Measuring the forces of long-term change The 2009 Shift Index Deloitte Center for the Edge John Hagel III, John Seely Brown, and Lang Davison Core Research Team Duleesha Kulasooriya Tamara Samoylova Brent Dance Mark Astrinos Dan Elbert Foreword A seemingly endless stream of books, articles, reports, applications, it may have more impact in how it changes and blogs make similar claims: The world is flattening; our conception of the economy. Interpreted through the the economy has picked up speed; computing power is lens of neoclassical economics, the Shift Index captures increasing; competition is intensifying. shifts in fundamentals, particularly on the cost side where technological changes allow firms to do more with less. Though we’re aware of these trends in the abstract, But, the Shift Index, by name alone, calls into question the we lack quantified measures. We know that a shift is neoclassical mindset that focuses on re-equilibration. underway, but we have no method of characterizing its speed or acceleration or making comparisons. Are The Shift Index resonates instead with a conceptual model rates of change increasing, decreasing, or settling into of the world economy based on complex dynamics. In stable patterns (e.g. Moore’s Law)? How do we compare this framework, the economy can be conceptualized as a exponential changes in bandwidth to linear increases complex adaptive system with diverse entities adaptively in Internet usage? Without times series data and a interacting to produce emergent patterns (and occasional methodology for integrating those data, we cannot large events). If one embraces the complex, dynamic identify, anticipate, or plan for change. nature of the economy, then the index can be appreciated in full – as a multidimensional measure of trends in the The Deloitte Center for the Edge – led by John Hagel III, constraints and opportunities within that system. As John Seely Brown, and Lang Davison—fills that void. In constraints fall away and opportunities increase, old this report, they describe their Shift Index. The Shift Index configurations become unstable and new structures consists of three indices: Foundation, Flow, and Impact, emerge. and 25 metrics that together quantify the stock, pace, and implications of the shift. The Shift Index speaks metric Shift happens. And, if we can measure shift, we can to metaphor. The index enables analysts to anticipate manage it. changes, identify bottlenecks, and guide strategy. Not everyone will choose to monitor the same metrics or assign them the same weights. Thus, the Shift Index is less a single measure and more an informational playground that will give rise to a diversity of models and, a stronger collective sense about the pace and nature of change. The Shift Index can be thought of as a new economy analog of the Composite Index of Leading Indicators, an old economy index that considers hours worked, unemployment applications, orders for capital goods, new building permits and the like. The Composite Index has its place, but its indicators don’t respond until months if not years into a shift. Walk through an innovation sequence: Bandwidth increases creating space for new social media. Entrepreneurs formulate ideas. Venture capitalists finance Scott E. Page projects. Proposals prove viable. Finally, mezzanine Leonid Hurwicz Collegiate Professor of Complex Systems, funding spurs a ramp up in employment. Only then, in Political Science, and Economics, this last stage, does the Composite Index identify the shift. The University of Michigan - Ann Arbor Using the Composite Index to track shifts is like driving a car by staring into the rearview mirror. In contrast, the Shift Index lets us look out the front windshield. As important as the index may prove for strategic Contents 2 Executive Summary 6 Overview: Context, Findings and Implications 12 The Shift Index: Numbers and Trends 19 2009 Foundation Index 40 2009 Flow Index 78 2009 Impact Index 113 Shift Index Methodology 136 Acknowledgements 2009 Shift Index Measuring the forces of long-term change 1 Executive Summary In the midst of a steep recession, when it’s all too easy to adoption rate for our new “digital infrastructure”1 that fixate on cyclical events, there’s real danger of losing sight is two to five times faster than previous infrastructures, of deeper trends. Strictly cyclical thinking risks discounting such as electricity and telephone networks. or even ignoring powerful forces of longer-term change. To provide a clear, comprehensive, and sustained view of the Given these long-term trends, we cannot reasonably deep dynamics changing our world, Deloitte LLP’s Center expect to see a significant easing of performance pressure for the Edge has developed a Shift Index consisting of as the current economic downturn begins to dissipate—on three indices and 25 metrics designed to make longer-term the contrary, all long-term trends point to a continued performance trends more relevant and actionable. erosion of performance. So what can be done to reverse these performance trends? Our first release of the Shift Index highlights a core performance challenge for the firm that has been playing The answer to this question can be found in the three out for decades. Remarkably, the return on assets (ROA) for waves of deep change occurring in today’s epochal “Big U.S. firms has steadily fallen to almost one-quarter of 1965 Shift.” The first, the “Foundation” wave, involves changes levels at the same time that we have seen continued, albeit to the fundamentals of our business landscape catalyzed much more modest, improvements in labor productivity. by the emergence and spread of digital technology While this deterioration in ROA has been particularly infrastructure and reinforced by long-term public policy affected by trends in the financial sector, significant shifts toward economic liberalization. The metrics in declines in ROA have occurred in the rest of the economy our Foundation Index monitor changes in these key as well. Additional findings include the following: foundations and provide leading indicators of the potential for change on other fronts. Changes in foundations have ō The ROA performance gap between winners and losers systematically and significantly reduced barriers to has increased over time, with the “winners” barely entry and to movement, leading to a doubling of maintaining previous performance levels, while the losers competitive intensity. experience rapid deterioration in performance. ō The “topple rate,” at which big companies lose their The second, the “Flow” wave, focuses on the key driver leadership positions, has more than doubled, suggesting of performance in a world increasingly shaped by digital that “winners” have increasingly precarious positions. infrastructure. This second wave looks at the flows of ō U.S. competitive intensity has more than doubled during knowledge, capital, and talent enabled by the foundational the last 40 years. advances, as well as the amplifiers of these flows. ō While the performance of U.S. firms is deteriorating, Because of higher unpredictability and volatility created the benefits of productivity improvements appear to be by the Big Shift, knowledge flows are a particular key to captured in part by creative talent, which is experiencing improving performance. Developments on this front will 1 More than just bits and bytes, greater growth in total compensation. Customers also likely lag behind the foundations metrics because of the this digital infrastructure consists of institutions, practices, and appear to be gaining and using power as reflected in time required to understand changes in foundations and protocols that together organize increasing customer disloyalty. develop new practices consistent with new opportunities. and deliver the increasing power The exponentially advancing price/performance capability of digital technology to business ō and society. of computing, storage, and bandwidth is driving an 2 The third, the “Impact” wave, centers on the consequences The Shift Index seeks to measure these three waves of of the Big Shift. Given the time it will take for the first deep and overlapping change operating beneath the visible two waves to play out and manifest themselves, this third surfaces of today’s events. The relative rates of change wave—and its related index—provides an even greater across the three indices will help executives understand lagging indicator. While current trends in firm performance where we are in the Big Shift and what to anticipate in indicate sustained deterioration, we expect, over time, the future. Current metrics indicate that we are still in the that performance will improve as firms begin to figure first wave of the Big Shift and facing challenges in moving out how to participate in and harness knowledge flows. forward into the second. Changes still manifest themselves Doing so will require significant institutional innovations, much more as challenges rather than opportunities not just changes in practices, resulting in value creation because our institutions and practices are still geared to through increasing returns performance improvement. In earlier infrastructures. At the same time, an understanding the end, these innovations will lead to a fundamental shift of these three waves leads to significant insights about the in rationale from scalable efficiency to scalable learning moves required to reverse current performance trends: as firms use digital infrastructure to create environments where performance improvement accelerates