Transaction Costs and Competency Development

In 1937, Ronald Coase, wrote an essay “The Nature of the Firm”, through which he introduced the concept of “transaction costs”. Ronald Coase was to later on receive the Nobel Prize for Economics. In economics a transaction cost is a cost incurred in making an economic exchange. Transactions costs are the costs which directly hamper the competitiveness of companies and where all things being equal, would determine the rise or fall of these companies.

So how does one relate the concept of transaction costs to long term viability of organizations? One answer as given by Jeffrey K Liker, in “The Toyota Way” is:

“Base your management decisions on a long-term philosophy, even at the expense of short-term financial goals”

This is an important aspect to be considered by the service industry. The service industry has been growing globally and in many countries represents in excess of 50% of those countries GDP. The Indian IT industry is primarily composed of the services sector. So what is a service and how do we reduce transaction costs here?

A Service has been defined in many ways. One definition has been given in the ITIL Service Design Book; “A means of delivering value to customers by facilitating outcomes customers want to achieve without the ownership of specific costs and risks.”

This is like a caterer providing cooked food to an organization for lunch where the company does not want to set up its own kitchen and hire its own workers to produce lunch, or an Insurance company engaging the services of a BPO to process its claims, or a Telco using the services of a provider to process the paperwork of the millions of clients signed up each year. There are so many other services, like remotely managing infrastructure, or software maintenance work, or even development work.

Efficiencies in all are achieved by better “quality”. Better the quality, lower are the transaction costs. For service providers the quality comes from better equipped people. If the service provider has systems in place to ensure less wastage, or reduced effort in providing services, it is more competitive. To have better quality one needs to understand Peter Drucker’s statement “Quality in a product or service is not what the supplier puts in. It is what the customer gets out and is willing to pay for”. So reading Drucker’s statement, we can take it that quality is developed by creating internal competencies or capabilities which help in reducing the transaction costs and hence improve competitiveness over time.

Further in organizations, one of the supplier’s is the L&D or competency development department. Developing internal competencies is not a one shot affair, but a process of continual effort of time and money in building people. Developing capability happens when you enable people to get a sense of real life exposure through scenario based training. As Confucius said:
“I hear and I forget, I see and I remember, I do and I understand.”

For any company to grow, its people are its strength’s. This is a Maxim, we have heard for a very long time. However the true strength is not in the people alone, but in the “talented and productive people”. To develop people, one needs to see the long term perspective and build in the systems and their associated costs and not take the short cut by having a transactional approach to competency development.

The Economic Imperatives of Education

“We can't afford our kids to be mediocre at a time when they're competing against kids in China and kids in India who are actually in school about a month longer than our kids”; Barak Obama.

There has been a great deal of discussion about the decline of education in the US and its possible impact on the US Economy. In fact Alan Greenspan in his book “The Age of Turbulence” writes about the economic consequences of a weak education system:

“A dysfunctional U. S. elementary and secondary education system has failed to prepare our students sufficiently rapidly to prevent a shortage of skilled workers and a surfeit of lesser-skilled ones, expanding the pay gap between the two groups. Unless America’s education system can raise skill levels as quickly as technology requires, skilled workers will continue to earn greater wage increases, leading to ever more disturbing extremes of income concentration.”

There are some important points which need to be noted by policy makers worldwide, about the economic impact of education.

It is very strongly believed that the rise of the US economy to its present state of pre-eminence is due to the fact that its workforce is one of the most educated with at least 85% of adult Americans having at least a high school degree.

In fact it is strongly argued that investment in education can have long term benefits like increase in GDP. Two leading researchers in the economics of education, Claudia Goldin and Lawrence Katz, have published a paper which covers this view “The Legacy of U.S. Educational Leadership: Notes on Distribution and Economic Growth in the Twentieth Century.”

http://www.economics.harvard.edu/faculty/goldin/files/legacyaea.pdf

Not only has education impacted the GDP, US data shows that at the personal level, the longer a person stays in school the more he earns. Persons with less than a school diploma are likely to earn about $ 426 weekly while those with a bachelor’s degree are likely to earn upwards of $ 978 weekly.

http://www.bls.gov/emp/emptab7.htm

The Bureau of Labor Statistics also projects that through 2014 over half of all new jobs in the US will require at least some college. Of the 30 fastest growing jobs through 2014, four out of five will require some postsecondary education or training. It is estimated that by 2020, the US may face a shortage of more than 14 million workers with these skills

For countries aspiring to raise the living standards of its people, focus on education is a key.

The foundation of every state is the education of its youth.
Diogenes Laertius

Create Heroes for Motivation

Many companies today are faced with existential issues. Productivity and sales are down. Companies are being forced to defer expansion plans and lay off staff. In a grim scenario like this motivation of staff has become a big challenge.

Organizations have the option to wallow in their circumstances or motivate themselves to bravely face the downturn and work towards a better future. So what can they do? To understand that, we need to understand what motivation is.

What is motivation?

It is a stimulus or a force that influences behavior and gives direction. We all need a motivation in life. The motivation to succeed could be internal (Intrinsic) or external (Extrinsic). I will relate an example of one method of external motivation, when a whole country was facing existential problems.

It was the dead of winter in November 1942. The German Armies were at the point of over-running the Russian army at Stalingrad. With Stalingrad gone to the Nazi’s; Hitler’s dream of World Domination could have come true. Nikita Khrushchev (later to become the Premier of the USSR), was the Political Commissar for Stalingrad and responsible for its defense. He needed to motivate his troops to stand fast against all odds. He asked for suggestions from his advisors.

“We need heroes”, a suggestion given by one advisor was picked up and thus the legend of “Vasily Grigorevich Zaytsev” was born. The film “Enemy at the Gates” is loosely based on this episode from the 2nd World War. Whether actions like this actually saved Stalingrad, may be debatable, however there is no doubt in the efficacy of the use of “positivity” in motivation.

A hero is a term which comes from the ancient Greeks. According to them a hero was person who did something beyond what a normal human would do and thus left an immortal memory of greatness.

Organizations need to look at their operations and find the areas where they have positive results, their success stories, in getting new deals, or in cost reduction, or in new inventions or processes. Organizations need to create heroes. Employees need communication in the form of hope and of people, their own colleagues who are doing well, and who are successful.

In the words of Mark Twain, “Really great people make you feel that you, too, can become great.”

Believe in the power of “Good Begets Good”. Create heroes and you will be successful.

Opportunities in Education

Only the educated are free. - Epictetus

In todays’s context, where the economic crisis looms large before us, job security provides freedom. So “Will certifications help in my job search or maintenance of the existing one”, is a question which is very relevant.

The main focus of this topic, opportunities in education relates to the Information technology field, mainly because of the rapid obsolesce of technology and need to constantly upgrade skills. Certifications help to prove to potential employers that you are equipped to face technical situations. This is much in the manner as quoted by the Reverend Edward A. Malloy

“A college degree is not a sign that one is a finished product but an indication a person is prepared for life.”

Certifications also help in depressed job markets as the pool of potential employees is much greater for employers and certifications help in getting you before the employer. They give an edge in that the chances of your resume being looked at is much more. Ultimately performance is the key but certifications helps you prepare theoretically.

Currently the focus of the Obama administration is to boost the economy by increasing new jobs by the tune of two million. Certifications relevant for these new jobs would greatly enhance employability.

Some of the new areas likely to see rapid growth of opportunities would be:

1. Construction and Infrastructure where Construction Project Management skills and PMI certifications would be in great demand.

2. Internet Infrastructure related certifications would be in great demand as money is pumped into the school systems to upgrade their connectivity. So persons with networking and security certifications like the CCNA, CCIE, CISSP or background in ISO standards would be in greater demand. ITIL certifications would be essential for IT Infrastructure designing and development in hospitals where greater use of technology would emerge.

3. HIPPA certifications would also prove beneficial for opportunities for the health workers.

eLearning provides an easy, cost effective way of enhancing skills without too much disruptions to a daily routine to enable a person to aim for those jobs. eLearning should get a boost with so many potential applicants.

Human Capital

"The strength of the United States is not the gold at Fort Knox or the weapons of mass destruction that we have, but the sum total of the education and the character of our people".

Claiborne Pell, US Senator from 1961 to 1997

The notion of Human Capital has been around for a very long time. In fact Adam Smith, in the “Wealth of Nations” has defined four types of fixed capital, or items which afford revenue or profit. The four types were: 1) Machines 2) Buildings 3) land and 4) human capital.

This has been commented on by a number of notables since. Karl Marx in his Das Kapital has stated:

"By labor-power or capacity for labor is to be understood the aggregate of those mental and physical capabilities existing in a human being”.

Human Capital has become an important economic concept since the 1950’s and 60’s. The basic reasoning is that people invest in education and training to build up skills and abilities which can bring about a long term return.

Theodore William Schultz was the 1979 winner of the Nobel Prize for economics. Amongst his varied research included a study into why post World War II Germany and Japan recovered much faster then the UK. He concluded that this was due to a healthy and highly educated population.

The first level of “labor capital” boosted the “Industrial Revolution”. Education and greater human skills was an enabler in the increase in the “services sector”.

Peter Drucker in his book, “The Age of Discontinuity” has talked of the “Knowledge Economy”. Today it is understood that in the “knowledge economy” or information economy, expertise and skills are an important asset.

With the current market conditions the conservation and enhancement of this important “Capital” is all the more important. The competition between companies, and economies would be won by those investing in and reaping the advantages of “Human Capital”.

The effects of the current economic crises would have wide scale implications in the nature of economic activity. Employees would need to have multiple skills and do multitasking as with time and improvement in technology, specialized roles would tend to be fewer.

In today’s scenario therefore Human Resources and specifically the training departments would need to refocus their attentions for the survival and growth of their companies

"So the question is Do Organizations realize the importance of Human Capital?

Linkedin Debate:

http://www.linkedin.com/answers/management/organizational-development/MGM_ODV/331106-564729

e-Learning

"Blended Learning-The Human Touch”

“If we don’t fly that helicopter, we are going to die”. Urgency, need, and desperation are some of the emotions that came about when Keanu Reaves and his companion had to learn how to fly a helicopter in the film “The Matrix”. What happens next, instant pilot awareness from a computer program.

The solution is instant education transmitted through computers. The spectacular image has opened the concept of eLearning to many a corporate.

Why not Instant Knowledge?

Technology has brought with it, greater speed, greater reach, and the ability to do everything “out of a box”. Instant food packets only need to be opened for you to have food that is ready to eat. In fact there are packets of food that heat up when opened! So why not have Instant Knowledge available in small doses, for use when absolutely required.

eLearning Is to learning what Kanban was to Manufacturing. eLearning has changed the outlook of people to training in the same vein as the “Just in Time” management philosophy has changed the outlook of people in manufacturing. eLearning has highlighted focused and timely teaching. .

From Competition to Unity

Prior to the widespread acceptability of eLearning as an accepted medium of instruction, there was an accepted view that learning was a group activity. One learned as much as from the “instructor” as much as one learned from the participating students. eLearning brought about an individualistic approach to learning and hence was considered “competition” to the traditional form of classroom learning.

In the last couple of years eLearning has gained widespread acceptance and there is a greater level of comfort to eLearning. The focus has now been to take the best of both in the form of a mixed platform of “blended learning”. In essence, a mix of the self paced learning philosophy of “E-Learning” and the interactive approach of a classroom session.

The blended learning model typically approaches learning by focusing on the use of eLearning content prior to the classroom session. .

How many people can use the Help features in a Software tool?

However, as in all great concepts the problems lie in the implementation. The problem in this blended approach is that most users do not adequately utilize e-Learning material before attending rapid fire training classes. Their awareness level is the same even after using eLearning material. To understand this, one must realize most people cannot use the power of electronic gadgets. After all how many users of “Windows” actually know anything beyond the basic commands, or how many users of mobile phones, PDA’s , can really use the power available at their finger tips? The solution lies in the understanding that the use of e-Learning itself is best when there is prior human interaction, bringing about awareness of goals, and instructions on the use of the medium. The full power of e-learning devices has to be explained.


Bring about e-Learning with the right “human” touch.

So if you do not explain the power of e-Learning and its use, you would be doomed to failure. My strong suggestion, use e-Learning rightly in the right manner with the right instructions.