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Adapting to Turbulence - Global Perpectives: Indigo Era

Adapting to Turbulence

Dominic Barton

Global Managing Partner of McKinsey

Dominic Barton has been with McKinsey for 30 years, and has been its Global Managing Partner since 2009. He is Chair of the Canadian Minister of Finance’s Advisory Council on Economic Growth and Chair of the Seoul International Business Advisory Council. He was talking to Edward Amory.

Q: Is this a moment of change in the world economy?

Yes. I think that the next 15 to 20 years are going to be some of the most exciting and disruptive in human history, and one of the biggest drivers of that is the technology shifts that are under way. Computing power, combined with connectedness, combined with data is enabling a tiny group of individuals to create massive amounts of value and disrupt established industries.

People and ideas, not resources, will drive growth. This is an enormously significant shift to what Mikhail Fridman has called the “Indigo Economy,” and most of our institutions, global and national, are not ready for it.

Q: How is McKinsey preparing for this new world?

We are helping our clients get a sense of this new context and the implications for their business models, and of course we are having to take our own medicine, which is often painful. Traditional orthodoxies – how to manage, how to grow, who to hire and how to develop them – are now out of date. We are doing more business model transformation work than at any time in the last 30 years, and not just for failing firms, but increasingly for successful companies as well. We are also looking at sectors – oil and gas, banking and so on – and how their value chain might change, because disruption is often coming from outside of the sector, which is not what I was taught at school.

Q: So how has McKinsey changed?

Change is essential, but hard for us because we are still successful. But first, it’s the work we do – we’ve had to really re-think that. Our range of services has shifted 50 per cent in the last five years. We are now, for instance, much more involved in cultural change and capability building. Then there’s the, ‘how we do it?’ It used to frustrate me that every issue or opportunity a client faced required McKinsey to spend three or six months with a project team with typically a couple of partners, a project manager and five people. Now we serve some clients with no people – literally it’s just software. Second, we now put dedicated people into organisations to run parts of them. We never used to do that. Third, we only used to serve big companies, now we have clients with only six employees. Fourth, we always used to charge for the time we took, now we are increasingly paid by results, by impact. Finally, and this is the most important, we have changed our approach to who we hire. It used to be just young graduates from business schools, now they are a minority. We’ve hired people who have run refineries, mathematicians, even this year one person with no university degree. So we are changing, but I worry it may not be fast enough.

Q:  You’ve written about the plague of short-termism, but how do we solve it?

We look at it as a value chain – the hope is that we can shift the behaviour of so-called long-term money to actually act in the longer term. That’s what I love about Mikhail Fridman, he thinks long term. Another example is GIC, an institutional investor in Singapore, which incentivises its asset managers on not just a one-year basis, but on a five-to-ten-year basis. We’re also trying to meet with the boards of the top 500 companies by market cap globally, and do board education. So far we have only done that with seven, but it’s a start.

Q: Are the rewards from capitalism flowing to fewer people, and what do we do about it?

When Facebook bought WhatsApp for $22 billion, the company employed only 55 people. This is not bad in and of itself, but it was indicative that we live in more of a ‘winner takes all’ world now. Right now, fewer people are capturing more of the rewards, and some people, countries and organisations – including McKinsey – are going to benefit more from globalisation than others. Government certainly has a role to play in managing rising inequality and displacement from technology and trade. For example, some countries might eventually consider moving to the idea of a guaranteed minimum income paid by the state. Tax policy may also need to change, for example through a 5 per cent Labour Dislocation Tax, with the money put into a fund to retrain people whose jobs are going to disappear as disruption gathers pace. Philanthropy is wonderful but not enough. If we don’t make structural changes, then we are going to have a French revolution.

Q: So will Asia and Africa wax or wane in this new world?

There are different factors pulling in different directions. By 2030 there will be 2.4 billion new middle class consumers globally, which will be a huge driver of growth and innovation. But at the same time no one has managed to completely mimic the creativity of Silicon Valley, which suggests that its unique success is rooted in institutions and culture which up until this point have been hard to replicate in Asia. Africa is also seeing a growth of the middle class, while they still need to build a lot of the infrastructure needed for growth. That also means they are more open to new approaches, to leapfrog activity. On the flipside, while the education system in Singapore has been very successful – they have incredibly high PISA scores [Programme for International Student Assessment] – that very success makes change and innovation more difficult. Kenya or Rwanda could be in a stronger position to adapt to the new world. But emerging economies also need stable political institutions, the rule of law, an open culture, and these are not always easy to achieve.

Q: So how should governments go about adapting to the Indigo economy?

My biggest worry is that this is coming on so quickly that I am not sure the institutions – public and private, all around the globe – are ready for it. First, it’s about the right kind of education in the right place. McKinsey is doing some work in Mexico and four other countries right now where we believe we can get people ready for a job in three weeks. But in other countries it’s more about life-long learning, returning to education at different points in your career to retrain and refresh. Then there is healthcare, where one of the biggest problems today is that regulation doesn’t always match what society needs. Some Chinese health experts are now arguing, for example, that you don’t need a doctor to perform heart surgery. That may panic us but they are saying, “No, we can have a super trained nurse’s assistant who has done it 150 times.” There are so many other aspects: for example, the legal framework around bankruptcies is incredibly important in making sure the capital is efficiently redeployed.

Q:  What would be your message for other leaders elsewhere in the world. How should they navigate through this turbulent era?

One message is the idea of having a microscope in one eye and a telescope in the other. You need the microscope to be very focused on what’s happening right now because the world moves so quickly. But you also need to have a 20-year long-term telescope view because if all you do is focus on the short term, you could just wake up and find you are irrelevant. Secondly, at the end of the day it’s about talent. That’s been true throughout history but I think particularly now, in this Indigo world we are in. At McKinsey we spend a lot of time focusing on strategy, but ultimately I believe if we hire the right people then they will figure it out in the end.