Measuring the forces of long-term change: The 2009 Shift Index

Christine Flanagan
December 1, 2009

BIF advisor John Seely Brown is Co-Chairman of the Center For Edge Innovation at Deloitte—a center that he co-leads with John Hagel.  The Center has unveiled the The Shift Index — a major new effort to track the real impacts of the network age. Pushing beyond cyclical measurement to look at the long-term rate of change and its impact on economic performance, this new indicator tracks 25 metrics across three sets of main indicators:

Designed to make longer-term performance trends more relevant and actionable, the report suggests the current recession is masking long-term competitive challenges for U.S. businesses. Among the sobering findings:

• Despite rising labor productivity, U.S. companies’ return-on-assets (ROA) have progressively dropped 75 percent from their 1965 level.
• The ROA of U.S. firms has declined in 2008 to roughly 25 percent of what it was in 1965.
• While top firms have maintained or lost some ground, underperformers are deteriorating at an increasingly rapid pace: In the first 15 years of the analysis, companies in the bottom quartile returned an average of .5 percent on their assets; in the 27 years following, they averaged nearly negative 20 percent.

One of the key conclusions of the study is that competition has intensified at an alarming rate and companies (along with their management processes) are not keeping up with the change. From the report:

“Until now, companies were designed to become more efficient by growing ever larger, and that is how they created considerable economic value. However, the rapidly changing digital infrastructure has altered the equation: As stability gives way to change and uncertainty, institutions must increase not just efficiency but also the rate at which they learn and innovate, which, in turn will boost their rate of performance improvement. Scalable efficiency must be replaced by scalable learning. This mismatch between the way companies are operated and governed on the one hand and how the business landscape is changing on the other helps to explain why returns are deteriorating while talent and customers reap the rewards of productivity.”

What I found most interesting is that while return-on-assets have plummeted over the past thirty years, the effective corporate income tax rate has also declined significantly. For the companies analyzed in The Shift Index, the 1964 effective corporate income tax rate (including state and federal taxes and taxes paid to foreign governments) was roughly 42.2 percent. By 2006, it had dropped nearly 13 percentage points, to 29.3 percent.

What's going on here?

To add insult to injury, consumer power is on the rise, based on the availability of more information and more choice. Again, from the report:

“In the context of our other analyses, we see that these forces, aided by powerful consumers and talent, have not only driven down returns but fundamentally changed the dynamics of who gets them. The group of winners is churning at an increasing and rapid rate. The result of rising competitive intensity becomes palpable in the rapid rate at which companies suffer declines in their ROA ranking. Nearly every advantage, once gained, is shown to be temporary. The notion of “sustainable” competitive advantage is increasingly illusive as the pace of change in the business world speeds up. Rapid change requires new flexibility from corporate institutions.”

So many of today's companies have become paralyzed by the economic crisis - suffering from what Jaron Lanier calls 'karma-vertigo' - seeing the potential for innovation yet only capable of slashing costs in a hail Mary attempt to survive through to the other side. This report makes it clear that there is no other side. Today is the new normal.

The authors of the report point to a bright side of value creation - namely the participation in and harnessing of "knowledge flows." Fundamentally different from the traditional stockpiling of knowledge, firms that develop a practice of tapping into expanding and diverse flows of capital, talent and knowledge will find themselves ideally suited to capitalize on the new digital infrastructure. (Open innovation social media practitioners should take notice: You are the creators of this new flow.)

The 2009 Shift Index is an important piece of research and one CEOs should take seriously.

Get the REPORT: Measuring the forces of long-term change: The 2009 Shift Index (PDF)