JUNE 2009
The Shift Index 2009

Corporate returns are under pressure from far more than the recession. The patterns we’ve uncovered span decades and deeply affect even the highest performing companies, with the single greatest driver of these challenges, and indeed future opportunities, being our underlying digital infrastructure. Regardless of when the economy shifts back to an upturn, the long-term implications for continued erosion of return-on-assets will continue.

We have just unveiled the “Shift Index,” a new economic indicator that suggests the current recession is masking long-term competitive challenges for U.S. businesses.

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Among the key findings, U.S. companies’ return-on-assets (ROA) have progressively dropped 75 percent from their 1965 level despite rising labor productivity. Even the highest performing companies are struggling to maintain their ROA rates and increasingly losing market leadership positions.

Deloitte’s Shift Index pushes beyond cyclical measurement and looks at the long-term rate of change and its impact on economic performance. The Shift Index tracks 25 metrics across three sets of main indicators:

• Foundations, which set the stage for major change
• Flows of resources, such as knowledge, which allow businesses to enhance productivity
• Impacts, which help gauge progress at an economy-wide level

These three indexes combine to provide a measure of economic performance specifically designed for the digital era — focusing on the computing, storage and bandwidth technologies and the practices and protocols of those technologies, which define our new infrastructure. Deloitte’s Center for the Edge also views these indicators as phases of transformation in what it calls the “Big Shift” in the global business environment. 

Foundations: Digital Infrastructure and Economic Policy Lead the Way
Rapidly intensifying competition, which has more than doubled in the United States in the last 40 years, is at the heart of this decline. This change is driven by the emergence and spread of digital technology infrastructure reinforced by long-term policy shifts toward economic liberalization. The metrics in the Foundation Index monitor changes in these key foundations and provide leading indicators of the potential for change on other fronts that will ultimately manifest in the second and third phases of this Big Shift.

The adoption rate of digital infrastructure is two to five times faster than that of previous infrastructure such as electricity, railroads and telephone networks. Changes currently manifest themselves as challenges rather than opportunities because our institutions and practices are still geared to earlier infrastructures.

Key metrics in the Foundations Index track the changes in technology components underlying the digital infrastructure, growth in the adoption rate of this infrastructure and long-term public policy shifts. Changes in these foundations have significantly reduced the barriers to market entry and movement, leading to the increase in competitive intensity.

Knowledge Flows: Key Drivers of Performance The Flow Index focuses on the key drivers of performance in a world increasingly shaped by digital infrastructure. This includes both physical and virtual flows of knowledge, capital and talent enabled by the foundational advances as well as the amplifiers of these flows. Such amplifiers include the increased use of social media and the degree of passion with which employees are engaged in their jobs.

Developments in this second wave will likely lag the foundations metrics because of the time required to understand changes in foundations and develop new practices consistent with opportunities. 

Improving performance starts with recognizing that knowledge flows can help a company gain a competitive advantage in an age of near-constant disruption. The number and quality of knowledge flows at a firm — both within the organization and especially across institutions — will be a key indicator of any company’s ability to master the Big Shift.

Impact: Rising to the Challenge  The Impact Index measures how well companies are exploiting the foundational changes in the capabilities of the digital infrastructure by creating and sharing knowledge and what impact those changes are having on markets, firms and individuals. 

According to Impact Index metrics:

• 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

This third phase in the Big Shift provides the greatest lagging indicator because of the time it takes for foundations and knowledge flows to play out across equity markets, consumer choice and the value captured by talent. While current trends in firm performance indicate a sustained deterioration, over time, corporate performance is expected to improve as companies learn how to effectively participate in and harness knowledge flows.

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(c) 2009 John Hagel III and John Seely Brown. All Rights Reserved

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