID on the wealth gap today. I think that is yet to be seen.
GEORGIE: Why so large? Why so large in those groups?
KEDRA: I think consider what wealth is and how you attain it over time. Just think about your own personal journey. And I think we have to start with the fact that intergenerational wealth plays a huge part in the wealth gap. Did your family have wealth to pass down to you? And that's everything from a trust fund or a massive business or tons of equity in a public company or private company, global company. And that certainly is a big part of the total wealth gap. So that affects a small percentage of people. But in fact, in even larger percentage of the smaller things. Could your parents make the down payment on a home? Could they give you a home? Could they pay for your college? Do you have to take debt out for that?
And you think about wealth accumulation, growing assets versus wealth extraction or decumulation. Debt creates extraction and decumulation, so if you don't have intergenerational wealth, you are heavily reliant on debt to grow your potential in our economy, and to grow your wealth over time. And so I think that's one big factor, is that intergenerational wealth is our starting point.
Where do you start at day zero of your life or year 20, of your life, as you become an adult? And then everything after that. It is what's your education level? Did you graduate from high school? And did you graduate from college? What are therefore the employment opportunities that are available to you? What are the income bands that are therefore available to you? What are the benefits packages in terms of health care, health care savings plans, which allow you to, do some of that tax-free? All of these seemingly small things have a huge impact on our ability to grow wealth.
And as we get older and have more steady jobs and have benefits and have retirement accounts and invest in other businesses and perhaps start businesses, all of those things contribute, as well as home values. So we like to think of it as a loop.
If you think about it that way, you're going up this ladder, if you will, and then looping back as you get the intergenerational wealth.
GEORGIE: Which is a big task. I mean, there's nothing we can do about intergenerational wealth. That's kind of done. So we're starting at a different point. Therefore what point are we starting at? What needs to be done? What needs to be changed? Where do you look across all areas of the economy? You said that things like education, that's just one part.
KEDRA: Right, that's a very small part. And I'll just say, an intergenerational wealth point, I think, yes, we are starting at different places. I do think you're seeing things that are really interesting where wealth is being given back to families. So you take, there's land in California that was taken by the city and now has been given back to that family. And the city is now paying for that land from that family. So that wealth that family had, a hundred years ago, has now been given back to the family that it belonged to. And now their wealth position is totally different, if you think of it that way.
I don't want to totally put that aside. I think at scale and mass, that will not be the solution for everyone, but there are opportunities for that to happen. There's some work going on in Evanston close to where I live here in Chicago, around reparations. And so there are some efforts to address intergenerational wealth gaps where feasible. Direct money, direct dollars.
GEORGIE: So direct money—direct dollars, direct money or dollars—could be one solution?
KEDRA: Could be part of the solution yes, yes. And I think that's a governmental solution. I think we are seeing pilots and experiments in that space and in various places.
GEORGIE: How else would you like to see that played out? I mean, could you have sort of parachute payments for certain groups?
KEDRA: I mean, there are really interesting ideas like baby bonds. How do we ensure that every child starts off with some level of wealth? I will say this, I think my only challenge, I would say when I talk to my clients in the public and private sector, is that it can't just be a government solution.
There are things that we can do in the private sector that are really, really critical. And I think education is certainly one of those. So we actually look at, for Black families, education is not a true wealth driver. Education is not a panacea. It doesn't solve all issues. I think the thing that we see employers doing, if we just talk about income for a minute, that I think is a big driver of equity is thinking about skills-based assessments of potential employees.
So rather than saying, “You have to have this college degree from this set of ten schools that we always recruit from,” employers can say, “We're looking for something very different. We're looking at an assessment of what makes someone successful in this organization.”
If you think about sales, think about the things that are important in a sales job. It is about being personable, being able to connect with people. There are a lot of different profiles of people that can do that role really well. So how do we find those individuals and ensure that they're getting equal opportunity to those types of roles that someone else might? And then you think about the benefits that come with that, the retirement account, etc., that I think is certainly a level that's really interesting.
GEORGIE: How do you find those people as a business? Because part of it is knowing where to look. And I guess the other part is giving young people or anyone the confidence to believe that they can go for those jobs.
KEDRA: Most, certainly all about exposure. I mean, how did I become a consultant? And how did you sit in the role that you're playing today as a journalist? You were exposed to something at some point in your life that said, "Huh, that looks like an interesting job. That looks like something that I could do."
I do a lot of community work and go into schools. And it's interesting to talk about consulting. To help students understand that everything you see and do and touch is someone's business. Anything that seems interesting to you, there's a role for you to get there. I think the question is what's the path.
GEORGIE: And the role that businesses can play in that?
KEDRA: I mean, I think that a lot of that is about connecting back to your community. What is the community service that you do?
When we talk about diversity, equity, and inclusion at BCG, we really talk about it in three ways. It's what are you doing in your community? Which I think businesses often really do think about. I don't know that they really think about how that is a channel and a pipeline to talent for their organization and for the economy more broadly, they think of it as perhaps more of a charitable donation, a charitable activity. But really investment in our communities is critical to how our nation will thrive over the long-term. And so I hope people start to think of it that way, but certainly one is that philanthropic piece.
I think the second way to think about is team and culture. And I think what we're talking about right now is the connection of that community work to that team and culture and the path into those roles over time.
And then the third piece that we think about is, from a business perspective, what are the products and services that you're putting out there? Are you being equitable in that piece? And certainly in financial services that plays a huge part in the wealth gap and the opportunity for families to accumulate wealth over time.
GEORGIE: What should leaders be doing? How do you get investors and consumers on board with this? Why does this matter so much from a business perspective?
KEDRA: I think from a business perspective, from a sustainability perspective as a business, and we often talk about sustainability as it comes to climate, but we also have to talk about it when it comes to people and communities.
When we are excluding large portions of our society, we are not setting ourselves up for success, quite frankly. One of the things we're really trying to do at the Center is to really think about how do you deliver services equitably, and what does that mean for people?
So take health care as an example, if we have truly equitable health care in the US, we don't have a public system in the same way that we see in other parts of the world. If we're not taking care of our people, we see outcomes like COVID, right?
And that comes back to wealth. Health is wealth. If you aren't healthy, you can't work. If a family member passes away, that is a livelihood that has gone, that has disappeared. And if that person passes away at an early age, think of the kids that no longer have those parents that can provide for them. And so health certainly is a contributor to this.
And we think about the health care organizations that are out there, that are shooting to do some of this work that is incredibly important to the wealth gap. I think on the financial services side, we talk a lot about how do you deliver services equitably?
How do you ensure that people are not experiencing wealth extraction by using really unfair, high-interest predatory lending products just to get by on a week-to-week basis? It's really difficult to be at a low-income status. It's hard, it's hard to make a budget meet. It's actually not hard at all to be wealthy. [LAUGHS] There are many things that you can do with that wealth, and you can make it quite difficult for yourself depending on your goals, but it's actually not that difficult. What's really difficult is living on a very tight income. And when our products and services don't meet the needs of those families and those individuals, there is no choice but to use products that are really quite predatory. And I think we talk a lot about wealth accumulation but we don't talk a lot about wealth extraction, and high-interest products are doing just that, they're extracting wealth every day, every week, from families that don't really have wealth to really grow at this point.
And so I think what we talk a lot about in our practice in financial services is what can banks do? What would equitable products looks like? What would equitable reach look like? And in all ways, from very traditional banking services, just like your checking and savings accounts to your mortgage accounts, to investments. How do we make that access more equitable for people? And how will that have an impact on those higher parts of the wealth loop, if you will, than the intergenerational wealth piece that we started with?
I think, the question is, are we reaching the folks that need the product and are we building the trust in the community that that relationship can be held? And how do we look at that product suite, on the investments we make there versus everything else we're trying to do as an organization? That's where the real challenge comes in. Are we making the investment necessary to make those products successful, to have the reach that's necessary to reach the communities that need them the most?
GEORGIE: How do you make the investment? How much is the right investment? Where does it come from? How do you direct it? What resources you need to achieve this?
KEDRA: First, let me just start with people.
I think the thing that's going to change that, I think one is, being a CEO-level priority and seeing that investment can be made—that it's not fundamentally dilutive to your margin. I think that's part of it. Do you have the leadership commitment?
I think the other question is what will investors do? And this gets back to the thing that you asked earlier: what about investors and consumers? A majority of the assets in the world are controlled by a relatively small number of pensions, sovereign wealth funds, etc., foundations, endowments. And I think when we start to see investors taking a different tack, demanding to be part of the goal set for companies, that's when you'll see change, really I think more fundamentally. And I think we're starting to see it. I think we see most of the major banks in the US have made those big pledges. I think all of them are working to deploy them. I think they're running into the investment challenges that we talked about. How do you prioritize this versus other things? But I think we are seeing a lot of those pledges come forth.
GEORGIE: Is there only so much the organizations can do? And by that, I mean, do you think the system, the economic system, governmental system, is rigged against Black Americans, Hispanic Americans, maybe to a large degree women too?
KEDRA: I don't think our economic system was set up to be inclusive of women, minorities, LGBTQ, to some extent, people with disabilities, it's just as simply the case that our economy was not set up to be inclusive.
GEORGIE: What was it set up for? How was it set up?
KEDRA: I think historically it's been set up for white men. You think about our government leaders. You think about our business leaders over time, and you think about the laws that are in place in terms of employment of women and minorities over time. These were not things that happened by happenstance. There's some work we recently released around climate that just says, you know, systems are not organic things. There are people, individuals making decisions.
And I think for hundreds of years, we were not making decisions to be inclusive. That's just not how our economy— and the global economy—not even just the US, but our global economy, was really set up. And so being inclusive is an active commitment. It requires action because it is not our norm. And I think you see that certainly for ethnic and racial minorities. And you also see that for women.
You know, I do a lot of work in wealth management. We did a study a couple of years ago, just looking at women in wealth management, looking at women that are actually high-net-worth, ultra-high-net-worth—very desirable to serve for banks and really being completely underserved.
And still a lot of conversations that you would have expected to be happening in the 1960s and 1970s of a woman sitting at the table with her husband: the woman is the CEO, the husband's a stay-at-home dad, and the husband is the one who's getting spoken to. And the husband's the one that's getting the advice and getting the packet that comes after the meeting. And so there's a lot of work to do. It requires focused and intentional activity because it has not been our historical norm. You could have a perfect credit score outside the traditional lending system and still be turned down for credit in the traditional lending system.
And so these are the types of really ingrained, I think, business practices that we have to attack and really look at very closely if we're going to build a more inclusive economy. And I think that intentionality around that focus of time and investment and study is the thing where you need those business leaders who are truly committed and are going to say, "You know, [inclusion] is an important innovation for us. Similar to how digital has been an important innovation for us, similar to how data's been an important innovation, inclusion is an important innovation for us.
We recognize that it is something new that we have to do differently, and we're going to put dollars against it, and we want to see progress and we're going to set goals." That's what we have to see from business leaders, if we're going to see real impact and real change.
GEORGIE: What did the Black Lives Matter movement last year—well not just last year because it's continuing—but what did that moment mean to you in your life, in your work? Are you optimistic that this could be a real point for change, permanent lasting change? We've had so many false storms along the way. Could this be the final one or is it just the way that progress happens?
KEDRA: It's a great question. I think, I think for me personally, one, the Black Lives Matter movement has been around for a long time, there's a great quote. I'll just speak very personally for a moment. There's a great quote by an activist. Actually I think on the West Coast in a press conference, and she said something like we've tried every way of protesting, we've rioted, but we've also made music and drawn pictures and made movies and tried to excel professionally to be in places of power as a way of, our presence being a protest, if you will.
And so I think the racial reckoning, which I wouldn't say is just Black Lives Matter, I think I would say the racial reckoning that occurred last year, Black Lives Matter has been, as a movement, has been happening for a very long time under that kind of name, if you will. But I think the reckoning of last year, which drew in people outside the Black community. I think that was an important moment. To me the impact of that moment, launching people outside the Black community on their own personal journeys of realization and reckoning, and then asking themselves the question: what should I do at this moment?
Unfortunately, in a way it took all of that to get to where we are today. And had we not seen so many protests by people in the streets, had we not all been confined to our homes and really unable to look at anything else, I don't know that we would be where we are now. And so I think for me, what's been really meaningful about, the last year is this: I've been in financial services for a couple of decades at this point. I've been at BCG for 13 years and been doing equity work outside my job for years. And in some ways doing it inside BCG for a number of years as well. But as we said earlier, systems are not organic, systems are driven by actors that are in places of power—and having actors that are in places of power care about these topics is what is making the difference.
And I think how we all choose to remain committed to this work and make it a core part of our businesses and our organizations is again what will determine whether or not this movement will be, you know, "Three years in the late, you know, early 2020s, something happened, and no change was...no progress was made." That could be the line in the history books. I think there are a lot of people who don't want that to be the line. I'm certainly one of those people.
And for me, it's a very personal journey. I want my kids to have a very different experience over the long term. I've been incredibly privileged, but I can look to my left and look to my right and my family and see a very different outcome. It's really heartening. I think it's really exciting to see where we are now versus where we were even 18 months ago. And it is heartbreaking, I think, that it took a global pandemic and a televised murder of a man for that to happen. But I think, I think that is what it took. And so now what do we do with all of that is the question.
GEORGIE: What do we do with all of that?
KEDRA: I think we stay committed, we stay committed to doing the work.
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GEORGIE: Thank you very much Kedra. And to you for listening, we'd love to know your thoughts to get in contact, leave us a message at, thesowhat@bcg.com and if you liked this podcast, why not hit subscribe and leave a rating wherever you found us? It helps other people find us too.
GEORGIE FROST: We live in an era of cognitive overload, that cell phone on your desk when you're working, even if you aren't using it is draining your brain and reducing your cognitive capacity. It's bad for us personally, and it's bad for business. So, what can we do about it? I'm Georgie Frost and this is "The So What" the podcast from BCG.
MICKEY MCMANUS: We don't have something that pops up and says, "Hey, here's your cognition facts" the same way that when we pick a bottle of orange juice that says, here's your nutrition facts. But what if we did?
GEORGIE FROST: Today, I'm talking to Mickey McManus, senior advisor and leadership coach at BCG and research fellow emeritus at Autodesks office of the CTO. He's a holder of 12 patents and author of "Trillions: Thriving in the Information Ecology."
MICKEY MCMANUS: For all that our cell phones are powerful tools for us. They take a piece of our cognitive reserve, and I think that as we move into the future, our cognitive reserve is going to be just as important as our capital reserve as an individual or as an organization. There was this recent study that showed that even not having your cell phone turned on, but having it in the same room with you when you were asleep, drained your cognitive reserve by the morning, the phone is kind of like this animal.
If you think of our primitive ancestors, and we don't know if it's going to bite us, we don't know if the next text message that comes in is going to be from our cell phone provider, just nudging us to join or do something new or whether it's going to be some horrible disaster.
GEORGIE FROST: That's an absolutely astonishing fact and I'm feeling very, very proud of myself for having in the last week, I decided to leave my phone outside of my room when I sleep. But it's, this is so much more than mobile phone smartphone hygiene. But before we get into the, what we can do about it, cognitive function, cognitive load, what are we actually talking about here?
MICKEY MCMANUS: So if you think about it as almost like a fuel tank, you wake up in the morning and you've got a pretty full tank of gas to be able to do things through the course of the day on your dashboard of a car, you've got both a fuel meter that shows how much fuel you have. And then you also have this thing called RPM or whatever, which is just how fast you burn it. So think of those as two gauges, you wake up in the morning, you've got a full tank of gas, and then you have that really important meeting. And that consumes some of your cognitive capacity. The important meeting consumes it really quickly. And so, then you're depleted by like, half a tank.
They did a study of thousands of judges in Israel, and they looked at whether the judges were throwing people back in the penitentiary during a parole hearing, or whether they were letting them go free. And one of the things they discovered was right around the midday break. You found out that they were actually throwing more people back in prison. Now, the question was, were those parolees or potential parolees, those prisoners worse right around lunchtime? No, they were the exact same thing, but what happened is the judges had depleted their cognitive reserve and it was just easier for them to look at them as a blank statement rather than evaluating their cases right after lunch.
GEORGIE FROST: Were they not just hungry, Mickey?
MICKEY MCMANUS: They might have also been hungry, while they saw this during the morning break at ten o'clock. And they saw this during lunch and hunger might have actually been one of the things, but ultimately what happened is they basically depleted their cognitive reserve and they couldn't make rational decisions necessarily as good about that particular case. So this gives you a sense of kind of what is cognitive capacity. We don't have a standard way of measuring cognitive load, but what if we did and what if we could kind of see that as a little bit of a quantified cell fuel tank and we could detect what depletes us and what gives us energy.
GEORGIE FROST: And this is where the rub lies, I think. If we're talking about having solutions to this problem, how do you measure this, empirically speaking?
MICKEY MCMANUS:
The problem is that it's mostly in the labs, but what we're seeing now is with the advent of things like AirPods that can actually measure your head orientation, your temperature, your basal temperature, your galvanic skin response, the ubiquity of these new kinds of sensors, like an iWatch that allows you to detect heart rate.
We're starting to see people being able to use these things. A AAA game company, this is a company that makes video games recently came out with something called Akili and it's for 12 year old kids and it got FDA approval. And what it does is it use your iPad to measure your ability to pay attention and your ability to deal with distraction. And it uses the sensors in the iPad to be a prescribable game, to help with ADHD.
And it's the very first prescribable video game that can actually be used to help 12 year olds or 65 year olds, frankly, deal with distraction and build their capacity to actually cope with distraction without taking a pill. So there are some glimmers on the horizon that show that we really may be able to help people. The doctor can prescribe it and it can be paid for by your health insurance. And instead of it being a shot gun blast to your system, the way a lot of these ADHD pills are, it actually uses the sensors in the iPad along with kind of a game methodology to build your ability to deal with distraction and to build your working memory.
So they've actually found that in 70 year olds, the same game actually helps reboot your cognitive capacity for memory and for dealing with distraction down to the 22 year old. And it has lasting effects when you stop using the game, they actually see that your neurons have wired themselves differently. And they've been able to demonstrate this. So the science is actually there. It's just that it hasn't really made it out into the world yet because the sensing component of it is only now starting to become easy to sense.
GEORGIE FROST: How have we got to this stage, Mickey? I mean, I said it's more than just smartphones. Smartphones are huge part of this great brain drain, but how else is it manifesting itself and how will it look in the future?
MICKEY MCMANUS: Well yeah, no, I think it's not only our cell phones. It's also just the rise of complexity in general has made it harder and harder for us to cope with reality. We've got so many more things begging for our attention, whether it's the social media, asking us to thumbs up something or like something.
And in some cases you're not even the product, you're just the raw material. And they're trying to get your attention through salacious content, through any way that they can. And we are still pretty basic animals in some regards. So we find what they're doing is they're pushing all of our are kind of cognitive bias buttons.
And there are over 190 cognitive biases, which are just shortcuts and they're built into us, but some of them are past their sell-by date. Maybe we built this cognitive bias when we were hunting wooly mammoths, and we don't need it anymore, but these systems and these companies have learned ways to do what's called dark patterns, which are basically design patterns that trap you in these cognitive capacity, draining situations.
GEORGIE FROST: In that regard, then it's the answer to have solutions. And I want to get onto those solutions in a minute or chief cognitive officers in your workplaces, or is actually, are our brains going to adapt sort of Darwinist theory here, those people who are perhaps more suited to this new-
MICKEY MCMANUS: That's a great question.
GEORGIE FROST: Quote, unquote, cognitive overload or distraction environment. I mean, is there evidence that some people may thrive on that, a 20 minute nap for you may make you feel invigorated where me working in a very highly distracted environment brings the best out of me?
MICKEY MCMANUS: Well, no, I think that's a great point. There are some people that really are thriving in some of this. And the question is sort of, will we evolve our way towards this? The big problem is some of these are super deep inside of our psyche. They're not something that is different between you and I, but I do think we're going to ultimately need something that's N = 1. That's just like actually dedicated to me and helping me deal with it.
So my PhD intern, Netta, has ADHD and she also has dyslexia. So reading research papers is really hard for her. Reading things for me is really easy for me. It doesn't pull down my cognitive capacity, gives me new ideas all the time. So I do think we're going to have to have this be targeted per person.
Now, the other thing though, is that my brain is no different than my grandfather's brain. Evolution just doesn't happen that quickly. And so, consequently, I don't think we can count on evolution. I do think what we'll see is that some people are just natively able to cope with it. And the other thing is that I think we're getting a whole generation of kids that have been grown in this space, and frankly, they are learning that they have to figure this out.
They have to curate their feeds a little differently. And so I'm already seeing hopeful signs from teenagers, even who are very bluntly. Like they understand the stuff that we don't understand in some ways, and they're starting to curate their own feeds because they understand that they need to, they can't just kind of accept whatever thing is coming by.
GEORGIE FROST: Can we leave it to our own individual decision making ability as it were? Or do you need change from a governmental level?
MICKEY MCMANUS:
So the Environmental Protection Agency, came around in the 1960s because of something called silent spring. Rachel Carson was a environmentalist who documented what happened when companies went in and strip-mined and created chemicals and then dumped all the stuff in the waterways of local villages and towns. And she wrote this serialized story that was seen by the President of the United States at the time, President Kennedy in the "New Yorker" where she talked about a fable of one spring, the birds didn't chirp and the bees didn't buzz. And basically, things weren't born because of this sign silent spring.
And I think we're facing a kind of silent spring 2.0, but we don't have something that pops up and says, "Hey, here's your cognition facts." The same way that when we pick a bottle of orange juice that says, here's your nutrition facts. But what if we did, what if we had the ability to say, "I don't mind that this is going to deplete my attention. I don't mind that this is going to habituate short-term attention spans, I need it." For some other reason, and that's fine. Maybe sometimes you want to drink that juice because you just feel like a little, a jolt of something, but today we don't have anything that's even flagging that.
And so I suspect we will have to have some either regulatory body that says cognition is a human right. Like we should probably have the ability to think, and we should defend that. But right now I don't see it on the horizon in the short term, but there are a lot of discussions going on right now about the debilitating effects of cognitive capacity.
GEORGIE FROST: How would you measure that? What would that look like? So is it, I pick up my mobile phone and automatically it flashes at me and says this mobile phone, full stop, is a, we use traffic light signals over here for like salt content. And I don't know what it's like in the states, but I mean, is it going to flash up red? I mean, am I going to have a Facebook or an Instagram which flashes up red? Are the BBC going to be green and Daily Mail going to be red? I mean, how would that work?
MICKEY MCMANUS: Well, yeah, I don't know. I think there's an interesting question. First of all, like I said, I think it'll have to be tuned to you. Not just something that's a blunt instrument, because you have different things that deplete you than I do. So it might be like, imagine the nutrition facts that you see on the side of your juice bottle, it might pop up something, it says cognition facts. This will reduce your ethical decision making by 20%. Don't use it for more than 20 minutes. And in fact it's pretty trivial to reduce people's ethical decision making.
GEORGIE FROST: How would you measure someone's ability of ethical decision making as opposed to any other decision making?
MICKEY MCMANUS: Yeah, so there's a famous study by Kahneman and Tversky who are cognitive psychologists and behavioral economists. And they basically studied that if you take a deck of cards and you flip up a card and you ask people to add three to the number that you see on the card. So if I flipped up a card and it said the two of spades and I said, come on Georgie, just add three to it. What would the two of spades be if you added three, what would it be, Georgie?
GEORGIE FROST: Five.
MICKEY MCMANUS: Five, okay. So, if I flip up another one and it's the nine of hearts, what would it be if you had three.
GEORGIE FROST: Queen, queen.
MICKEY MCMANUS: Queen, I think queen. So if we did this for about 20 minutes and then we administered a test, that's kind of one of the classic tests for ethical dilemmas, pull the lever on the big thing. And the train either hits one person on the track or hits the entire thing. You would make horrible, ethical decisions. And that would be depleted for about 24 hours after you slept.
And so there have been pretty powerful studies about being able to reduce your ethical capacity. And that's just using math, like just asking you to add that for like 20 minutes or even 10 minutes or even five minutes.
That sounds really dangerous in some ways, especially if we've got people that are open, like let's imagine your frontline in an organization that are working in different parts of the world. They've shown that things like corruption are infectious, that if you're offered some kind of a corrupt deal and you turn it down, within the course of a year, you'll be more open to actually saying yes to it later. This is a study out of the Duke Center for Advanced Hindsight, where they've been able to basically demonstrate that corruption is contagious.
GEORGIE FROST: Well I'm glad you mentioned that because I mean, this is the podcast called "The So What," so it's one of the big questions with all of this is if you're a business, if you're an individual, so what, what does this matter? You've called it civilization's cognitive collapse, but why should business organizations care? Because if you care then you know to do something about it and where to put your resource.
MICKEY MCMANUS: Well, imagine you're a corporation. You realize that every time you buy in a new piece of software, it's either going to amplify complicatedness and make it harder to think, or it's going to actually help your employees cope with this. It's an unfair advantage if you actually have more cognitive reserve than your competitors. And so consequently, you might have something that helps the CIO or the CTO, CHRO, the human resources person, right, between that and the it guy. Maybe that's an opportunity to say, when you buy these things that you think are productivity apps, are they really going to help you with productivity or not? And people on the front line, we might want to teach them new things.
There's a study out of, again, out of the Duke Center for Advanced Hindsight, where they actually looked at decision myopia, this is just short-sighted vision for making good decisions. And they made a game called Happy Money and they played it out in different places in the world. It tested you to try to make better decisions about how you save and how you spend money. And one of the interesting things they found is that you have had very low decision myopia, you had basically made bad decisions pretty quickly for conserving your like local money for your family or friends. But after you played the game, two or three times, your ability to make better decisions was better.
So playfulness in games help you simulate the future before doing anything real serious with your real future. So for people in the front line, we might have new kinds of tools that help them build their ability to not be blindsided by things.
GEORGIE FROST: I mean, we've spoken about food, signaling. I sense that sleep is a new thing that we're focusing on something that seems pretty obvious, but it was only in the 80s, the 90s, even now you can hear people saying how impressed they are. They only asleep for four hours. And I thank Margaret Thatcher, was very famous for that. And now we're suddenly realizing that, how important sleep is to our physical health, our mental health. Do you think cognitive health, I suppose, is the next thing? The science is perhaps just a little bit early and organizations really, really, and governments and individuals really need to start taking this a lot more seriously, but what is that point? What do we need for that to happen?
MICKEY MCMANUS: Well, I think we are already seeing it happen in some regards because of COVID, because of the great lockdown we saw that more people were dealing with mental health issues and we saw that people had to really think differently about how to on wall-to-wall Zoom meetings all day long, not having the capacity to just take a break. And you heard things like Zoom fatigue.
Now typically, mental health challenges have been stigmatized or they've only been open to the one percent-ers, the people who are high performance athletes get, get help with their, coaching with their mental health, people who can afford having a therapist or that things. But it's actually a fairly rarefied place where you can actually get that. But I think during the COVID crisis, we saw a lot more people having open conversations about mental health. And I don't mean mental health, like at the extreme side of it, where you might have bipolar disorder, things like that. But just generally, how do we recharge?
There was an amazing study by Dr. Ming Kau in Chicago, where they looked at kids that were going to school. This was before COVID and they looked at, could they get them outside just to be out in the forest or out in like a park. And over a ten-year study, they found that kids that were given a chance to walk outside during the day and be in parkland, had lower rates of diabetes, had lower rates of illnesses and had higher rates of passing tests and being able to do things just by doing what the Japanese would call "forest bathing."
So I think COVID has accelerated the urgency on it because it's forced people to say, I don't even have a boundary between my office and my home, but I also think there's been a lot more discussion of it just being a human right.
GEORGIE FROST: What do you mean human right?
MICKEY MCMANUS: Well...
GEORGIE FROST: Who's taking this away from me, companies they're taking away my human right?
MICKEY MCMANUS: I think they are, yeah. Every IOT device, every internet of thing device is begging for your attention. That smart speaker wants to sell you something. You go into a store like Amazon Go store. That's like a robot you're walking into and it's trying to figure out how to sell you more things. There's no sort of click-through license when you walk into the store that says that you're OK with that. But you know, there are.
GEORGIE FROST: Do we have no free will in this then? Do we have no free will? When I look at social media, am I being duped?
MICKEY MCMANUS: Well, I love that question. I think we do have free will.
But on the other side of the aisle, we've got machine learning algorithms that are trying millions of little ways of doing this. And each child, each person, you and I are pitting our brain against like a building full of servers that are all trying to get your attention. So it's an unfair battle and we don't have any sort of circuit breaker to say, give us a chance to deal with this.
GEORGIE FROST: It's a tricky one though, isn't it, Mickey? Because I mean, I think about me and my profession. I'm a journalist, I'm a podcast host. There are millions of podcasts out there. I want to do what I can to grab people's attentions for 20 minutes. I mean, as soon as they start hearing my guests, then of course they'll listen, but it's like trying to grab people's attention away from whatever they're doing. I am part of that, as are many businesses.
How do you marry that up? When so many diverse businesses are based on trying to grab people's attentions and you are proposing that what we're doing is breaching someone's human right, essentially. And we need to bring in traffic lights to say whether it's good or bad for us. I mean, would this podcast be good for someone, cognitively speaking?
MICKEY MCMANUS: Well, I love that question. I mean, I think in some ways the journalism side of things is both built on getting people's headline, getting the attention. But the question is, will I get a value from this podcast?
Like I can't really listen to every single episode today, but if I could pace myself and if I can sleep in between, because sleep is when we actually rebuild our cognitive capacity and I have a chance to have that refractory period, many of these things that are high cognitive load, actually give me more potential, actually add more batteries to my system.
Unlike say, my metaphor of using an electric car where you've got like, kind of the electric fuel gauge that that says, you've got more or less battery. You can't add more batteries to that electric car. You can do regenerative braking and when you hit the brakes, it like recharges the battery, but you can't build new batteries. The human brain is not like that at all. The human brain can add new batteries. We can actually build our cognitive capacity. And I think that's what's hopeful about this.
GEORGIE FROST: Finally, before I let you go. What can organizations do to find ways to protect, to restore, to build the cognitive powers of their employees, not just their employees, their partners, their customers?
MICKEY MCMANUS: Well, I think, we mentioned a little earlier, what if there were a chief cognition officer and I think we're going to have something like that. Somebody who stands between the human potential side of things and the technical side of things inside of an organization.
There's a company that basically has their board of directors go to a mixer the night before a board meeting. And they're challenged with finding out something interesting happening by talking to the rank and file employees. What they're doing, what you're doing is you're enlisting them to be able to help us discover weak signals that might be in your organization already, that could hurt you later.
So you're enlisting the board of directors in a different way, and they found that this is really powerful to do this. If it's the middle manager, they've got to deal with how to manage expectations above them and how to manage the frontline team.
Take a look at the software that you're installing, take a look at the things and evaluate them on cognitive load or complexity. And whether it's just helping increase complicatedness and complexity, or it's really helping people do this stuff.
GEORGIE FROST: Mickey, thank you so much. And to you listening, we'd love to know your thoughts. To get in contact, leave us message at thesowhat@bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us, it helps other people find us too.
GEORGIE FROST: "Mend your speech a little, lest it mar your fortunes." Words, they're most powerful tool. You can share your greatest ideas, your most intimate feelings, but they can also wreak havoc intentionally or otherwise. So, are you paying enough attention to the language that you use? I'm Georgie Frost. This is The So What from BCG podcast.
ASHLEY GRICE: It's not about being a word snob, even though I self admittedly, probably am one. It's not about feeling as though you've got intellectual superiority over somebody because of vocabulary. It's about choosing the right word.
GEORGIE FROST: Today, I'm talking to Ashley Grice, CEO and a Managing Director of BrightHouse Consulting, a BCG company.
ASHLEY GRICE: He boldly states it to the room, A thought refined. First offered quietly, then boom! Repeated loudly, now it blooms. Nods of assent, they're all aligned. I shake my head, my face bemused. His thought's acknowledged as sublime. I like it too. As it was mine.
Language has always been a really important part I think of my identity. I was a big reader when I was a kid. I learned to read young because my sister forced me to play school at home, and I always kind of felt that language and words were a superpower. It's something that I loved. It's something that I like to be able to use and to flex. It's something my good friends tease me about occasionally. And it's something that as I grow older, you start to sometimes lose the ability to pull out just the right word in the exact moment, and so it's like it's joyful but also has a little bit of nostalgia to it.
In this particular poem, it's a little snarky, but the reason it's like that is because it talks about this concept of having somebody take your voice and take your language. And what they're really doing when they do that is they're taking your identity. And then sometimes they express it really well, but then sometimes they express it with a different intent. And then it's like, then a foreign concept to you. So, that idea of wanting to hold on to that identity through those words and the way that you express your wonder and ideas is incredibly important to me and it always has been.
GEORGIE FROST: Firstly, Ashley, thank you so much for reading out your poem. I have to say, this is a first for The So What from BCG, having a published poet on. So, it's very exciting for me, but apart from mansplaining, how else does language manifest itself in your role? Those aha moments if you like, where you acknowledge it, where you understand its importance, where it has resonance for you in your job. Those moments where companies really need to get it right, some do, and some of them fail hugely.
ASHLEY GRICE: So I help companies find purpose for a living. That's what I do. And ultimately when you are doing that, what you're trying to do is take the concept of their ethos and marry it to their future aspiration and set a goal for who they want to be, what they will live up to in a very pithy phrase that is memorable and deep and unique.
GEORGIE FROST: Ashley, words can create movement and change. They can convey great ideas, our passions, our thoughts, but they can tear them down as well. Get the language wrong, get the context wrong, even if you mean it as a joke you can destroy your business.
And the famous example that comes to my mind, the most obvious example, is perhaps that of Gerald Ratner, the former chairman of Britain's, at one time, largest jewelry chain describing one of its products as, I think I can say this "total crap." And essentially, he brought down the whole operation with those two ill-chosen words. So apart from describing your goods as rubbish, never advisable thing to do, what are some of the most common, less blatant though no less important mistakes that you see companies make?
ASHLEY GRICE:
So, we are always telling executives, you need to make this personal, you need to understand the story that you are going to tell as a human because people want to see authenticity in their leaders, and that is a combination of strategy and empathy. And that sense of empathy often comes through how one expresses themselves, and so you really need to think about what words do I use as a leader, as an individual?
Why is it so important in business to really push beyond the boundaries of this normalized language, this lingo that we speak? I think it's important because using our vocabulary to its fullest, it increases wonder, it increases expression and then this creates value by reaching different people differently, and by spurring imagination.
I really do think that imagination and this concept of wonder can lead us to resulting innovation that sometimes we cut off when we use our language in a really narrow way. And I also think that language can help push this empathy-driven culture of trust that as we continue to be digitized and working remotely, and we continue to be globalized, that's an important piece of creating value in business.
GEORGIE FROST: Now Ashley, you are, I think it's fair to say, a bit of a word snob. Indeed, I think you have admitted to me that before.
ASHLEY GRICE: I am.
GEORGIE FROST: If you haven't, then I'm very sorry. Yes, thank goodness. You did say you're a bit of a word snob. So, it's not just about using everyday language, the common vernacular, but a specific type of language. But isn't there a danger with that, that we exclude a lot of people from the conversation creating a barrier between the, I use the good language from the Ivy League schools, I use the Queens English and you don't.
ASHLEY GRICE: So it's not about being a word snob even though I self admittedly, probably am one. It's not about the two-point words or looking important or, you know, feeling as though you've got intellectual superiority over somebody because of vocabulary,
GEORGIE FROST: So I was reading an article in The Economist a couple of weeks ago that was highly critical of a certain company's mission statement, I won't name the company. But having read the statement, I can see why. Now it used some good words and big words, but put them together and it was nonsense. Guff, I think the journalist called it. You must see this a lot in business. Pretty words, no real meaning about what your aim is.
ASHLEY GRICE: We do, and in fact, a lot of the work that we do is to help companies use the be beauty of eloquence to be able to express what they do. In fact, half of the work I do always begins with, there is a difference between a purpose statement and a vision statement and a mission statement. They have different intentions. They need to be expressed differently, but yet they also must be complementary, and everybody within that organization knows how to use them.
So when you do have an empty statement, if what you do every day is not within that mission in an inspiring way to the people that work for you, it's not effective. It's almost worse to have a bad one than to not have one at all.
GEORGIE FROST: So if you were advising a company to write their mission statement for example, how would you go about doing that? Give me three ways that a company could start looking to use the right language to convey what their purpose really is in an authentic way. Now we spoke on this podcast previously to Sarah Willersdorf about high fashion and the metaverse. But she highlighted that what mattered most to Gen Z consumers, was authenticity of brand. So how can you convey that with the right words?
ASHLEY GRICE: First way, I think you start from your ethos. You go back into your organization and you understand fundamentally who you are, what is in the company DNA, because that will always be at the core of the work you do really well, of the way that you can create impact. The second way would be to consider your tone.
And I think the third thing would be to focus on uniqueness. There's so much jargon in business that all of us slip into all the time. I'm guilty of this. I had a client call me out on it recently, too much jargon, and I had to go back and look at the the Zoom recording and say, why did they say that? And I listened to it, to pick out those words because that kind of blithe, that glibness, I don't want that. That concept of really getting to what makes you unique and not being afraid to use all of your words.
I was having a conversation with a colleague of mine I hold in very high esteem, his name is Martin Reeves at Boston Consulting Group, and Martin and I were having a discussion about how we don't use the word beautiful enough in business, and how the idea of a strategy being gorgeous is something you never hear but actually can be incredibly true, right? The idea of something being splendid, or magnificent or multiplicative, like all these words we don't use but really lend themselves well to differentiation and uniqueness in that moment. So, I think don't be afraid to use words that other people don't use, but that describe you really well. I think that will get you far.
GEORGIE FROST: I'm smiling Ashley, because my conversations are liberally sprinkled with gems, such as splendid, marvelous, fabulous. I'm not sure if that's because I'm British from the books I would read as a child, but there you go. I do want to ask you about social media. I certainly don't believe it is a universal evil, I'm not in that camp. But in terms of language, what do you think that it is doing to the language that we use offline too? I don't want to get Orwellian here and talk about double-speak but you can see where that's going. The way in which able to express ourselves, the quality of debate.
ASHLEY GRICE:
There's so many, I don't want to say rules, because I think that's a little old school, but there's so much formatting or thought that goes into the certain types, right? You have to be incredibly choosy about the words that you put in there. And there's something to be said about being succinct. You know, that whole concept of, I didn't have time to write you a short letter, so I wrote you a long one. There's that, that can be a good thing. I do think that, you know, on the other side, you are also setting up some kind of barriers generationally in terms of people understanding acronyms and just words that the other generation simply doesn't understand. I know, I have a 16 year old and a 14 year old.
GEORGIE FROST: It's a different sort of jargon, isn't it?
ASHLEY GRICE: Completely, it's their own jargon, and it gives them great latitude to do the teenage eye roll and say, you simply don't understand what I'm saying, and I'll say yes, figuratively and literally, I do not understand what you're saying. But for those generations, they're creating a vernacular that has a sense of belonging to it. That's what that is. And so, there are good parts about it and bad parts about it, right? It does cause discussion in our household over dinnertime, isn't that what we're supposed to be doing? So in some ways, I think it can be good and bad.
GEORGIE FROST: I agree, it's not one way or the other but in terms of businesses, it is certainly rocky terrain. One, to get the language right for it to be engaging and relevant, otherwise why on earth are you in that space in the first place, but also the substance of what you say. Now this is an issue on or offline, but notably online. We exist in a world of cancel culture, of "no" platforming. I'm wondering if you think this is having a chilling effect on the way that we communicate in expressing our authenticity. We're told to be genuine. We're told to be authentic, but only in so much as it conforms with the morals of the day.
ASHLEY GRICE: It's very true. You know, I was having a conversation yesterday, very specifically about this, under the umbrella of diversity, equity, and inclusion, we were going through a training, frankly. And one of the comments that I was making about it was so much progress happens in micro conversations, right?
I was telling a story about how I was describing something and a really good African-American friend of mine said, "Hey, you don't know but Black women really hate it when you describe something like that." And I said, "why?" It was meant to be complimentary. She said, "I know, I know you, I know your intention, but let me tell you why." And she took that moment to educate me on that particular word, which was loaded and I didn't know. It was the word articulate, right?
To me as a white privileged woman, it didn't have a load. And to her, it did. And she took a moment to explain that cultural nuance to me and I will forever be grateful for her doing that. But those micro-conversations changed how I approached my own language in a way that was a big learning point for me, that was a blind spot I didn't see. If we don't allow ourselves to use words that are uncomfortable and to have those small conversations in the moment, we will forever be stuck in this hamster wheel of, you know, lack of change, and I don't want that for us, I don't want that for anybody.
GEORGIE FROST: Those small conversations in the moment are tough though, aren't they? Choosing the right words to say something that could be a cause of conflict, we hate it, but this is something that we all need to do, isn't it? Personally and professionally, get good at saying those things that may make ourselves and our listener uncomfortable, unhappy, but that ultimately need to be said if we're going to grow and we're going to progress. And I quoted from King Lear, at the start calling on his daughter to shower him with words of affection. He doesn't want an authentic daughter, he wants an obsequious one. But in the current climate, are we to become masters of that glib and oily art? Are we to become sycophants, frightened to say anything that's going to offend anyone or may get us into trouble?
ASHLEY GRICE: I agree. There's this woman, Francesca Gino, who is a behavioral scientist. I believe she teaches at Harvard Business School. And she made this comments around conformity gives us comfort, But there is something to be said about the kind of progress one makes when they are in discomfort, which is something as human beings we are terrible at doing. We try to move forward, we either flee or we fight.
GEORGIE FROST: I'm wondering about when you speak to people who don't share your mother tongue. Now I know this from my own personal experience, my other half is Spanish, how something seemingly innocuous, just words or comments can be taken in completely the wrong way. How do you bridge that divide in your career?
ASHLEY GRICE: It's very true. Well, you slide into it. I think everyone naturally slides into it because they like to belong. Right from the days when we were in caves, you had to belong with everybody else, and if they moved without you and you were alone, you died. So, everybody constantly wants to create that group. For those that know me and listen to me a lot, you can tell I've worked for a British company because I will use words like chuffed or brilliant or one of my favorite blagging, I love that word. I think it's an incredibly good word for exactly what's happening in that moment, you know? But there are words that I have used in English in the British context, which do not mean the same thing.
GEORGIE FROST: Pants, pants in America don't mean the same thing in England, by the way.
ASHLEY GRICE: They simply do not. Yes, they simply do not, they create a whole fish bowl. The concept of fanny pack in America is just simply not the same, right? You know, there are things like that, you see what I mean? I have made that mistake. Part of that too is creating a cultural connection that is just simply human. You know, right now for example, I am taking French lessons. At 47, it is near impossible to cram French into my brain. I am trying for lots of reasons. I have an office in Paris and when I go to Paris to be with the team, clearly they're all speaking English for me. It's beautifully done. They make my life easy when I am there, but I try really hard when I'm there culturally to speak as much French as I can. It's a disaster. All the folks with whom I speak are thoughtful about it but I'm trying to make connection through word, and I think that intention goes a long way even if the accent is just horrendous.
GEORGIE FROST: I'm glad we're having a bit of a joke with this and a bit of a laugh because actually, I do want to focus on the the joy of language. And used well, what it can communicate can be such positive things. And I know you've got another poem and I'm desperate for you to read it out to us. So, the joy, let's focus on the joy and the comedy and the beauty and how splendid language could be because it'll make me really chuffed to hear you talk about that.
ASHLEY GRICE: Aha, I love it. All right, this is not published work. This is menial beginning work but I was laughing about the concept.
GEORGIE FROST: Exclusive BCG podcast, yeah?
ASHLEY GRICE: Exclusive, you're right. Now I'm feeling very important. It's an exclusive, and I was joking about the fact that consulting bingo exists. Do you know this, right? You have the board, and if you really want to, during a long call you can chuck off the words you hear. So, I wrote this little thing called "Death by Jargon". Doll Zoom, let's play bingo. With consulting lingo, we'll listen for paradigm shifts. Agile and best practice, synergistic action, win-wins, decks, and benchmarks and gifs. Manage up, then top-down running I'll hit the ground while white-boarding key attributes, 30,000 feet high, A sea-change clouds my why obscuring the low-hanging fruit. Now, new action plans drafted prove quite value added. Assuming we sidestep scope creep, we'll drill down on pipelines, find green fields and landmines. Bingo, my engagement's complete.
GEORGIE FROST: Ashley Grice, fantastic. Thank you so much. And thank you for listening. We'd love to know your thoughts. To get in contact leave us a message at thesowhat@bcg.com. If you like this podcast, why not hit subscribe and leave a rating wherever you found us. It helps other people find us too.
GEORGIE FROST: Empty supermarket shelves, everyday items going up in price. And where is my online order? All of us have been impacted in some way by the global supply crunch while there's little we can do about COVID, could some of that disruption have been avoided if we just did things differently? I'm Georgie Frost and this is "The So What" from BCG.
DUSTIN BURKE: In the past, there was a high degree of trust put on suppliers to deliver. And now I think companies are of the mindset, that's not sufficient.
GEORGIE FROST: Today I am talking to Dustin Burke, a leader of BCG supply chain practice and an expert in shipping and logistics.
DUSTIN BURKE: Many industries run at very high rates of capacity utilization in plants and they don't carry a lot of inventory. We've seen that in places when we've had say natural disasters in specific areas, any given point in time. But COVID has been a global disaster and so it has impacted many different industries all at the same time, so it's making us very aware.
And at the same time, our logistics infrastructure in many countries is under invested in, it kind of worked before COVID. But what COVID did is it skewed what we were buying, how much we were buying because many of us were stuck at home. We're not taking as many trips as we used to. So we're doing different things with our time and with our money and that has driven a shift which has stressed the infrastructure we use to import and distribute goods. So those weaknesses were there.
It essentially means that in many of our supply chains, we just weren't able to cope with shocks and COVID has brought many little shocks all at once.
GEORGIE FROST: That's too much emphasis and I do appreciate everything you've just said there about the impact of COVID, it's been huge and it's impacted every area of our lives and every link along the chain. But has too much emphasis do you think then put on reducing costs and promoting efficiency over resilience? When did that start? When did things start to change towards that?
DUSTIN BURKE: It's a good question, I do think a lot of emphasis has been placed on that and probably primary emphasis in most supply chains. Too much, I think depends on your competitive context. So companies are often trying to ring waste, right? Out of their systems, increase their margins in the face of steep competition. And if you're making something or you're distributing something, most of your costs are tied up somewhere in your supply chain and wringing that waste out of it is not all bad, it's what helps many of us get reasonable prices on the things that we want to buy. Waste can also mean carbon, right?
So looking forward, we're trying to take waste out of the supply chain in that way. And so, that's an important driver but it can get out of balance and in any given quarter or any given year, it is understandable that a company's primary objective is going be trying to make a little bit more money but we can lose sight of the robustness of that supply chain.
Do we have the right buffers? Do we have backup or secondary suppliers when we need it? Is there enough capacity in our supply chain? Those things are important but it's very tempting to get rid of that buffer and to essentially lean out resilience when you're trying to remove waste and I do think that we've gone too far in that direction.
GEORGIE FROST: Is this been a massive wake up call do you think for businesses, supply chain managers?
DUSTIN BURKE: I would like to think so. On the one hand we have had massive disruptions in specific industries before in companies and the leaders who work for them, the supply chain leaders who work for them really they compete within industries for the most part, most days, right? When we have had say, for example, floods in Thailand or we have had tsunamis in Japan, or it's not uncommon that we have hurricanes on the Gulf coast of the United States, we have disruptions in supply chains and particular industry value chains suffered during those times.
Right now we have several of those things at once. So I think there is more consciousness about it. Now I am hopeful that we won't miss this opportunity or this awareness that we now have, say two, three, four years, hence and that there will be a renewed emphasis on supply chain resilience or at least a better balance but it won't happen by itself because human nature being what it is, competitive pressures being what they are, people doing most easily, what they know how to do, I think will tend to make us behave in the ways we did pre-COVID unless we actually think now differently than we did before about how to make our supply chain stronger.
GEORGIE FROST: So before we actually get to what you think we can do to make our supply chain stronger, I do just want to address first, a couple of myths, perhaps, ideas that I'm sure you've heard, I've heard that things like we could just easily move our supply chains away from far-flung countries, that's the problem. And back to the U.S. or wherever that this is all just temporary, that self-driving trucks would solve the driver shortage, will they?
DUSTIN BURKE: Yeah, it's a good question. So there are, I think a lot of solutions that are either a little bit unrealistic because of maybe their boldness. Here's, what is a problem, long supply chains that don't have appropriate risk mitigation around them, such as the right inventory levels. Manufacturing in any particular place is not without risks. So long supply chains can involve risks.
So for very far from where we're trying to source things, then a lot of things can happen in between. We might have, like I mentioned, natural disasters at one end of the supply chain. And to be sure if that chain were shorter, then there would be less risk there. On the other hand, it's not without risk. So many manufacturers in north America, for example, right now we're facing shortages of important residents that they need to make plastic products. And I'm only talking about a distance from say, Houston to Chicago, it's not that far.
And so, location is not everything. It's how many suppliers we have. Are all of our suppliers in the same place and subject to the same risks, be they natural political pandemics or whatever. So diversification or lack of diversification is a problem. And people are focused on autonomous vehicles, it's very exciting, I think and I actually believe someday we're going to have that. It will take longer than we think.
GEORGIE FROST: Why would that make a difference? Why would that make such a difference?
DUSTIN BURKE: Yeah, it's a good question. So in many markets, we have a very tight labor market right now, particularly around commercial truck drivers. It's a job that has been challenging to attract people to. It's a difficult job to do. And so, one of the things that we could think about doing is to remove that capacity constraint or ease it at least with some autonomous vehicles.
That will not happen I think in most jurisdictions for at least a decade for the type of trucking that you and I think about. So it's not a solution for the problems that we face today. And frankly, for a lot of the problems we're facing today, lack of trucks, lack of truck drivers, it's a cost issue but it's not the primary thing that is causing shelves to be empty for example.
GEORGIE FROST: So do you think that supply chains need a major rethink? A brand new model of working? I mean, hopefully we're never going to get a situation like COVID again, but it has exposed issues here.
DUSTIN BURKE: Sure.
GEORGIE FROST: Or can we just make certain tweaks at the side that will be enough to make sure that this doesn't happen again.
DUSTIN BURKE: Right, I don't think tweaks will be enough. I do think that many of the things the supply chain managers have been doing for years to drive reasonably good service to their customers, be the consumers or other companies to take cost out of the supply chain. I hope in the future taking carbon out of the supply chain, actually mostly work.
What is missing, I think is new ideas or sufficient emphasis around the resilience of those supply chains. We, as consumers should ask the companies that sell us things, we should demand resilience and reliability. Companies should demand that more of their suppliers. And I think that we need innovation and how to get there because in the past, the tools at our disposal were just not attractive, carry more inventory, okay, well that has a cost. Source maybe from nearby despite higher input costs, well, then maybe I'm uncompetitive. Those are just unappetizing and they're really not sustainable in the face of intense competition.
So we need, I think some major rethink of how we actually get to more resilient supply chains in a way that people will find acceptable and stick with.
GEORGIE FROST: Well, talk to me about that. How can we get there and what do you mean acceptable and people will stick with?
DUSTIN BURKE: Yeah, I mean the managers, you know, let's say you are leading a company and your job is to be sure that that company delivers great products to its customers at a good price and also value to its shareholders. It would be very tempting to take waste out of that system if you were falling behind. So we need to drive a resilience with minimal waste and that can be hard to do. So often we carry that waste or that buffer in the form of inventory, in the form of capacity, capacity being extra lines in the plant or extra workers around because we don't know what will happen. There is uncertainty and therefore we carry extra.
We need to think differently about how to address that uncertainty. The other way that you address uncertainty is you try to become more certain about what will happen and you can only do that with information. It's sometimes hard to get this information but this is where the energy needs to be focused. And so for example, it is not uncommon that companies sure, know who their suppliers are but they don't necessarily know who else is buying from their suppliers. And they often don't know who their suppliers are. And so, there are points of vulnerability that are just not knowable now.
GEORGIE FROST: Why does that matter to a company to know that information?
DUSTIN BURKE: Yeah, great question. So for example, if you and I like to buy the same product, it doesn't matter so long as there's enough of it. If you suddenly have a change in your condition, such that you're going to buy much more of that, and therefore there's not enough for me, that would have been nice to know because then I would actually look and see kind of how you're behaving and I would try to predict that.
GEORGIE FROST: To say it's jumpers and the weather gets cold and I want a lot more of them, right? Okay.
DUSTIN BURKE: Exactly. If there are not enough jumpers, I might want to know whether you're going on a ski vacation soon but I don't know that, we're just customers and I normally don't need to know but if suddenly there's a shortage in jumpers or as we say sweaters, then yes. And then the other kind of example on suppliers suppliers. So let's go with the sweater example again, the company that makes sweaters and there's only some, not enough sweaters to go around needs to source wool. Well, perhaps wool is being used for other things, right? To stuff materials of some sort.
And so, I actually want to know if demand is exploding in the world of wool stuffed pillows and that would be helpful for me to know but I just don't know that yet because I don't know where else that wool goes. We can bring a lot of innovation to this and there's some energy now but it's a very early stage. And when we think about what companies particularly in the startup sector have been able to do and bringing some visibility into other spaces and bringing technology to these problems, this is where it needs to focus in supply chains. Being able to see up the supply chain, several different levels, being able to see across to companies that are not even in my own industry, but I know that I am linked to because of the things that we depend on that are in common. We have seen this during COVID and this is, I think of the wake up call.
Companies are scrambling for these semiconductors because they're relying upon the same common scarce source of supply. And these are companies they normally wouldn't even think of each other because they don't compete against each other. They don't play in the same industry. Solving this problem, focusing on redefining, identifying risk and tools for driving some resilience to mitigate that risk, I think is the main frontier for supply chain management for the next several years. And this is where I hope innovation will come.
GEORGIE FROST: So that seems very sensible knowing who my supplier is also supplying to but it feels like a first step. What comes after that? How do I work better with that information? Do we look towards further collaboration? And if that's the case, how does that work alongside competition?
DUSTIN BURKE: I think it is what you mentioned. I do think it is around coalitions, partnerships. I think it's around cooperation which is also challenging to do but it's not impossible. We have companies that cooperate in supply chain topics on specific things. You know, we have recently airlines collaborating on driving sustainable fuel sourcing and we have companies that collaborate on supply chain problems around say human rights concerns on particular commodities such as on seafood. I don't think it's unreasonable to think that we can have companies that collaborate with each other to look at, hey, this is a critical input for us. We should really work closely with our suppliers, require them, certify them, some mechanisms such as that, to make sure that they have enough capacity to make sure they have their risk mitigation plans in place or we don't source from them. Or at least we label them as somewhat quote unquote, higher risk and we need to know that.
It is hard to get companies to compete on things like this but I am optimistic that it can happen because we just mentioned, we have interests in common with companies who are not our competitors, so that actually should make it much easier. The hard part is identifying who those companies are but we could do that. We can do the work of mapping our supply chains. Ideally with technology but otherwise with brute force. And once we know, we can see companies that have interests that are common to ours but they're not our everyday competitors necessarily. And that actually, I think opens up interesting possibilities for these coalitions or partnerships that are looking to drive some resilience farther upstream in our supply chains.
GEORGIE FROST: You mentioned there semiconductors, is there ways that we can better reflect, products that are actually really critical? Can we protect those products in some way to make sure perhaps they are not as disrupted? I mean, I don't know how it'd work but-
DUSTIN BURKE: I think it depends who it's critical to. When there's a public interest, this is probably a role for government and in some instances it is and we know that didn't work perfectly at the outset of COVID-19. So when it comes to something like masks, critical medicines, ventilators, those types of things, there is a public good. The importance of having them in supply is not reflected in the price. And this is probably something that only governments can fix adequately or governments collaborating with industry.
Otherwise, what is critical is it really in the eye of the beholder in a particular industry or between individuals what you view as critical as an input to your life is probably different than for mine. I do think companies can look and say, for this particular input, this particular component or this raw material, how long could I go between shipments or how easily could I find an alternative source? And so, you can look and see which ones are higher risk and by that definition critical. But when you're making something like a car, really by definition, every part is critical. You could have a car waiting for lack of tail lights, for example, that kind of thing is happening. So I think it's more about what is more vulnerable rather than what is more important.
GEORGIE FROST: You mentioned their governments, what role can and should governments play when it comes to supply chain logistics?
DUSTIN BURKE: Yeah, so when it comes to supply chains and ensuring resilience, I really think the governments are in a position to lead in some of the ideas I proposed in terms of defining what resilience is in key sectors and ensuring that the companies who play in those sectors have that. And so, you know, that stamp of approval whether it's literally a regulatory approval to operate or whether it's an ability to sell to the government or something along those lines in terms of having the right risk mitigation plans in place, excess capacity, redundant suppliers, that could be led by government. I do think the private sector is probably going to innovate on the technology solutions to do that most efficiently. So that is one and that will pertain to those things which are important to public health and public safety for the most part.
You did mention logistics and logistics is dependent on infrastructure and infrastructure by definition has a huge role for government, through funding and through regulation. And many of the countries where we live and work, we have exposed vulnerabilities in our logistics infrastructure and fixing that does take time but it can only come largely through funding. And I think the important thing is that we're funding the right things, the things where we see bottlenecks today. The main bottlenecks is around sort of the importation of goods and specifically around full distribution centers and warehouses. We have too little space at least here in the U.S. and especially in Southern California to put these containers of things that are being imported at record volumes. And that is really gumming up the works.
And so, sure it makes sense to try to fund port infrastructure but that's not primarily where our bottleneck is here at least right now in north America. Our bottleneck is in place to put that stuff. And so, whether that's through allowing more land to be developed into distribution centers, whether that is through developing port regions outside of Southern California to diversify our infrastructure, those are I think the directions that we need to fund and innovate as opposed to say, throwing more truck drivers at the problem. And we've kind of tried that and it's not working.
GEORGIE FROST: It seems it's quite a large problem which is going to require quite a lot of deep thinking about it across a lot of different areas. And we'll take some time, are there any indications we're moving in that direction at least or is this really something that has caught a lot of people, to borrow in American expression with the pants down, a little bit?
DUSTIN BURKE: So I think it has but I think most companies and governments are admitting that at least. I do see momentum toward changing it but I don't think you and I will see a big difference in the next few months. And here's why. Changing those infrastructure problems which I mentioned does take quite a bit of time. You need to identify projects, approve projects, build them out. And this is all at a time when we're worried about a lack of available labor in the United States and now we want to build new bridges and roads. It will take quite a while and it doesn't happen overnight. And then also for companies to identify new suppliers, maybe for their existing suppliers to invest in plants in different parts of the world, also takes time.
But I will tell you from the client conversations that I've been having, that is the direction in which companies are thinking. They don't see you know, abandoning a global sourcing activity as the future of their businesses but what they do see is risk diversification thinking about those right buffers and they are acutely interested in having more visibility, farther upstream into their supply chains. In the past, there was a high degree of trust put on suppliers to deliver. And now I think companies are over the mindset, that's not sufficient. I want to know more about the supply chains further upstream. They don't necessarily know how yet but they are interested and they are investing and they're exploring exactly how right now and so, yes, I am optimistic we will see change, that change we measured in years.
GEORGIE FROST: Talking about years, is this just a blip? How long is it going to last?
DUSTIN BURKE: So this has been a massive blip because we experienced supply chain issues and other instances, it's because of geopolitical turmoil somewhere or a natural disaster. And those are relatively localized. COVID-19 is the most global adverse event that we've had in generations. It's a blip in many different places at the same time and it will subside but it will take time and
I think what we should experience, at least in terms of the availability of goods, the things we want to buy, having them on the shelves, having our parcels arrive on time, is a change over the coming months and and here's why, factories in China, for example, typically shut down over Chinese new year. So that's going to last a few weeks, that gives a bit of a pause to the volume of containers coming into most Western countries and a bit of time to work through that backlog. Not enough time to work through all the backlog but a bit more. We are seeing consumers in Western countries in particular and especially in the United States, spending more on goods than they did before because they're very flush, so savings are very healthy and also they're spending more on goods than services. That cannot last forever.
And then I think finally, some of the more innovative ideas and some of the attempts to actually just remove the bottlenecks will finally start to bear fruit but I think that also will take time. So all of those things together, I think mean we can work through it in the coming months but I think it's not two months, it's more you know, well into 2022, at least as far as moving things through our infrastructure with speed.
GEORGIE FROST: I asked you earlier in the podcast about whether this is a wake-up call moment because it does sort of sense that, oh yes, in a couple of months, this will just go back to normal. And actually, do we want business as normal?
DUSTIN BURKE: That's I think a very good question. The answer should usually be no if we believe the world will have be more uncertain going forward or have more shocks then those systems don't work particularly well and we need to change them. I also think there are other reasons to do this that are very timely. It is very hard to know how ethically produced something is. Or what the true say carbon footprint is of something.
Unless you know where it came from all the way up the chain and unless you know how it was made all of the way up the chain and consumers and governments and increasingly companies now I think have much more attention paid to this and I do not believe that this is a flash in the pan. I actually believe this will be with us for some time to come. And so, there are so many reasons right now to invest energy, technology and creativity into supply chain transparency and visibility to solve not only resilience but to solve the other things we want to change about our supply chains as well.
GEORGIE FROST: So where should companies then be putting their focus at the moment? What are the new, the troubles, the opportunities perhaps on the horizon? Where should they be looking?
DUSTIN BURKE: Yeah, it's great question. I think there are a couple of things they need to be doing. One, they need to be exploring with technology partners or how they can build themselves some way of accumulating data from suppliers, supplier suppliers, and supplier suppliers' other customers and keeping that in some particular way that they can actually monitor real time.
Two, outside of technology, I think it's the coalition and partnership idea. With some intelligence about who shares our risks, we should be bringing those companies to the table at least to start. Then the solutions that come out of that I think can evolve. So I think that's the second main area. And then I think the third one is revisiting or further exploring some of the solutions that might not have been chosen in the past.
And so, for some companies, let's say you're managing warehouses or running stores or running plants. You know, labor has been in short supply. We think about automation. Some companies haven't taken that step because of costs. Going forward, that might not be only about costs, that might be about the ability to handle the volume of work, production, distribution that you need to do.
And so, reframing those questions around how I make things and how I distribute things in my facilities and do I need to automate it, I think is also important. So I think that visibility technology, partnerships, further exploring automation are three things companies can be doing right now.
GEORGIE FROST: Dustin, thank you so much and to you for listening. We'd love to know your thoughts. To get in contact, leave us a message at "The So What" at bcg.com. And if you like this podcast, why not hit subscribe and leave a rating wherever you found us, it helps other people find us too.
GEORGIE FROST: Accelerated by the onset of the coronavirus pandemic, the world of work is changing. The debate is raging over where we work, home, office or hybrid, but is it just a red herring? Are we thinking too small? There's a lot of talk about the great resignation, but are we headed for the great recalibration? I'm Georgie Frost and this is the So What from BCG.
DEBBIE LOVICH: Work before COVID doesn't exist. Done, it doesn't exist. We've been at this for what? A year and a half, almost two years?
BRIAN ELLIOTT: The problem is we keep on falling back into these conventional wisdom tropes. My favorite is water coolers are the source of innovation. It's just sort of insane when you think about it.
GEORGIE FROST: Today I am talking to Debbie Lovich, Managing Director of BCG. Alongside Debbie is Brian Elliott, executive leader of the Future Forum, a slack back think tank in partnership with BCG.
DEBBIE LOVICH: The way we work is completely broken. It hasn't really changed since the industrial revolution when people had to leave the home, go into the factory, performed repetitive task jobs, create hierarchy and spans and control to manage them and fix time and place. It's never changed. Even with knowledge workers, people get fixed job descriptions to be performed in fields of cubicles from 9:00 to 5:00. And what COVID told us is that's totally broken and it's not just the fixed place element. It's all of it. It's the fixed job description, time work gets done, what a leader is in command and control. All of that is broken and if you really dig into it, this do we let people work from home one or two days a week is like a tip of an iceberg. In executives minds, they're saying, well, relative to work before COVID, this is super generous. And what they don't realize is that work before COVID doesn't exist. Done, it doesn't exist. We've been at this for what? A year and a half, almost two years? So, we've been showing something very different can work. So, relative to that, anything edict driven is a step backwards.
GEORGIE FROST: Do you really think that it's done, Debbie, work before COVID? COVID has changed fundamentally the way we work, the way we want to work, the way we think about work because the noises that we're getting certainly from a lot of CEOs, many politicians as well is head back to the office everybody. It's business as usual and actually your career will suffer if you don't. Are we going to miss an opportunity here with thinking like that?
DEBBIE LOVICH: Brian and I, we as part of Future Forum, right, we're advocating for the world to realize work needs to be redesigned and the answer lies a lot in the last year and a half. But the other thing you can't ignore is that we were lonely. We needed to see people. There are some things you can't replicate on Zoom. So, in advocating to rethink work, don't misunderstand and say we're advocating that every company should be remote only. Our point is that there are a lot of things that need to be done in person, but it has to be purposeful, right? Like socializing and getting to build community is hard to do by Zoom. So, yes, we need to go back to the office for that. Working on unknown, hairy problems, collaborating in a room together, some digital natives can do that better remotely. I can't, right? So, some of those things are better to do in person. Going back for everything is not the answer and those companies are missing it and they're going to see it happen with an exodus of talent when you can work from home and only go in when it makes sense. To go in and sit in a cubicle or sit in an office and be on Zoom all day, right, that just doesn't make sense. So, if you could do something that makes sense and get the same salary and exciting work or better salary, people are going to walk. They're going to walk. You see it happening already.
BRIAN ELLIOTT: That's where the entirety of this conversation lies. One of the executives in one of our working groups the other week said this whole notion of the battle for talent presumes that it's really a choice on our side. The talent is one. Talented people, attracting, retaining and engaging. Highly talented individuals is now where competition advantage is. It's not in physical capital. It's not in financial capital. And if your job as a senior executive is to get the most talented people you can, then you're going to use flexibility as a way of leveraging that. You can attract people from a broader geography, you can attract a more diverse population. And people are clearly in our research saying that flexibility is key. It's the second most important thing after compensation to them. 57% of people in our survey globally are open to new jobs this year. If you're in a company that is saying, we're not going to be flexible, we think everybody needs to get the work done in the office, your competition is going to come and attract your most talented people, whether that is your salespeople, your marketing folks, your engineers, you name it.
DEBBIE LOVICH: And I think you have to dig deeper and say, why are some leaders saying we need to go back? And we know that statistically, right? Executives want to go back full-time. I think it's what Brian, 3x?.
BRIAN ELLIOTT: It's 44% of executives want to come back five days a week versus only 17% of their employees.
DEBBIE LOVICH: And so, the question is, why do executives want to go back, all right? So, one, they have nice offices, they have secretaries, they have good food. Their average worker does not have the same setup they have. Two, they've learned to become an executive by remember management by walking around. When I see someone that means they're productive, which is kind of doesn't make sense. What this past year and a half almost two years has taught us is that executives need to build new muscle to lead in very different ways than they used to lead. And that's hard. Going back represents so many things that they're just comfortable with. The important thing is we've got to teach executives new muscles because that disconnect is pretty profound between leaders and their people.
BRIAN ELLIOTT: There's this core issue of trust that we're seeing pretty consistently in transparency, which leads to trust. 2/3 of executives told us that they were making their future of work plans with little or no input from employees. 2/3 of executives also thought they were being transparent with their employees. Surprisingly or not really surprisingly, employees disagreed with them. Didn't feel like they were being transparent. And you can kind of see why. If you're not engaging your employees in the conversation, then they're not going to trust that you have their best interests at heart because you are living a very different life than they are. And so, what we're seeing pretty consistently when we talk with executives across companies is that the leaders are the ones that are leaning into this and admitting something that's sometimes hard for an executive, which is I don't have all the answers but I want to enlist my team in figuring out what the right answers are. And that's where you get much higher sense of belonging in an organization, which leads to higher retention, to more engaged employees.
GEORGIE FROST: We've touched on a lot of issues already. Transparency, flexibility, trust, productivity, where you work, when you work, how you work and the new muscles, of course, that leaders need to build. Is this the great recalibration that you talk of? And I want you to explain to me, Debbie, if you could, if I was to work in this ideal way of working in the future, that's so different to the industrial revolution style that we've seem to have got still at the moment, what exactly will it look like? What will I be doing?
DEBBIE LOVICH: There have been a lot of things that have been really broken about what work is. It's not just, again, flexibility and going into the office. In that I mean if you look at the income gap between the highest earner and the lowest paid earner in every company, that's been expanding and expanding and expanding. And it's not surprising, compensation has skyrocketed about what's important to an employee. Guess what? Compensation is up there because this gap is just terrible. And the other thing is that COVID has pushed people to realize there's more to life than just work. And we've got to work to live instead of live to work. And we can't contort ourselves around work anymore. Work, you contort yourself around us a little bit for a change. That's one part of the great recalibration. The other part is, what is a job? I started off by saying we've been working this way because of how factory workers were. And so, you had this very narrow definition of what a job is. Repetitive tasks, so you can do it really fast. And what happened at the beginning of COVID? We forgot what our jobs were in those first weeks and months. People just banded together to get stuff done and we did it in little ways and we also did it in big ways like taking people from stores and putting them in call centers. Or in China, taking people and moving them across companies to fill in. And what did that do? Not only did it use talent efficiently, but people learned, they grew, they broke down silos, right? They built their networks. They felt like they were working on the most important things. So they felt accomplishment. So, we've got to bottle some of that. That's all part of that recalibrating what work is.
BRIAN ELLIOTT: Debbie, I love the work to live versus live to work because so much of the decades worth of experience about how work is set up in that factory farm of an office is based on the live to work ethos. It's the senior executives who, to be honest, look a lot more like me. And it doesn't work very well. In our research, it consistently doesn't work as well for black employees, Hispanic employees, Asian American employees. They want and need more flexibility. And for caregivers in particular, reschedule flexibility is such a key issue. So, if you want to win talent, if you want to win people over, if you want to attract them, retain them, engage them, you have to really think about how this actually opens doors for people that don't look like you. That requires that you really rethink the workplace as well. We've gotten even more factory farm like in a lot of ways for the past couple of decades. Average space per employee dropped by like 50% because we'd shoved even more people into open office floor plans. We need to go from thinking about how do managers keep track of their human capital by monitoring them in a space to how do you actually re-skill managers to think about measuring on the basis of outcomes? How do you help people understand what the purpose is in their organization and free them up to do their best work. Georgie, to your question about what's the workplace of the future look like, there's definitely still space involved because there's huge value in bringing people together to build belonging, for socialization. That's what employees want it for. But to give them a lot more flexibility and freedom, and to be blunt, this sort of movement of people into offices or into a physical headquarter space needs to get broken down because digital actually is your headquarters these days. It's where you share knowledge and information. And think about everyone who ever worked in what we like to call a satellite office or remote office. Not a remote employee, but all of you who've ever been in that situation before you always felt second class to people who were in the headquarters building. Digital helps level that playing field.
DEBBIE LOVICH: There's so much there. And even remember before COVID, you point back, right? People were in satellite offices or working from home. But I remember, people were in the same office building and they wouldn't come to the meeting room because they'd rather dial in from their desks so they can multitask. And so, what's the value of meetings? And one of the reasons people are dying, right, of these back-to-back Zooms is because we haven't thought through the right interactions for the right goal. Let's just think about it, right? If it's information sharing, record it and have someone to it when they're working out in 1.5 times speed. If you need to brainstorm something and be creative, get in a room together or if we could all upskill on Miro or other collaboration tools, we could do it remotely. And so, we've got to be intentional and think about what interactions for what work. I want to get back to your point of the paradigm of seeing people, meaning they're productive. It's crazy how many times in the past year and a half I've been asked the question, how do I know my employees are productive when they're at home? For call center and sales, I can measure it, but for other employees, I can't measure it and I just have to go back. Well, how'd you know they were productive when they were in the office?
BRIAN ELLIOTT: One of the chief people officers in one of our conversations last week said, "For everybody who says that, "I'd like to remind them that when I was in my 20's "and I was in an office from 8:00 a.m. until 8:00 p.m., "I was woefully unproductive for about half of that day "and really not doing a lot of work." The problem is we keep on falling back into these conventional wisdom tropes that the office was good for... My favorite is something like water coolers are the source of innovation. It's just sort of insane when you think about it. You're going to rely on completely random chance of people bumping into each other as the way in which knowledge gets shared and people meet one another across organizations. So, think instead about how are you going to actually foster that kind of environment, where you're bringing people together episodically? That's where you're going to really get those sort of crosscurrents working. And if you can do that, those connections, even if it's once a month or once a quarter persist on an ongoing basis. But that's why this blending of physical space together to build a relationships plus digital tools to stitch it together, it requires that we rethink and not just assume that the right answer is just put them back in an office.
DEBBIE LOVICH: Yeah, there's a bucket around what does work look like? This asynchronous flexing time, flexing place, measuring impact instead of activities and output, like even calls per hour, right? You're measuring cost per hour, but how do you know how many were good calls? How many led to a sale? There's a second bucket of things around culture. What does leadership mean? How do you be what we used to call an agile, a servant leader? You're there to set a vision and remove barriers. You're there to coach and inspire and help and provide connection. So, there's a whole bucket of the future that is going to redefine what leadership means. Then there's a third bucket around the structure of an organization. So, back to where we started around the industrial revolution, do you need hierarchy? Do you need spans and layers? What is a job? I think there's something like 200 startups working on this fluid talent platforms for organizations to staff people on projects 'cause right now everyone has a day job that they're evaluated on and narrow swim lanes and then off to the side, you get put on a zillion projects. Well, why have that day job? Just go project to project to project to project based on what you're interested in, what your skills are, what your learning agenda is and what the company needs. That will make a much more fluid talent model. So, what an organization and jobs structure looks like, and then finally, there's the tools and space and technology, and I know the technology companies like yours are just all scrambling to reinvent tools to match this future that we just described. And even when you think about space, so, a lot of wisdom is we're going to need space for collaboration and social, but we also have to remember not everyone has a home they could work from. So, we need to think about providing offices more local, whether it's we work subscriptions or distributed facilities that give people options or just extroverts. They don't want to be at home all day. They need people around them. Buy water coolers, real water coolers to give them energy not to innovate.
GEORGIE FROST: Funny it all sounds, like a lot of things need to change. Very positive, very exciting. It sounds like a lot of things are changing already, but as a business, a CEO, quite intimidating, I think. Debbie, give me the top three things that a CEO or leader can do to facilitate this change in their company?
DEBBIE LOVICH: So, I think working on what is the work model, where it's not just days per week, but it's what are we intentionally together for? What are we intentionally a part for? Together could be to be together in person, together could be together on Zoom. And also what are we, fixed time? Research tells us people are much