Mike R. Jay, Developmentalist Mandating Resilience A Mandating Resilience A Business Case for Adaptive Leaders & Organizations

People come to believe what they must believe when they must believe it. or You can’t reason people out of their perceived self-interest.

My Presentation will:  Demonstrate radically increasing complexity  Show stable, predictive change doesn’t exist  Identify only one key factor of future success  Outline a specific path of leadership  Describe Adaptable Organization But First, the dilemma…and the context

Every single perspective is Right

Every single perspective is Wrong!

Juan Enriquez A Warning from Latin Americans The United States requires a massive restructuring to address its debt, cutting back on its borrowing, spending, and wars. The bailout package is essential to keep the credit markets open. But absent sentences that include the word austerity all the bailout will accomplish is a temporary postponement. Bailout and stimulus are a stopgap. Juan Enriquez and Jorge Dominguez

“If you put the federal government in charge of the Sahara Desert, in 5 years there'd be a shortage of sand.” --Milton Friedman--

Radical 1. Radical! COMPLEXITY

Begins with dramatically increasing uncertainty

What happens with Scenarios in a Complex “Dynamic” Environment with Radically Increasing Uncertainty?

ALL SCENARIOS are happening at once… Simultaneously! With Changing Dynamics

You must be able to adapt and deploy varying capability in different densities using uncertain data points…dynamically.

In other words… building an airplane while you are flying!

This is no simple thing…

Predictable Change – NOT! 2. Predictable Change – NOT!

When you combine the newfound freedoms of the people in economies such as India’s and China’s with demographic projections, you really get a startling picture of what is yet to come. After all, great migrations and population shifts can give us clues of where the economic growth will be and how it might unfold.

Resilience is the KEY Success Factor of Adaptive Cultures 3. Resilience is the KEY Success Factor of Adaptive Cultures

We need resilience because…

Not Just the USA: "Over the last three quarters, the German economy has erased all GDP gains made since 2005.

“You can con investors,” hedge fund manager Igor Lotsvin concluded, “you can con taxpayers, you can con mutual fund managers many times over…but the laws of supply and demand cannot be conned. The supply of distressed inventory is so large that there is not enough of a balance sheet to take it all on…The supply of distressed assets is astronomical.”

California Dreamin…?

“Lord Make Me Chaste, Just Not Yet,” Augustine

No bailout money was used in the production of this automobile.

Serious Reductions Coming In Standard of Living! Even if individuals work until age 65 and use all financial assets—including the value of their homes—to cover expenses in retirement, 61 percent of households are “at risk” of not maintaining their standard of living. In addition, their analysis shows that younger workers are even more “at risk” than those nearing retirement. The estimated share of early baby boomers—those born between 1948 and 1954—who have an inadequate retirement income is 51 percent. This share rises to 61 percent for those born between 1955 and 1964 and then to 68 percent for those born between 1965 and 1974.

Emphasis on Saving is going to put pressure on consumption… Recent declines in financial markets have made the situation worse. The lesson here is twofold: First, not saving enough during your working years is hazardous. Second, younger workers and those in their prime earning years should start saving more now for times ahead when Social Security and a traditional pension may not provide adequate retirement income. —By Christopher J. Martinek, Senior Research Associate, Federal Reserve Bank of St. Louis

Outlining a Specific Path to Adaptive Organization 4. Outlining a Specific Path to Adaptive Organization

Stable, predictable conditions

Ambiguous, Complex Conditions

© Mike Jay, 42 Decentralization being born…

From Stable to unpredictable We move from stable…To a new structural design

Leaders say Leadership is changing

Shift in Leadership, causes a corresponding shift in culture…

(C) Mike R. Jay, May Not Be Used Without Permission 46 Creating Self-Illuminating Systems

Enterprise of the future?

(C) Mike R. Jay, May Not Be Used Without Permission 48 Complexity means adaptation

Each of these components are evolving distinctly on their own and intersubjectively with each other at different rates. 49 (C) SpiralNEXT, LLC May NOT Be Used Without License

(C) Mike R. Jay, May Not Be Used Without Permission 50 Creating Balance Between Intended and Unintended Effects

Adaptive Organization 5. Adaptive Organization

Developing an Adaptable Workforce: A critical capability There can be no doubt that winning in competitive and quickly shifting global markets requires responsive organizations. However, for many companies, workforce adaptability has been elusive. Among (IBM 2008) study participants, it found that only 14 percent of respondents believe their workforces are very capable of adapting to change. What do these leading-edge adapters do that others don’t?

3 Keys to Creating Adaptable Capability: Findings suggest that three key capabilities influence the workforce’s ability to adapt to change. First, organizations must be capable of predicting their future skill requirements. Second, they need to effectively identify and locate experts. And lastly, they must be able to collaborate across their organizations, connecting individuals and groups that are separated by organizational boundaries, time zones and cultures.

Conclusion From the study and many experiences working with clients in the human capital arena over the last several years the following conclusions about mission-critical: Creating an adaptable workforce requires more than a series of HR programs.

Right Leadership It starts with leadership – having the right people who have the skills and capabilities to develop and communicate a vision, provide structure and guidance and ultimately deliver business results.

Identity Experts & Foster Collaboration It requires the ability to identify experts and foster an environment where knowledge and experience travel beyond traditional organizational boundaries.

Talent Management It calls for a talent model that can help companies recruit, develop and retain valued segments of the employee population.

Real Time Data & Information It depends on an underlying backbone of data and information about the current and projected state of workforce performance, environmental requirements and the ability to apply that information to develop strategic insights and recommendations in real time.

6 Competencies of the Next Generation6 Competencies of the Next Generation… Moser-Wellman calls the six special competencies: "The Platform Strategist," "The Marketer," "The Community Builder,“ "The Data Miner," "The Complete Storyteller," and "The Entrepreneur." These competencies encompass many specific skills, from smart product differentiation and advanced digital storytelling to the abilities to technologically extract maximum value from archives, leverage content across platforms, and drive contact and collaboration.

By itself, this was not a problem; household debt has risen relative to income since the 1950s, as a growing share of the population has taken out mortgages.

Despite the higher debt burden, falling interest rates kept total household financial obligations - interest payments, rent and leases - within a range during the 1980s and 1990s.

"An inflection-point occurred around Income growth stagnated but debts continued to grow rapidly, from 94% of income to 133% in "

But that was when house prices were rising and credit was easy to get. This year is different, the Economist tells us.

The credit card industry sent out only one quarter as many solicitations for new credit card customers as it did last year.

And now, with house prices falling...and the financial industry running for cover...consumers no longer have shovels to dig themselves deeper holes of debt; instead, they have to stop spending so much money.

The Economist estimates that consumers need to shuck $3 trillion worth of excess mortgage debt, alone, in order to get back to year-2000 levels. If all US savings were put to the task, even that would take 4 or 5 years at the present rate.

But the year 2000 was a year with very low real interest rates... …and it came at the end of a 20-year period of credit expansion, not at the beginning of one

As real interest rise in the next long cycle of credit contraction, consumers are likely to want to erase debt down to, say, a or even a level, which would require paying off trillions more.

"Consumers still haven't decided to start spending money and the economy is still in a funk. Folks are very focused on non- discretionary items, buying staples, and people are trying to deleverage themselves," said Bob Duffy, leader of global advisory firm FTI's Retail Practice.

According to Merrill Lynch, China's economy didn't grow at all in the last quarter of And it's still contracting fast, ever since the start of this year

Of course, official Chinese growth last year topped 9%. But if you did the math the way we do in the U.S. and they do in Europe, the real growth rate — for the last three months of 2008 — was zero.

Keep in mind that China needs at least 9% growth to soak up the 24 million new Chinese workers who come of age each year — something even the Chinese Premier doesn't like to mention.

Korea, Singapore, Taiwan, Vietnam. Thailand. Malaysia. And Indonesia... just to name a few, all soared thanks to the China boom. Now they're going bust in kind.

Korean production alone is already down 14%. Japan is off 20%. Taiwan's exports have dropped 28.5%. Singapore is already deep into recession. Thailand's decayed into political crisis. Until U.S. and European consumers come out of their shells, the new Asian meltdown doesn't end any time soon.

“…the central banks' calendars are no better than their maps.”

service sector consumer spending is overstated

The SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated "discouraged workers" defined away during the Clinton Administration added to the existing BLS estimates of level U-6 unemployment.

People without jobs can't buy stuff - neither the kind of stuff you get at the grocery store...nor the kind of stuff you get from real estate agents. Since they don't buy stuff, manufacturers don't make stuff. stuffing” And since they don't make stuff, they don't need the stuff that stuff is made of, nor the employees who turn the raw stuff into the finished stuff. Result: “stuffing” knocked out of the economy.

"The next group of Americans to lose their homes seemed to have good credit and affordable loans. But those families have been walloped by the recession. "In the housing market, a lot of prime mortgages are becoming subprime as a new wave of foreclosures begins to hit. Mainstream homeowners - those previously 'safe' borrowers with sound credit who have conservative, fixed-rate mortgages - are getting into trouble at an alarming rate. "In the first quarter, the percentage of these borrowers who were behind on their mortgages or in foreclosure had doubled from a year earlier, to nearly 6%. For the first time in the housing crisis, these homeowners accounted for the largest share of new foreclosures. Breaking News: 12% of people are behind or in foreclosure!

Weekend Edition SundayWeekend Edition Sunday, June 14, 2009 · In recent weeks, mortgage rates have shot to the highest levels since Thanksgiving. That rise has left procrastinators wishing they had refinanced their home loans last month, when interest rates on 30-year fixed mortgages were below 5 percent. Today, with rates at roughly 6 percent, the mortgage refinancing boom is cooling.

"Without a genuine return of the tendency of households to consume," says Dr. Unger, there can't be, in the United States, a durable economic recovery. Manufacturing is still in sharp decline. It's only the presence of a large volume of liquidity that permits Wall Street to fantasize about a new phase of economic growth."

A Crack in the Nest Egg: May 2009 Are Americans Doing Enough to Save for Retirement? “The message that I want to leave is that we need more organized retirement saving. A declining Social Security system and fragile 401(k) plans will not be enough for future retirees.” —Congressional testimony by Alicia H. Munnell, director of the Center for Retirement Research at Boston College

It’s NOT going to be enough… The Social Security Administration points out that for the average worker, Social Security is intended to replace just 40 percent of prior earnings. Even with a defined-benefit pension plan providing guaranteed retirement income, Americans will have to rely heavily on their retirement plan contributions or personal wealth to adequately replace income beyond their working life. Yet, Americans nearing retirement appear to have done little to accumulate savings in retirement accounts (either individual retirement accounts (IRAs) or defined-contribution retirement plans). According to the Federal Reserve’s 2007 Survey of Consumer Finances (SCF), in households where the head of household was age 55 to 64 years, only 60.9 percent had retirement accounts. Furthermore, among households with savings in retirement accounts, the median account balance was just $98,000.

Unless the U.S. becomes a net saver, “another global financial crisis triggered by a dollar crisis could be inevitable,” forecast former Chinese central banker Yu Yongding over the weekend. (31 May 2009) (Beijing is 7,000 miles from Washington, even they can see this coming.)

Bounded rationality is a concept based on the fact that rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make decisions. This contrasts with the concept of rationality as optimization. Another way to look at bounded rationality is that, because decision-makers lack the ability and resources to arrive at the optimal solution, they instead apply their rationality only after having greatly simplified the choices available. Thus the decision-maker is a satisficer, one seeking a satisfactory solution rather than the optimal one. Predictably Irrational?

But if you believe that this is something more than a typical Post- WWII recession, then...watch out. The Great Depression lasted for nearly 4 years...taking 27% out of the GDP. And then, when it looked as though it was over, along came another downward whack in 1937 that lasted another 13 months.

"This process, known as de- leveraging, requires consumption to grow more slowly than income in coming years," notes the Economist.

After 25 years of recklessly spending, borrowing, and going deeper and deeper in debt, Americans are coming to their senses. They're cutting back. They're determined to stop being the bagman for the entire globalized world economy.

"Since the early 1980s," begins a report in the Economist, "spending by households on goods, services and homes has grown faster than GDP, making it the locomotive of American - and global - expansion. By 2006 it accounted for 76% of nominal GDP, the highest since quarterly data began in 1974.

"This was accompanied by a steady decline in the personal saving rate and a rise in household debt relative to income.

"[Culture is] a pattern of basic assumptions - invented, discovered or developed by a given group as it learns to cope with its problems of external adaptation and internal integration that has worked well enough to be considered valid…

“…and, therefore, to be taught to new members as the correct way to perceive, feel, think and act in relation to those problems. Because such assumptions have worked repeatedly, they are unlikely to be taken for granted and to have dropped out of awareness. -MIT Professor of Management Edgar H. Schein

Time…for transformation? Old work habits are hard to forfeit, and change is resisted. Most organizations have a full workload managing business as- usual, much less managing a major organization transformation simultaneously.

Typical Collapse Curve

“Vacancies are definitely rising across the commercial real estate market,” observed hedge fund manager, Jason Stock, at last month’s Value Investing Congress in Pasadena, California. “You've got office vacancies well over 15%. We think those are going to approach 25% before this is over.”

Economists Barry Eichengreen and Kevin O’Rourke

Just six months ago, I estimated that at least $2 trillion of available credit- card lines would be expunged from the system by the end of However, today, that estimate now looks optimistic, as available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone. My revised estimates are that over $2 trillion of credit-card lines will be cut inside of 2009, and $2.7 trillion by the end of – Meredith Whitney

BLS reported 467,000 jobs lost in the last month. A horrible, giant number…but it’s still softer than reality. Because Birth / Death adjusted the number upward by 185,000 jobs.

The first five months of this year have shown a 52% increase in the total number of commercial bankruptcy filings (36,106) compared with the same period last year (23,829), according to the Automated Access to Court Electronic Records. On average thus far in 2009, some 350 commercial enterprises file for bankruptcy daily — an increase of 240% from 2006, the first year after the bankruptcy law was changed.

Warren Buffett put it best when he said recently: "I get figures on 70-odd businesses, a lot of them daily. Everything that I see about the economy is that we've had no bounce. The financial system was really where the crisis was last September and October, and that's been surmounted and that's enormously important. But in terms of the economy coming back, it takes a while. There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite a while. In the [Berkshire Hathaway] annual report, I said the economy would be in a shambles this year and probably well beyond. I'm afraid that's true... "I had a cataract operation on my left eye about a month ago and I thought maybe now I'll be able to see green shoots. We're not seeing them. Whether it's retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we've never seen it for a simple thing like electricity. So it hasn't happened yet. It will happen. I want to emphasize that. But it hasn't happened yet."

Seldom do we appreciate our incredible good fortune being alive. As Oxford biologist Richard Dawkins writes: We are going to die, and that makes us the lucky ones. Most people are never going to die because they are never going to be born. The potential people who could have been here in my place but who will in fact never see the light of day outnumber the sand grains of Sahara. Certainly those unborn ghosts include greater poets than Keats, scientists greater than Newton. We know this because the set of possible people allowed by our DNA so massively outnumbers the set of actual people. In the teeth of these stupefying odds it is you and I, in our ordinariness, that are here...And none of us knows how long he's going to be here. Celebrate Life!