The Modernisation Reportedge.alluremedia.com.au/uploads/bi-research/2017/08/BI...McKinsey Global...

August 17

BY NARAYANAN SOMASUNDARAM

The Modernisation Report

BUSINESS INSIDER AUSTRALIA / RESEARCH

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Introduction

This is a story about getting businesses ready for the modern world.

Disruptors are challenging time-tested models and re-writing the rules across economies and

industries, from manufacturing and banking, to education and retail. Robots and artificial

intelligence are changing the very look of factory floors and offices.

There are tangible social changes as the nature of work evolves in a newly-minted, globalised

and connected world, where there is less friction than ever between producers and their

customers, or capital and labour. Populations are ageing in many western nations and

marketing channels are rapidly evolving.

Behind the noise, there are significant cost savings and opportunities ahead for companies, and

employees as well as policy-makers.

Companies with the right outlook, data, structures and processes can make the most of these

opportunities. Other components of the economy will need to modernise too, as employees

upskill or retrain and pressure comes on governments to introduce policies that incentivise

business innovation, discovery, and evolution.

In this cycle, certain resources -- if tapped strategically – can rapidly improve thinking and

execution. Specifically, there is more data available to inform strategy and decision-making.

Companies and policymakers are sitting on new mountains of ever-evolving sets of data.

Computing power advances are making it easier to dissect it, and extrapolate product and

services demand, and model out potential changes in market prices for all kinds of variables.

This report is broken into three sections where there are opportunities to modernise:

Technology, Workforce, and Organisational Structure and Processes. Among other areas, it

looks at how the gig economy, technologies like and block chain ledgers and cloud computing,

agile methodology, and innovations in corporate investment can be harnessed to help unlock

new levels of productivity, and discover new products and services fit for the modern age.


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1. Technology’s acceleration Technology has been reshaping the workplace for centuries, but since the industrial revolution,

the pace of change has picked up and has accelerated in recent years with the advances in

automation, artificial intelligence (AI) and cloud computing.

AI, in particular, has the potential to increase the rate of change even further as machines learn

to solve highly complex problems.

The benefits of technology clearly extend beyond just labour substitution and include lower

costs, higher output, more uniform quality, and fewer errors.

While companies may have lost some product pricing power, they are gaining from low cost of

funding and record low wage growth. Put another way, recent years may have been a low-yield,

low-return environment for many sectors, but with borrowing costs and wage pressures also

extremely low, smart investment in expansion, innovation and research and development is

SOURCE: McKinsey Global Institute, McKinsey analysis, ABS, AIHW


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attractive. It’s an opportune environment for refreshing processes, re-examining return targets,

and investing in preparation for the future.

Here are some of the realities facing Australia’s current technology preparedness:

• 70% of people entering the workforce currently are hired for jobs that will

be radically affected by automation.

• More than half the workforce will need to be trained to use digital systems.

• Technology is disrupting the way work is conducted, expanding competition and

reducing the costs to consumers but also putting pressure on incomes.

At the same time, however:

• Automation will clearly reduce costs and in some sectors -- such as financial

services -- by as much a half, according to CapGemini freeing up capital for investment,

which will eventually lead to more targeted jobs.

• While digitisation is lagging, it could be the next contributor to

productivity. The economic contribution of the internet- and digital-enabled economy

could increase from $79 billion in 2014 to $139 billion by 2020, rising from 5% to 7% of

Australia’s economy, according to a study by Deloitte Access Economics for Australian

Computer Society.

• Technology offers labour force mobility and flexibility as well as new roles,

which are central themes for an ageing population and the growing gig economy.

Australian businesses lag their international peers when it comes to technology adaption,

according to the OECD’s Digital Economy Outlook. On a number of digital engagement

indicators, Australia ranks in the middle of the pack of advanced economies, rather than at the

forefront.

For example, Australia is ranked 20th among OECD countries in terms of enterprises having a

website — a cornerstone digital asset for any business to interact with customers and suppliers.


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Australia also ranks 12th for business IT investment as a proportion of total capital investment.

OECD studies show that many businesses, particularly small and medium enterprises that are

behind in productivity, also lag in digital maturity.

Australia’s productivity growth surged in the 1990s. Multifactor productivity growth rose to a

record high of 2.6% a year in the mid-to-late 1990s, compared with a long-term average of 0.9%

with the increased use of computers, according to a study by the Bureau of Communications

Research.

In the mid 2000’s productivity began to decline with a marked fall during the GFC as

companies cut back on IT spending. With technology spend picking up, productivity could

improve, the Bureau said.

Large disparities in such digitisation exists even among big companies. A few sectors such as

financial services, mining, and the tech sector itself are well advanced, according to the Department

of Industry and Innovation. These tend to be among the sectors with the highest productivity growth

and wage growth.

SOURCE: World Economic Forum, Global Information Technology Report 2016

http://reports.weforum.org/global-information-technology-report-2016


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The three sectors contribute less than a fifth to GDP and account for under a tenth of the national

workforce, based on Australian Bureau of Statistics data.

Many others such as healthcare, education, and retail are lagging. Incidentally, these tend to be the

largest share of the economy in terms of GDP and the lowest-productivity sectors.

McKinsey Global Institute’s May 2017 report titled Digital Australia: Seizing the opportunity

from the Fourth Industrial Revolution pointed out digitisation can contribute between $140

billion and $250 billion to Australia’s GDP by 2025, based on currently-available technology alone.

McKinsey’s study found the following opportunities and requirements for seven key sectors.

They are listed on the next page.

NOTE: Unless otherwise stated, sector coverage consists of all activities in manufacturing and non-financial market services.

Only enterprises with ten or more persons employed are considered.

SOURCE: Eurostat, Information Society Statistics, January 2015.


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Healthcare: Australia’s annual healthcare expenditure could be reduced by 8% to

12% and going digital could improve the quality of care. However, it would require significant

cooperation between individual providers and government.

Public sector: Applying digital tools to government’s citizen-facing activity and back office

support has the potential to generate annual efficiency gains of as much as 15%, primarily from

digitisation of citizen interactions and internal processes. Capturing the opportunity will

require continued investment in nationwide digital literacy and attracting new skill sets into

public sector roles.

Retail: Despite strong strides in recent years, the digital maturity of Australia’s retail sector

lags international peers, particularly in relation to reaching and influencing consumers through

digital channels. Digital has the potential to transform each step of the retail value chain, from

sourcing, distribution, logistics, and instore operations, through to the customer-facing areas of

marketing, and consumer engagement. Retailers can boost their operating profits by up to $30

billion. And those moving first could have additional gains through revenue and increased

market share.

Banking and insurance: While these sectors have been at the forefront of digitisation, there is

opportunity to increase digital service and sales, apply advanced analytics in managing risk, and

use new technologies like telematics to reinvent traditional products. In retail banking, the

potential EBIT improvement opportunity is between $7 billion and $11 billion. In personal

insurance the opportunity ranges between $440 million and $880 million in operations costs

and up to $1.1 billion in claims costs.

Mining: The value of digital to the mining sector is between $40 billion and $80 billion in

operating profit improvement.

Utilities: Digitally-enabled innovations can be applied across generation to, transmission and

distribution, energy trading, and energy retailing. The value of the opportunity is up to $1.3

billion in EBIT improvement, achieved by optimizing supply and demand management,

maintenance, workforce management, automating processes, digitizing customer journeys, and

collecting and mining the data unlocked by new technologies such as smart meters.


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And then there’s what’s happening with computing.

After years of being confined to only performing tasks that a programmer can perfectly define,

computing has taken a giant leap forward.

Data is allowing non-routine tasks to become programmable. When there is sufficient

information available, machine learning can find unexpected similarities between old and new

data, aiding the computerisation of more tasks. And sensory technology is automating the

factory floor faster than ever.

Cloud computing and off the shelf software are shavings away billions from companies budgets

and making them agile and nimble. The technology available offers automation and digitization

of data platforms, supply chains, payment systems and workforce.

Companies that are digital leaders in their sectors have faster revenue growth and higher

productivity than their less-digitized peers. Their profits and margins can increase as much as three

times as fast, and workers within these companies enjoy double the wage growth, according to

McKinsey.

The growth of big data will not just create a significant need for statisticians and data analysts but

boost efficiencies in several ways.

It has the potential to improve by many multiples jobs and worker matching boosting efficiency in

labour markets. It can raise labour participation and working hours, and also lift independent work

or self-employment, which can support income already derived from traditional jobs. Platforms

such as Uber, Didi, and Etsy are just examples of digital platforms that are coming in useful for the

likes of underemployed, students and aged people.

Even while technologies substitute scores of jobs, they are creating new work that wasn’t even

conceived a few years back. A third of new jobs such as those in IT development, cloud architecture,

deployment of new software systems and app creation in Australia for instance barely existed two

decades earlier.


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2. The changing workforce Australia’s workforce is in flux. It is staring at unprecedented changes with automation,

migration and an ageing workforce throwing up myriad opportunities and challenges.

But look at this chart:

More Australians are at work now than at any other time in the nation’s history. That’s good for

the country and good for domestic demand.

There are many ways to pick apart this employment data, not least the contribution of

population growth over the period and the move to increasing levels of part-time job creation.

The fact remains that the number of Australians in work has continued to rise remarkably

consistently over time, providing both a growing workforce and a source of increased domestic


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demand. Australia has responded well in the past to transitional economic phases and industry

disruption.

But technological change will continue to have profound effects on how work is organised in the

future. The growth of job sharing and gig economies means the relationship between employees

and employers will increasingly focus on creating opportunities to upskill and deliver better life

balance, rather than on life-long job security.

Australians have in the past been fast adapters as jobs and employment models continually

changed with technology, demographic shifts, consumer preferences and social trends.

We look at some of the current issues on the next page.


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• Australia has the lowest level of unemployment benefits in the OECD for a

single person recently unemployed. Australia’s employment services system tends

to reward private businesses that give priority to the most easily placed of the

unemployed. It does not give enough resources to providers that can offer the most

disadvantaged jobseekers the intensive, individually tailored services and help they need.

• That is significant when nearly one in five Australians will be over 65 years old

in 2035, compared with one-sixth of the population today. Nearly two thirds of the

population could become dependent on those in the labour force by 2046, according to

the government’s intergenerational report.

• The same report says 70% of people entering the workforce currently are hired

for jobs that will be radically affected by automation and more than half the

employees will need to learn digital technologies.

• The ascendancy of peer-to-peer (P2P) transactional services and the rise in

entrepreneurial activity are set to change traditional employment models. It’s easier

than ever before to start a business and get connected with investors who are

enthusiastic about risk.

• Australians are likely to face increasing competition for skilled jobs, as the

number of people with tertiary education is rapidly growing globally. More than a third

of every third adult in OECD countries have a tertiary degree, according to a study by

CSIRO.

• That comes as Australian students demonstrate falling interest and

performance in science, technology, engineering and mathematics. In 2017,

11% fewer year 12 students study maths than in 1992 and there has been a 35% drop in

enrolment in information technology subjects at universities since 2001, according to the

study.


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Australia could look to countries such as Denmark to retrain mature-aged unemployed workers.

This can’t be achieved through short-term programs. Taking middle-aged workers, who are

often lower skilled, out of their familiar environment and putting them in a classroom with the

expectation they will immediately learn new skills is unrealistic.

Extensive investment in reskilling programs needs to be considered for industries experiencing

high levels of retrenchment. Retraining should happen as soon as possible, preferably prior to

retrenchment being finalised.

The substantially higher public investment in skills retraining opportunities can make a

massively positive difference to the prospects of mature-aged unemployed workers.

The Danish approach includes active programs to provide support before the workers leave

their old jobs through local employment services working constructively and early with the

company and using a combination of public and company funds.

It involves flexible rules for hiring and firing. It also involves the provision of generous

unemployment benefits for those who have lost jobs. It also involves the provision of substantial

and effective Active Labour Market Programs (ALMPs) to help unemployed people gain new

skills for new jobs.


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Australia has the lowest level of unemployment benefits in the OECD for a single person

recently unemployed. It does not give enough resources to providers that can offer the most

disadvantaged jobseekers the intensive, individually tailored services and help they need. This is

an area which needs public-private consultation to ease the transition.

Such an approach can help in getting the workforce ready to meet some of the looming job

changes.

A study by the Reserve Bank of Australia showed over recent decades, there has been a

noticeable decline in the share of people employed in routine manual jobs. Industries that have

high shares of routine manual occupations include construction, mining and manufacturing.


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There has been a decline in the share of routine cognitive jobs since the early 2000s partly as a

result of the technology revolution. That exposed a new set of occupations to the possibility of

automation and paved the way for roles such as call centres and back-office functions to be

carried out in other parts of the world, where labour costs are far lower.

At the same time, non-routine jobs have risen in prominence, and been the job creators. The

Australian workforce may also have a comparative advantage in many occupations in the non-

routine category because of our relatively high levels of educational accomplishment.

Others, such as child care work, intrinsically require a physical human presence. The health

care and social assistance industry has made the largest contribution to employment growth

over the past 15 years or so. After health care, the two industries that have made the largest

contributions to growth in non-routine jobs over this period are professional, scientific &

technical services and education & training, according to a study by Committee for Economic

Development of Australia.

Employment growth in health care and social assistance sector over the next five years is

projected at 19%, followed by education and training at 16%, according to CSIRO. Employment

in the ‘creative economy’ has been growing at an above average rate for the whole economy and

is contributing 8% of gross domestic product growth annually.

*Non-seasonally adjusted. SOURCES: ABS; RBA


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Historically, when job losses have been caused by automation and technology, they have tended

to create demand via higher incomes and lower prices. That has in turn generated new jobs

economy wide.

With the advantages Australia possesses – take being well-educated and English-speaking as

the core – diminishing in a more globalised economy, the transition is not going to be

easy. Success in this new environment will require incentivising businesses and providing the

workers with the right skills and environment to flourish.

Companies, employees and policymakers need to think aloud about the following to plan a

model for the future workforce:

Empowering and informing labour: Big data analytics offer the potential to model

workforce deployment for the whole economy. A thorough model will empower individuals

affected by digital disruption and the service providers who are responsible for supporting them

is to provide up-to-date information about demand and supply for labour and specific skill sets.

New workforce statistics: To inform investment decisions such as education, redeployment

of workers in a continually changing environment, it is essential to have good measures and

data. Much of the value delivered by the digital economy is not captured by traditional

measures. A recent analysis of statistical measures needed for the digital economy suggests that

priority should be given to productivity, living standards and wellbeing indicators, labour

markets and income distribution and the way in which production is organised.

Skills for future jobs: The current education system teaches people to be effective in a highly

structured system, but the future workforce is unlikely to thrive in a set path. Our future

educational system will need boost innovation, entrepreneurial and flexible mindsets. As one

example of this type of approach, in Iceland, ‘Innovation Education’ was included in the

national curriculum in 2007.

Workplace learning: Dedicated educational institutions may not have sufficient resources to

meet the future need for re-skilling and training. The demand for lifelong learning in the digital

economy may lead to a renewed focus on workplace learning. Mobile technology provides a new


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channel for workplace learning, allowing workers to access training materials and information

on the job and when they need it.

Improved understanding of the peer-to-peer and freelancer economy: The recent

ascendancy of the peer-to-peer marketplace such as Freelancer, Uber, AirBnb in a globalised

labour market characterised by entrepreneurial activity is likely to change traditional

employment models. Many P2P models and employment platforms are in the early phases of

development and showing signs of rapid growth.

With each wave of industrial and technology revolution Australian companies and employees

have stepped up the specialisation ladder. That boosted wealth and prosperity as the complexity

of its goods and services increased.


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3. Modernising companies The changes in technology and the Australian workforce discussed above are

forcing companies to change, too.

The acceleration of automation, robotics, the sharing economy and cloud computing challenge

the traditional organisational structure. What’s needed is a sweeping rethink of organisational

model, influence, and control.

The success of a company now calls for agility, the ability to be stable and dynamic. Just as old

landmarks such as the General Post Office in Martin Place in Sydney accommodate high rises

behind their sandstone façade, companies should push to transform themselves. That is crucial

for large incumbents to take on the start-ups that threaten to reshape organisational structure.

Most of the organisational ideas over the years have taken for granted jobs or the way people

work together or in isolation.

The hallmark of a modern successful company is calls for an organisation that operates at its

fullest potential by allowing people to do their best work, according to a study by Harvard

Business Review.

It should be a company where individual differences are nurtured; information is not

suppressed or spun; the company adds value to employees, rather than merely extracting it

from them; the organisation stands for something meaningful; the work itself is rewarding; and

above all there are no stupid rules.

Automation can devastate these assumptions by disrupting low skill roles. That will force

companies to figure out how to reassemble the remaining tasks into something even as it

reconceptualises the very idea of what a job is.


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SOURCE: “SCALE AGILE THROUGHOUT THE ENTERPRISE,” PwC, December 2013


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The early stages of these efforts are already visible as organisations free highly specialized

knowledge workers from mundane tasks.

Success will depend on the ability of corporate leaders to reshape the workforce and

organisation structures by using the same digital technologies that are disrupting the workforce.

It doesn’t stop there. You’ll have heard of “agile methodologies” adapted by companies as varied

as Google, ING, and ABN Amro. It’s not a complicated philosophy but it does push the company

to move away from traditional command-and-control models.

Agile methodology involves project-orientated teams that are small, and cross-functional. The

driving force is incubating ideas and turning them into workable solutions. Where it comes in

useful is in realising long-stated organisational objectives that mobilise talented

people for their best opportunities.

Digital workforce platforms make goals for these teams more feasible now, through the use of

software layers that help executives allocate collections of workers’ skills against a wide array of

projects and processes.

Companies can deploy these platforms even as they lower overhead costs and improve their

responsiveness and flexibility. The opportunities include:

• Better use of cloud computing

• Adaptation of big data and its analysis

• Leaning more on operational expenditure

• Adapting to the reality of the gig economy

Let’s look at these in more detail.


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Better use of cloud computing: On one hand, enterprises are increasingly looking at their

IT departments to help drive business growth and transformation. On the other, IT budgets are

not keeping pace with growth and transformative demands. Gartner Inc. explains it simply: “By

lowering the cost to ‘keep the lights on’ companies can start freeing up funds.”

Infrastructure and operations comprises two-thirds of overall IT run costs. These are the most

obvious area for reducing expenses. By switching as much as possible to cloud-based computing

models, costs can be slashed.

Gartner says $US111 billion worth of IT spending will shift to cloud. That number will almost

double to $216 billion by 2020 and will become "one of the most disruptive forces of IT

spending" since the beginning of the computing era.

Instead of buying and maintaining their own computer servers, storage, and networking gear in

their own data centers, they are now letting other companies such as Microsoft, Amazon and

Google handle it for them.

One big benefit, in theory, is the customer pays for the computing, storage, and networking

power they use, but once they stop using it, the meter turns off. In the traditional model, those

SOURCE: Gartner (July 2016). Prices are in US dollars.


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customers updated their gear every few years and managed all the upgrades and patches

themselves, which is both expensive and time-consuming. And they paid for all of the gear even

though it was often underused.

There is also a private cloud option in which corporate customers still own their own data center

equipment but offer their own internal users – say the human resources or accounting

departments – a pay-as-you-go model similar to that of the public cloud. It offers some of the

flexibility of public cloud but keeps data and applications on company-controlled infrastructure.

Adaptation of big data and its analysis: Data analytics plays a critical role as a decision-

making resource for executives, especially those managing large companies. Firms need to put

appropriate technologies in place, build the necessary skills, and embed analytical decision-

making into key organisational processes.

Companies that do this well can reduce cost, model demand, supply more efficiently for their

products and services, plan staffing, and decide effectively on investment levels. Industries —

from airlines to insurance to sports — will rapidly copy analytics innovations and reimagine

them but the first movers have a massive advantage.

Leaning more on operating expenditure: In the 12 months to June 30, the Australian

Bureau of Statistics (ABS) estimated businesses would spend about $52 billion buying plant and

equipment.

About a quarter of companies’ asset base is expected to be leased or financed, according to

AllLeasing’s equipment demand index. That means about $40 billion of the plant and

machinery will be bought outright while only $12 billion will be leased or financed. This bias

towards buying outright is supported by other Index data, which shows four in 10 businesses

are using their own equity to fund their asset purchases. So do businesses make the decision to

buy, as opposed to lease, because of access to capital and financing or because it is seen as a

better solution? Four in ten businesses buying their assets outright say that their main driver is

price, but is this a false economy?

For those businesses which choose to lease or finance, four in 10 cite improved cash flow as the

main reason for their decision. By leasing assets, businesses are able to free up cash to ensure


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the smooth running of the business and drive growth. Instead of paying a lump sum for an

asset, the annual outgoings to acquire and use it are significantly less than a one-off payment to

purchase outright, particularly if maintenance and upgrades are included in the agreement. Not

all of the $40 billion businesses will spend on buying assets this year could be leased or

financed, but if more businesses were to explore alternative avenues to acquire assets, such as

leasing, this would potentially free up billions in the economy as capital expenditure reduces

and operating expenses, which have a far lower impact on profits, increasing.

Achieving this requires not only a change in thinking from businesses, but a greater availability

of finance and innovative capital solutions from providers.

Adapting to the reality of the gig economy: An increasing number of people are veering

away from traditional employment models in favour of undertaking freelance work. While

some are disenchanted with their 9 to 5 routine and have an increasing need for flexible and

diversified work, others unable to secure employment in a challenged labour market are opting

to freelance.

In Australia, the largest freelance category is web, mobile and software

development with 44% of the workers in the category using it. It is followed by design and

SOURCE: American Action Forum


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creative, customer and admin support, sales and marketing and writing. The Australian

Industry Group has data that suggests 4.1 million Australians, or 32% of the population,

freelanced in the financial year ending June 2015.

This has multiple benefits. It is not only freelance workers who benefit from greater flexibility.

Contingent work provides companies with fluid human capital, allowing them to swiftly scale up

and down on a project basis. On average it takes 2.7 days to hire a freelancer from a talent

marketplace, rather than 34 days for traditional recruitment methods, Ai Group said.

It also gives wider access to talent. The global nature of freelancing means companies can access

the best untapped talent around the world.

Finally, it can also boost productivity, which has been eluded Australian businesses for a while

now. Two factors – specialisation and accountability — will drive the productivity. Rather than

hiring one generalist to complete all tasks and demands of a business function, companies can

divide the tasks into smaller subsets and hire several specialist freelancers who may work only a

few hours a week to complete it.

It also changes the traditional employer-employee relationship into a customer-

client dynamic. The freelance economy provides for a culture where workers are truly

accountable and performance standards dictate future security and income.

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