Deloitte’s New Shift Index – Elegant Framework For A Complex World

We were intrigued by Deloitte’s newly unveiled “Shift Index” which “pushes beyond cyclical measurement and looks at the long-term rate of change and its impact on economic performance.” The Shift Index is “designed to measure the rate of change and magnitude of these long-term forces that spawn the extreme events currently observed in today’s business world.”

And here is how this is put together: the Shift Index has three constituent indices:

First Wave: Foundations Index
This involves the evolution of a new digital infrastructure and shifts in global public policy, quantifying the rate of change in the foundational forces taking place today. A leading indicator since it shapes opportunities for new business practices.

Second Wave: Flow Index
Increasing flows of capital, talent, and knowledge across geographic and institutional boundaries, shifting the sources of economic value from “stocks” of knowledge to “flows” of new knowledge.

Third Wave: Impact Index
How companies are exploiting foundational improvements in the digital infrastructure by creating and sharing knowledge, and what impacts those changes are having on markets, firms, and individuals.

And what has this shift index shown?

U.S. firms’ ROA has steadily fallen to almost one-quarter of 1965 levels at the same time that we have seen improvements in labor productivity
The ROA performance gap between corporate winners and losers has increased over time, with the “winners” barely maintaining previous performance levels while the losers experience rapid performance deterioration — falling from positive returns in 1965 to largely negative ones today
The “topple rate” at which big companies lose their leadership positions has more than doubled, suggesting the “winners” have increasingly precarious positions
The benefits of productivity improvements increasingly accrue not to the firm or its shareholders, but to two stakeholders: top creative talent, or knowledge workers, who have experienced significant growth in compensation, and customers, who are gaining and wielding unprecedented power as reflected in increasing customer disloyalty

A write up on the index and the actual report (142 pages in pdf) are available here:
http://blogs.harvardbusiness.org/bigshift/2009/06/measuring-the-big-shift.html
http://www.deloitte.com/dtt/press_release/0,1014,cid%253D267047,00.html


The construct is fascinating – can you really take multiple indices and track foundational and secular changes in the economy? How can you distinguish between the multiple and oftentimes counteracting forces which shape today’s complex global economy? Can we really model all the elements of an economy a la the Unified Field Theory? And many such intransigent questions…

Going through the report, we were impressed with the amount of thought invested, the elegant presentation and a formidable attempt to bring together disparate measures in a simple explanatory framework. The conclusions are in sync with what equity markets know and incorporate into stock prices, in that returns on capital which are above cost of capital are generally competed away and eventually all super-normal returns on capital “fade” away to the cost of capital, however, the extent of fade varies across industries and companies. Sectors with low entry barriers generally attract a lot of competitors and such sector returns on capital are just slightly over the cost of capital. Proprietary knowledge and high capital investment costs provide high barriers to entry and thus help maintain excess returns on cost of capital.

The only way to maintain high returns is to “beat the fade” and continually reinvest in technology and processes to keep raising the bar and thwarting imminent competition. That US companies’ return on assets have dropped 75% over 40 years vindicates the fade concept and shows that competition from other countries has intensified and driven down returns from a period when US companies ruled the global marketplace.

The Shift Index has gathered attention from the Harvard Business Review and Financial Times, and though the authors themselves acknowledge that additional work is needed to make it practical and impactful, we look forward to any unique insights that this can bring to the confusing and complex world we live in and how to effectively deal with large-scale changes and big shifts to create benefits for ourselves.

Q2-2009 IPO Activity Grows Seven-Fold Over Q1-2009, Signals Some Deal Optimism

Ernst and Young has just released its Q2-2009 global IPO report, and while activity in this quarter was substantially over previous Q1-2009 quarter, it was far below 2008 levels and driven largely by 3 key IPOs in developing countries. We blogged about the dismal conditions in the Q1-2009 report at http://bigfouralumni.blogspot.com/2009/04/ey-report-shows-q1-2009-ipo-activity.html

Global IPO activity was higher in Q2-2009 with 76 IPOs worldwide compared with 52 in Q1-2009; deal value was up seven-fold to US$9.9 billion from just US$1.4 billion. However, Q2-2009 remained far lower than Q2-2008 which saw 269 IPOs raise US$38.2 billion in capital.

Three key IPOs: Brazil’s VisaNet (US$3.7 billion), the largest IPO worldwide so far this year and Brazil's biggest ever; metals company China Zhongwang Holdings Ltd (US$1.3 billion); and Vodafone Qatar (US$0.95 billion) accounted for 60% global capital raised. Together, Brazil and China were two-thirds of worldwide capital in Q2-2009.

This quarter, the most active country was South Korea with 17 IPOs (8 IPOs in Q1). China and Canada followed, with 13 and 9 IPOs respectively. US also experienced an uptick in activity rising from 1 IPO in Q1-2009 to 8 in Q2-2009. Not surprisingly, emerging markets accounted for 53 of the 76 global IPOs.

Global IPO activity is one measure of how the global economy is performing and recovering from the worst recession since the Great Depression. Activity levels were rock bottom in the first three months of the year, but since March, equity markets all over the world have been on a tear, rising 20%+ from multi-year lows, and this has created a sense of some confidence in investors and promoters. Banks in the US have rushed to the capital market as their stock prices have smartly increased and the bravest of the IPO candidates in the pipeline have ventured out. Rosetta Stone in the US, which markets language learning software, had a nice run on its IPO on opening day.

But it is clear that emerging and developing markets is where the action is, these markets have risen 40% plus in just three months and that two-thirds of IPO activity concentrated in these markets is not surprising.
Q2-2009’s substantial increase over Q1-2009 level is a matter of cheer, and perhaps defines the level of the “new normal”, and the heady days of 2007 seem but a distant memory.

It’s been only a few days since the quarter ended, and thanks to E&Y we have a near-contemporaneous indicator of global equity health. While the firm believes that conditions will remain difficult in the coming months, according to Gil Forer, Global Director of IPO initiatives at Ernst & Young, “However highly successful IPOs tend to emerge from post recession periods. These companies, having survived the ultimate stress test, are often leaner and have demonstrated the resilience of their business model. It’s a good time for dynamic entrepreneurial companies. And the high performance of stock exchanges around the globe in the second quarter has resulted in renewed interest in companies around the world to go public.”

And that comment pretty much sums up the cautious yet resilient sentiment in global equity markets today.