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The „Digital Challenge“ for TIC: Applied relativity

October 14, 2019

Albert Einstein’s Theory of Relativity contains many astounding and bewildering concepts. One of them is the idea that time is relative and depends on the speed of an object’s movement. In consequence, even though it subjectively may seem that the same amount of time has passed, objectively there can be huge discrepancies.

In our last blog post, and in similar vein several times before, we have talked about the mysterious “Digital Challenge” for the TIC industry. In order to avoid the impression of unsubstantiated scaremongering, let us take a look at two examples what this means in practice. We’ll come to the connection to Einstein’s great theory later.

 

Our first example for the “Digital Challenge” is the TISAX case. TISAX (Trusted Information Security Assessment Exchange), a proprietary standard for Information Security, secure data handling and data exchange was defined by the German Automotive industry association VDA based on ISO 27001.

Most German Automotive OEMs and major suppliers now require their business partners to be TISAX-certified, rendering this into a must-have for most active in that industry. A typical certification service in nature, and moreover and pleasantly “something digital”.

However, three of the “Big 4” managed to get accredited by the newly-formed accreditation body ENX before most of the TIC players – cp. http://www.enx.com/tisax/tisax-home.html. In other words: they recognized the business potential and relevance quicker and moved faster even though being TIC outsiders, winning a good part of the market.

This does not cast a too positive light on the (German) TIC industry’s ability to develop (slightly) digital business models. If key players only manage to move at a snail’s pace on their very hometurf and leave a new business very adjacent to their current offering to new contenders, what are their chances of success in less familiar and more sophisticated new services?

It can be expected that A&A players will continue this strategy and pursue similar “digital” certification opportunities in other industries – PwC and Deloitte have set up dedicated legal entities for such “Certification Services”.

 

The second example for the “Digital Challenge” is the sheer speed and force at which other new contenders e.g. from the professional services space expand in Cybersecurity and related services. To us, Accenture is probably the best example and one of the most determined players to this end.

In the last twelve months, Accenture has acquired or invested into 13 players in Cybersecurity, Software and Digital Services:

  • Pragsis Technologies, Spain (Big Data)
  • Fairway Technologies, USA (Software development)
  • Analytics 8 LP, Australia (Big Data)
  • BCT Solutions, Australia (Cybersecurity)
  • Deja vu Security, USA (Cybersecurity)
  • Cirruseo, France (Google cloud solutions)
  • Vlocity, USA (Cloud software, Series C)
  • Knowledgent Group Inc., USA (Data engineering and management)
  • PrimeQ Pty Ltd, Australia (Oracle Cloud solutions)
  • Intrigo Systems, USA (SAP cloud solutions)
  • DAZ Systems, USA (Oracle Enterprise Software)
  • MaLong Technologies, China (AI-based product recognition, Series B)
  • Pillar Technology Group, USA (Software testing)

In contrast to that, in the last twelve months, the 13 largest TIC players have made a whopping zero acquisitions in the field (at least to our knowledge; the last deals we noted were NTA/Intertek and InSite/Eurofins, both in June 2018).

To be fair, several TIC players such as SGS, UL, DNV-GL, Eurofins, Intertek or TÜV Süd have invested (in some cases substantial) organic efforts into Cybersecurity and Digital –  with new labs, alliances and partnerships, new services and digitization of processes. But that will hardly be enough to keep up with such a pace of expansion.

 

A certain pattern can be observed along these and other examples: While some TIC players apparently still need to fully comprehend the “Digital Challenge” and develop strategies for dealing with it, those who have realized what is going on struggle with being rigorous and fast enough in execution. In other words: Too little, too late.

Coming back to Einstein: Even though the TIC industry may feel that its efforts are substantial and well-timed, the rest of the world may come to a different conclusion – because both spheres are travelling at different velocities.

If the TIC industry does not “up its game” and starts playing at “digital speed”, others will prevail in “Digital TIC”. This would limit the industry to its existing businesses and services, which will increasingly be substituted by digital TIC offerings – effectively locking (most of) the industry into a shrinking market.

In that case, sooner or later fierce “dog-eat-dog”-style infighting for the remnants of contracting legacy businesses will begin, with the stronger players grabbing market shares from the weaker ones that eventually go out of business.

In a certain way, that will then be the long-awaited further consolidation of the TIC industry – only quite differently than expected and hoped-for.

The TIC Council Risk Mitigation Survey: Climate Strange

October 2, 2019

It has been a busy summer and September at adeptic, so we were only able to read the TIC Council’s 2019 Risk Mitigation Survey published and presented in June a few days ago (https://www.tic-council.org/publications/reports/climate-change-risk-mitigation-report).  

It is based on a survey of “400 senior executives with strategic decision-making responsibilities (…) from organisations with more than $100m in annual global revenue” in April and May this year.

It’s an interesting and thought-provoking read, to say the least. Quoting a few of the key, and surely memorable, statements in that paper:

  • “Storms, fire and floods are nothing new, but climate change is increasing their frequency and making their timing and location less predictable. This has severe implications for business. (…) And now there is a compound effect, because recent trends in business practices make companies even more vulnerable to climate change. Today, they rely on extended supply chains and ‘just in time’ delivery. There is more scope for disruption, and less tolerance for it.”
  • “A year ago, our respondents placed climate risk relatively low down on their priorities, but it is now expected to become a more immediate concern over the coming year.”
  • “One of the difficulties companies face in confronting climate risk is understanding the ways in which climate events can affect them.”
  • “There is little value in having a sophisticated strategy to head off reputational damage if a supplier is exposed to climate risk beyond those central controls. When the Deepwater Horizon oil rig failed catastrophically in the Gulf of Mexico in 2010, it was BP’s ‘gross negligence’ judges blamed for the disaster, despite the fact that the rig was owned by a contractor, Transocean, and the faulty cement at the heart of the failure was produced by Halliburton, another contractor.”
  • “…climate [risk] mitigation is a new area of technological development and innovation…”
  • “The most popular climate risk strategy is lowering energy consumption and becoming more efficient, and it is not hard to see why – it is a strategy that both saves them money and makes their brand look good.”

So, paraphrasing what the TIC Council survey says about the topic:

  • Storms, fires and floods will tear apart global supply chains, and companies will be blamed for causing global warming. That is ‘climate risk’.
  • While completely neglecting the topic last year, executives are now really, really worried about this…
  • … even though they don’t know what it is and what its impact could be.
  • One example for a major climate risk is faulty construction and operation of oil rigs that causes oil spills, because if we all didn’t need the oil to burn in our fancy streaker-lightning cars, it wouldn’t have happened (or so)
  • Dazzling new technologies will be needed to deal with all this
  • At the moment though, saving energy e.g. by replacing light bulbs and turning down the heating is the most popular business strategy – whatever the logical connection of that “strategy” to the original “risk” of disrupted supply chains and tarnished reputations might be

In addition, in contrast to this gretesque climate panicking, macroeconomic risks are disregarded as a low-risk “also-ran” - despite the Sino-American trade dispute, despite worsening economic indicators in all major economies that prompted central banks to cut interest rates, despite Brexit and the still unsolved Eurozone calamities. A balanced and informed risk assessment, certainly.

/Irony off: Did someone, either at the TIC Council or at Longitude, read this outright nonsense before it went into publication and online? And does anyone there believe that such a botch job will be taken seriously and position the TIC industry as a trustworthy partner for mitigating risks?

Rather, this vexing effort, to us a comical blend of apocalyptic prophecy, logical inconsistency and stylistic inability based on poorly designed research, still illustrates the TIC industry’s intellectual and strategic tragedy.

In the survey, as far as discernible in all the wordiness, “climate risk” seems to be comprised of two aspects: An “operational risk arising from severe weather events” and a “reputational risk arising from angry consumers blaming companies for destroying Earth”.

Dealing with the former would require helping clients identifying critical elements in their operational setups, restructuring their supply chains and footprints to make them more resilient and slowly transforming their business systems. Leaving aside for a moment that this is the job and the domain of consultants, not of inspectors and auditors, it above all requires being sufficiently competent and not just delivering data sets. It would require to be on par with clients, understanding how their businesses and the technologies they employ work.

Dealing with the latter, if really addressing the problem beyond PR, requires pushing that transformation even further, with carbon-free production, completely new products, recycling schemes etc. – a major design, engineering and managerial effort that requires even deeper,  more comprehensive and quite industry-specific competence. If supposed to go beyond generalized statements, this would mean e.g. to tell Automotive OEMs which type of vehicles are most eco-friendly over the life-cycle, how to minimize the resource requirements for producing these, where to ethically source required materials and how to organize a more climate-friendly manufacturing.

In short: Playing an active role in fighting climate change requires being competent enough to guide others through a complete transformation of their businesses. Does TIC really have the competence to guide e.g. the Automotive industry to this end and act as a sparring partner? Doubtful.  

Moreover, TIC never played this role. In their role as impartial experts, TIC companies judge how well others have done something in hindsight and do not tell them how to do it in the first place. This separates the auditor from the consultant, and distinguishes the 3rd party from the 2nd party. Both roles are hard to reconcile and difficult to balance in a single enterprise.

Of course, if some TIC companies or even the industry in its entirety feels compelled to move into this new direction, who are we to stop them? But probably, it might make sense to think twice before abandoning one of the most successful service industry business models without a cause, only to chase the buzzword of 2019 based on a flawed study, and meeting such benevolent and pleasant competition as McKinsey or Accenture.

 

PS: We encourage our readers to consider alternative views on the topic, e.g. http://perspectives.occstrategy.com/post/102fn90/can-tic-solve-climate-change, and to share their opinions with us. Let’s discuss!

The Hong Kong crisis and beyond: Black Swanosaurus Rex

September 2, 2019

Few would have expected on March 31st, when the “Civil Human Rights Front” NGO began to march against the “Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation (Amendment) Bill 2019”, that this would turn into mass protests in the former British colony, finally plunge Hong Kong’s economy into a recession and evolve into a major international crisis. And still today, after three months of intense protests, a solution is hardly conceivable, given the contradicting political ideas of democracy-seeking Hong Kongers on one side and the increasingly less masked authoritarian style of the Chinese Communist Party government on the other.

Much has been said about the political dimension and importance of this “Battle for Hong Kong”, but (in our view surprisingly) little attention has been paid to the territory’s key role in China’s current economic setup:

  • Hong Kong is China’s “financial window to the world”. Not only is it, according to the UNCTAD World Investment Report, the 3rd largest global destination for FDI – with half of that being directly re-routed to mainland China. It is also the by-far most important clearing center for international renminbi transactions, with 75% of all offshore RMB payments transiting via Hong Kong (source: SWIFT). And it plays an important role in international wealth management, ranked fourth globally with USD 0.8tn of international assets being managed there (Deloitte; Switzerland as largest global wealth management center: USD 1.84tn).
  • In addition, Hong Kong’s ports and airport serve as a vital trade hub for China, with 20% of Chinese exports being handled there.

In other words: The domestic political fallout of a rebellious Hong Kong might be unpleasant albeit probably controllable, but an economically dysfunctional HK would be a severe problem for, if not threaten the very existence of China’s hybrid capitalist-communist system. It is therefore vital for the Chinese government to get the situation back under control.

Essentially, this leaves Beijing with a choice between the devil and the deep blue sea: Intervene in Hong Kong and let the People’s  Liberation Army “restore order” – and subsequently face tough, Iran-style economic sanctions and a collapse of the export-oriented parts of the Chinese economy. Or do not escalate things further, trying to get the protests under control with the means and forces already deployed – with the likely outcome of failure to this end and continuing, probably further intensifying protests that will continue to hamper economic activity and may spill over to mainland China.

The course of events unfolds nicely for the Trump administration, with the Chinese government apparently slowly losing its temper and exhibiting willingness to retaliate. So nicely that some, such as former HK Chief Executive Tung Chee-hwa, have rumored that the CIA might have instigated and organized the protests. Despite such speculations, it indeed appears that the Trump administration carefully prepared the scene for such a major confrontation with China, e.g. by creating even stronger bonds with vital allies such as Saudi-Arabia and using the Iran nuclear deal cancellation to illustrate the power of Western economic sanctions.

In our earlier blog posts on the “trade dispute”, we have noted that the underlying conflict between the U.S and China runs much deeper, and that it remains to be seen how long the Chinese government will be able to stay composed. To us, it is neither a surprise that the confrontation worsened nor that the Chinese government is starting to fight back before beginning to lose face, the ultimate humiliation in Chinese culture. Recent events, such as the episode around Cathay Pacific (cp. i.a. the Straits Times’ coverage), have again demonstrated that Beijing is willing to use brutal political, economic and intelligence force in a concerted effort if necessary.

For the reasons pointed out, we believe that a Chinese intervention in Hong Kong is more likely than unlikely, if other attempts to get the situation back under control (from a Chinese government point of view) fail. Some view October 1st as the ultimate deadline to this end, as the Communist Party might not be willing to let anything overshadow its nationwide celebrations for the 70th anniversary of Communist rule in China.

In that case, tough U.S. economic sanctions would follow immediately, and any country that wished to maintain orderly ties to the United States would have to join this sanction regime. Not even Germany would be able to abstain, despite having to take the biggest economic hit – supporting a brave fight for freedom, democracy and human rights would be a too compelling case, after all. Not participating would be portrayed as siding with an unteachable authoritarian regime repeating Tiananmen. And in sharp contrast to 2003, there wouldn’t be a need for fabricated evidence to coerce allies. Rather, the case would be crystal-clear, and no Western government could continue to sit on the fence without completely losing any credibility.

What does all that mean for the TIC industry?

  • Write-off the further opening of the domestic Chinese TIC market
  • Instead, expect worsening conditions of doing business there – e.g. through the extension of the “social credit system” to companies, planned for January 2020. Not only is the system going to be complex with up to 300 specific rules and KPIs, driving up compliance cost (arduous introduction and maintenance). It moreover creates a perfect platform for seemingly data-substantiated official arbitrariness, e.g. special audits, fines and even blacklisting. And as employee-related data will have to be included, expect interesting discussions especially with European works councils.
  • Factor in that the Chinese export business could really be at risk and could collapse suddenly – make sure that the impact of that can be handled and that the network is able to adjust to sudden shifts in trade/supply patterns.
  • Non-U.S. TIC players: expect to come under intensified scrutiny in the U.S., depending on your China exposure.

Hard times and choppy waters – if they have not done so already, TIC players now need to hurry up to prepare their houses for the storm and improve the resilience of their business models.

 

Press coverage:

Crew describe climate of fear at Cathay Pacific after Hong Kong sackings: https://www.straitstimes.com/asia/east-asia/crew-describe-climate-of-fear-at-cathay-pacific-fter-hong-kong-sackings

Battered Hong Kong faces economic recession, existential crisis:
https://www.reuters.com/article/us-hongkong-protests-economy-analysis/battered-hong-kong-faces-economic-recession-existential-crisis-idUSKCN1VG007

China to impose ‘social credit’ system on foreign companies: https://www.ft.com/content/726905b6-c8dc-11e9-a1f4-3669401ba76f