Some Upside Surprises in 2009?
December 18th, 2008 | Posted by stockAs 2008 lingers a little longer, the mood on Wall Street and among investors could not be more foul. The Madoff scandal renews the betrayal many investors feel. Their anger will only grow as the fourth quarter ends and mutual funds and 401(k) plans report abysmal annual results.
So how about some hope? Though he’s often been gloomy in the past couple years, Charles Dumas of Lombard Street Research offered a shred of optimism in a research note yesterday.
His conclusion: The surprises in 2009 “should be on the upside.”
Wouldn’t that be nice? Rather than continually being surprised by Bear Stearns, Lehman, Madoff, etc., we could get some shockingly good news for a change?
While many expect gloom and doom, we could do better for three reasons, he says:
1. As oil and food prices fall, “U.S. households are benefiting from a 3% real income boost.”
2. The Federal Reserve’s policy of buying up mortgage-backed securities “should have a favorable wealth effect and could loosen up paralysis in the loans market.”
3. A “monster” fiscal stimulus package from the Obama administration, about which we learned more today. Dumas writes government spending, combined with help from net exports “could pull the economy back into growth of 1-2% [in the four quarters from mid-2009 to mid-2010] — versus an ongoing recession at perhaps a 1% rate without a significant package.”
However, it’s not all sunshine in this prediction. Dumas is worried about 2010, predicting there could be another “downward leg” in the economy then. One year at a time.
New tax rule hits you where you live.
December 17th, 2008 | Posted by taxJust about anyone who owns a home knows that you can exclude up to $250,000 in capital gain when you sell it ($500,000 for joint fliers). But like most tax rules, this one has limits and exceptions. Simply assuming that you’ll qualify for the exclusion can be a costly mistake.
If you plan to sell a home, talk to your tax advisor first to be sure there won’t be any unpleasant surprises on your tax bill. Planning is particularly important if you own more than one home. Recent housing legislation makes it harder to convert a vacation or rental home into a principal residence and then sell it on a tax-advantaged basis.
House Rules
There are two main requirements to qualify for the home sale exclusion. First, you must have owned the home and used it as your principal residence for at least two of the previous five years; and second, you can’t use the exclusion more than once every two years. If you don’t qualify, your gain will be taxed at capital gains rates (currently 15%) or, if you’ve owned the home for less than a year, at ordinary income tax rates.
If you’ve lived in your home for less than two years, or if you claimed the home sale exclusion within the last two years, you’re generally better off (at least from a tax perspective) postponing the sale until you meet the two-year requirement. You may qualify for a partial exclusion, however, if you’re forced to sell early for health reasons, because of a change in your place of employment, or due to unforeseen circumstances.
No More House Hopping?
The home sale exclusion is only available for your “principal residence.” But what if you want to sell a vacation or rental property that has appreciated significantly in value since you bought it? Is there any way to soften the tax blow?
One popular strategy has been to sell your current residence (using the home sale exclusion to reduce or eliminate capital gains taxes), convert the second home into your principal residence, wait for two years, and then sell that home with little or no capital gains tax. Keep in mind, however, that capital gains attributable to depreciation deductions you took for business or rental use of the home are always taxable.
Starting next year, this “househopping” strategy will become less effective. Under the Housing Assistance Tax Act (HATA), which was signed into law in July, you won’t be able to exclude capital gains attributable to any “nonqualified use” of your home before you convert it. Nonqualified use generally means any use other than as a principal residence.
Time to make yearend tax moves
December 17th, 2008 | Posted by taxDEMOCRAT BUSINESS EDITOR
Time is running out for making certain financial moves that should be done before year’s end to gain the income tax benefits.
The Internal Revenue Service says taxpayers also should review recent changes in the law that may apply to their tax situation. Some planning now may well save some time – and perhaps even money – later.
Make 2008 deductible charitable contributions no later than Dec. 31. If you are claiming a tax deduction, give to a qualified public charity and keep a paper record and receipts of the transaction.
Donations charged to a credit card by Dec. 31 are deductible for 2008, even though you may pay the bill in 2009. To claim a deduction, you must itemize deductions on your tax return.
Another action to take is contributing to a retirement account. The maximum 2008 IRA contribution is $6,000. The IRS says the Retirement Savings Contribution Credit or “Saver’s Credit” of up to $2,000 is also available to taxpayers who contribute to a plan and whose annual income is generally less than $53,000.
A Roth IRA conversion from a traditional IRA may also be a long-term, tax-saving solution to investigate. Check with your tax adviser.
For investors, it’s time to sell the losers and make portfolio adjustments. Tax rules allow you to deduct up to $3,000 in capital losses each year.
As for the impact of new legislation, the Emergency Economic Stabilization Act signed into law this year includes several “extender” provisions that bring back some popular tax deductions and provides for 2008 Alternative Minimum Tax relief to millions of Americans.
Among the extenders in the law are the following:
* Qualified tuition and fees are extended through Dec. 31, 2009. Up to $4,000 can be deducted.
* State and local sales tax deductions were extended through Dec. 31, 2009. Taxpayers can deduct either state income tax or sales tax.
* The teachers’ deduction was extended through Dec. 31, 2009. Educators can deduct up to $250 in out-of-pocket expenses they incur.
* The energy credits were extended for eight years on property improvements made that increase energy efficiency. Taxpayers may be able to take a credit of 30 percent of the cost for qualified solar electric, solar water-heating and fuel-cell equipment. Also, dozens of hybrid vehicle makes and models still offer tax credits for original buyers.
For more details on these provisions, visit the IRS Web site www.irs.gov.
The Price of Forgoing Basic Research
December 17th, 2008 | Posted by innovIn the “good old days,” the industrialized world was peppered with corporate research labs. At the same time, universities were generally well funded. Curiosity-driven research, a key component in innovation was the ethic of the academy. The university produced great minds that were encouraged to think deeply and creatively without the consideration of commercial relevance. Industry selected appropriate candidates from among this cohort and gave them a home where they could generate proprietary intellectual property on which that company’s future could be based. Along the way, all did some outstanding basic science.
But since about 1970, we have been on a path where industry’s investment in basic research has been in decline. At the same time, there has been a significant shift toward applied, “industry-relevant” research within academia. I believe that these trends do not augur well for the future of industry, academia, or society as a whole.
Some might argue that the decline in the number of corporate research labs is no bad thing—that the market made a correction and halted investment in things that did not provide an adequate return. I can even hear someone bringing up Xerox PARC (where I worked) as an example. “Hey, they developed the laser printer, local area networks, and personal workstations and were still not a player in personal computing!” Well, if you want to argue that a failure in a particular technology transfer is sufficient to condemn the whole notion of corporate research, then we will just have to disagree. The invention of Nylon, Lycra, Spandex, Teflon, and Kevlar provide a clear illustration of how investment in research can sustain the long-term viability of a corporation (in that case, Dupont (DD).)
Others might argue that corporate research has simply moved to other parts of the organization—to places where it can be more integrated with the rest of the company and therefore accelerate the adoption of research. They might even support such a conclusion by referring to the data reported in sources such as the OECD Science, Technology & Industry Scoreboard 2007 which indicates that, in general, reasonable investments in research and development are being made by industry, academia, and government.
But the term R&D is so broad as to border on useless for the purpose of analysis, since it covers the whole gamut of activities from basic research to product development. It ignores the significant difference between the work of a Nobel Prize laureate and a junior programmer. As early as 1980, the economist Edwin Mansfield showed that throwing everything into one R&D bucket obscured the fact that corporate investment in basic research, and even advanced development, was in decline. In this now-classic paper, Mansfield surveyed the R&D spending of 119 firms, representing about 50% of R&D expenditures in the U.S. He found approximately a 25% reduction in their investment in basic research between 1967 and 1977.
That may seem like a long time ago—but think how long it can take for research or development to play out (for more on this topic, see my previous column, “The Long Nose of Innovation”). All of a sudden, the issue becomes contemporary. As a result, we should be skeptical of reports which lull us into believing that our R&D bucket is adequately full.
There will still be those who argue that industry can no longer afford to undertake basic research and that any investment is best made in applied research and development.
I would direct them to one of the more significant conclusions of Mansfield’s study: that for a given investment in R&D, there is a significant and direct relationship between the percentage applied to basic research and total factor productivity. That is, the return on investment goes down as the R&D budget shifts from basic to applied research.
Universities, meanwhile, have been encouraged by various subsidies, fund-matching schemes, and tax incentives to pursue the hope of generating mini-Silicon Valleys and incremental revenue through the licensing to industry of intellectual property resulting from their research. (In the U.S., this was given a boost by the Bayh-Dole act of 1980, which enabled universities to patent and license the results of federally funded research.) Academia has apparently been only too happy to make a Faustian bargain to redirect priorities towards the shorter-term objectives of industry.
Take, for example, the deal between Virginia Commonwealth University and Philip Morris (PM), reported earlier in the year in The New York Times. Notably, it is not the university, not the sponsored academics, nor peer review that controls what, if any, research results can or will be published. Philip Morris does. Furthermore, the original deal also insisted that the university not make any public disclosure about the terms of the contract. So much for academic freedom and open research.
The foundation of academic life is the community of scholars. This can only be sustained if academics have the freedom to talk about their work with their most knowledgeable colleagues, no matter what university they are associated with. The growth of knowledge stemming from an open community of scholarship should trump the hypothetical short-term commercial potential of any patentable idea. Yet in this Faustian world, as an academic with international stature in my field, I cannot speak to you if I have any belief that you, as an academic, may patent ideas stemming from our conversation. This is unacceptable.
Healthy universities need to understand that their primary role is long-term, basic, curiosity research. To be blunt, I believe that when academic research starts demonstrating industry relevance is when funding should be cut off, not augmented.
It seems to me that we have lost any appreciation of what constitutes a healthy and sustainable ecosystem of research and innovation—one that reflects the dependent yet distinct natures of the academy and the corporate world. Crucially, industry needs to look past the myth that research is something it cannot afford or that only extremely large companies can afford. I funded my research program at the 500-person, 3D-graphics-software company, Alias Research, on about 1% of revenue (which was about $100 million). With larger companies, as little as 0.5% is sufficient to support a research group worthy of the name.
What we are doing is not working. The current worldwide economic crisis and the repeated cries for innovation and game-change are only-too-visible indicators of that. We are largely paying the price for policy decisions made a quarter of a century ago. Those policies are still rigidly in place. But it is not too late for change. Industry should pick up the ball or suffer the consequences, and academics should get back to long-term work.
The real question is not “Can I afford to invest in research?” It is, “How can I afford not to?”
December 15th, 2008 | Posted by innovEditor’s note: This is the seventh in an eight-part series of Viewpoints by author Don Tapscott, who draws on the $4 million research project that inspired his new book, Grown Up Digital, to explain how digital technology has affected the children of the baby boomers, a group he calls the Net Generation.
Think of the old family organizational chart: The father was the CEO. The mother was the chief operating officer reporting to Dad. The kids reported to Mom. (I was the eldest kid in my family; the dog reported to me).
This org chart was deeply embedded in popular culture and embodied by the television and radio shows of the 1950s and 1960s, shows like Father Knows Best.
Today’s family setup looks more like concentric circles. The child is in the center surrounded by parents and step-parents, who are in turn surrounded by grandparents. Most Boomers like me don’t even try to order our children around as our fathers did. We’re now part of a more democratic family that gives the kids a voice in family affairs.
These new families are both tighter and more collaborative than the families that raised Boomers. And the children of these new families—the Net Geners, age 11 to 31, who have grown up digital—have been deeply affected. This upbringing is influencing the way they behave as parents, as consumers, and as employees. Business should take note.
Net Geners, for instance, often have closer links with their parents than Baby Boomers ever did. Roughly 80% of Net Geners age 18 to 25 years report speaking to their parents in the past day, nearly three-quarters see their parents at least once a week, and half say they see their parents daily. Even college students who no longer live at home touch base with their parents an average of more than once a day via phone, e-mail, text message, and other means.
Two out of three teens and college-age young adults say they would first call their parents if they were in trouble. Furthermore, these young people are twice as likely to trust their parents over their friends. They are also more likely to discuss serious issues with their parents than with their friends.
Consider what this means if you’re hiring from Net Gen. Chances are, the parents may be involved. Nearly one-third of employers in a 2007 survey report that parents help with résumés, and 9% say parents help negotiate their kids’ pay raises.
This family closeness will also affect the way Net Geners deal with their careers. They’re less likely to sacrifice home for career than their parents were. For 63% of Net Geners, getting married, having children, or owning a home is more important than becoming a manager, earning a certain salary, or starting a business.
These tight ties may also have a direct impact on shopping. Net Geners have enormous influence on their Baby Boomer parents and their money—some $2 trillion in spending a year. Young people age 13 to 21 influence 81% of their families’ apparel purchases and 52% of car choices. Even younger children have powerful sway; Kids between 5 and 14 influence 78% of total grocery purchases.
Growing up in collaborative families has also made a deep impact on these young people. When Net Geners become parents, they’re unlikely to return to the old, authoritarian ways. If anything, they’ll be even more collaborative than their parents were.
Consider the issue of what your kids are seeing on the Internet. Although Boomers have given their kids a say in family life, many are worried about their kids’ online activities. Half of them have installed blocking devices to stop their kids from viewing pornography, or violence, crime, or other inappropriate content. The devices can even allow parents to track—i.e. to spy on—their kids’ activities.
I avoided these steps with my own kids. In the open family we tried to develop, we talked honestly about issues like porn on the Internet—and about the far greater danger of driving under the influence of alcohol or drugs. Our children signed a deal that they wouldn’t agree to meet—or actually meet—anyone they met online without their mother and me in attendance. In return, we wouldn’t spy or censor. We trusted each other, and we both kept up our side of the bargain. Of course as with any family, there were problems and breakdowns. But we worked hard to build trust by making sure that information flowed freely.
When members of the Net Generation become parents, I think they too will adopt this open model of parenting. Instead of censoring or spying or ordering, these Net Gen parents will negotiate with their kids, explain, and build a common view. Maybe they’ll even revive the wonderful tradition of the family dinner as a place to talk about issues, rather than to give and receive orders.
This is a different model of authority inside the family. It has conditioned Net Geners to recognize that the best way to achieve power and control is through people, not over people. I believe that when they start work, they will bring these attitudes toward authority with them and change the fabric of the working world.
Don Tapscott recently led a survey of 11,000 young people around the world. He is the Chairman of nGenera Insight and has written 12 widely read books on the impact of the Internet on society. He is also an adjunct professor at the Rotman School of Management, University of Toronto. His 1996 book Growing Up Digital defined the Net Generation, and the sequel, Grown Up Digital: How the Net Generation is Changing Your World was just released.
December 12th, 2008 | Posted by stockGM was the largest U.S. company in 1928, with $3.55 billion in market value, up from $2.40B in 1927, when it was also #1
Their current (trade) market value is $2.05B; yesterdays close was $2.52B
XOM (yesterday, $407B) is currently #1 in market value (in the S&P 500), with 5.40% of the index weight, the first issue to be over 5% since IBM in 1985 ($95.6B)
Fun stats:
XOM wasn’t directly around in 1928 (Sherman Antitrust Act), but some of the seven sisters were in the top ranks by market value – Standard Oil of NJ (Esso-> Exxon), CA, and NY
All 9 days this month have moved at least 1% (5 up, 4 down), and while we had 10 back in November, the record is 20 in Oct-Nov 1931
AND FOR TODAY – Over the last 60 trading days we have had 17 days of at least a 5% change (6 up, 11 down) in the S&P 500, over the prior 50 YEARS there have also been 17 (8 up, 9 down); exciting times we live in
And one last ‘crazy’ personal item. My 12 year old son wants to put some of HIS OWN MONEY into stocks. He says in 30 years some will make it and some won’t, but they should be worth a lot. He put together a list (also part of his school Stock Market game, gee these capitalists start early, even in the ‘liberal’ schools), and I am seriously considering the venture (I would have to pre-clear any trades).
Never Mind Wall Street, Watch D.C.
December 12th, 2008 | Posted by stockThese are terrible times for traditional equity research. Research budgets are being cut for many reasons, especially the financial trouble at investment banks, hedge funds and institutional investors. Also, fewer investors take seriously analysts’ earnings or cash flow projections at a time when the economic situation is so volatile and difficult to predict.
However, despite the tough times, smart investors may need to beef up research coverage of one important topic: Washington politics.
World stock markets plunged overnight after the U.S. Senate failed to pass a $14-billion bailout package for the U.S. auto industry, but then U.S. stocks did better Friday, perhaps because the Bush administration said it wouldn’t let the ‘Big Three’ collapse.
It’s only the latest example of how closely investors are watching Washington. The halls of government are the key to the future of not just the auto industry, but the financial sector (which got its own bailout), the health care industry (as reform legislation is developed) and the energy business (as lawmakers discuss the climate change issue). Government stimulus efforts under an Obama administration could also directly influence retailers, construction firms and many other parts of the economy.
Federal policy has always mattered to the markets, but something fundamental has shifted recently. The financial crisis has pushed government toward an aggressive, hands-on approach to the economy.
The Bush administration took the first steps toward government activism with its financial bailout and promises to protect the auto industry. President-Elect Obama and Democrats in Congress will be aggressive, too, in hopes of preventing a deep economic slowdown.
Washington can be a world as complex, incomprehensible and intimidating to outsiders as Wall Street is to novice investors. In the next few years, much depends on not just Obama’s policy preferences, but the vast power wielded by committee chairman like Montana Sen. Max Baucus or House members Barney Frank and Charles Rangel, and even their staffers who do much of the actual writing of legislation.
Gaining insight into this world will be crucial for investors. This news item is evidence at least some firms agree: Glass, Lewis & Co. bought up political and economic advisory firm Washington Analysis Corporation late last month.
Integrity Research Associates, which tracks the research industry, commented on the acquisition:
We expect that insight into upcoming changes in US government policy and legislation, and the impact this will have on businesses, will be among the most in-demand forms of research over the next few years. […] The injection of public funds into financial and other companies will mean that Washington will loom larger in investors’ mindsets than at any time in recent memory.
Investors and the 2009 Economic Outlook
December 11th, 2008 | Posted by stockBullish investors are focused on the middle of 2009, with many strategists and economists thinking the economy will start bouncing back by then.
If that’s the scenario you’re betting on, however, this dispatch from the Atlantic’s Marc Ambinder ought to be troubling:
It’s quite unsettling to talk to members of Barack Obama’s transition teams these days, especially those who are helping with the economics portfolio. Without going into details, the sense I get from them is that they are very worried that the economy will get a lot worse before it gets better. Not just worse… a lot worse. As in — double digit unemployment without the wiggle factors. Huge declines in aggregate demand. Significant, persistent deficits. That’s one reason why the Obama administration seems to be open to listening to every economist with an idea and is stocking the staff with the leading lights of the field.
It’s in the political interests of the Obama economic team to lower expectations. Dire predictions help win support for aggressive policy responses. But the last year has shown that dire predictions can come true.
BusinessWeek’s Peter Coy talked to a lot of economists about their 2009 outlooks and he got a much more mixed picture in this week’s cover story.*
But, as I think Coy’s piece makes clear (and you really should go read it if you’re wondering where the economy is headed), the chances of a very bad 2009, particularly in the U.S. job market, aren’t exactly remote. Coy writes:
“We’ve got so far to climb out of this [financial] hole that if we start today, then on any reasonable time path we might still be climbing out a year from now,” says Robert V. DiClemente, chief U.S. economist of Citigroup (C) in New York. Predicts the AFL-CIO’s chief economist, Ron Blackwell: “Things will get worse, perhaps much worse, before they get better.” That said, this job bust won’t last forever. There are forces at play that will eventually pull the economy out of its free fall. The key is smart government policy that sets politics aside. It must provide a combination of short-term consumer stimulus and long-term investments without stepping over the line into wasteful and innovation-stifling industrial policy.
There are reasons to be optimistic — Obama’s stimulus plan might work, the Federal Reserve’s efforts to stabilize the financial situation could finally pay off — but there’s a lot that could go wrong.
That’s why I’m a bit surprised by the optimism I’m seeing in notes published by investment advisors and stock strategists. The idea that the economy will start to recover in the middle of 2009 has really taken hold.
Bruce Bittles, chief investment strategist at R.W. Baird, writes:
The combination of falling home values and a drop in mortgage rates will dramatically improve housing affordability and along with plunging energy prices improve consumer discretionary income. This is the first step in the recovery process that is expected [to] stabilize the economy by mid-2009.
Standard & Poor’s Global Investment Policy Committee note from Dec. 3:
Despite ongoing weak global news flow, given that equity performance tends to lead an upturn in the fundamentals by roughly six months, global stock markets have rebounded on hopes the worldwide economic and profit outlook will begin to stabilize by the [second half] of 2009. Time will tell.
Throughout this crisis (and I’m thinking all the way back to late July 2007), optimists have continually insisted that an improvement is about half-a-year down the road. Eventually, hopefully soon, they will be right.
*Coy notes in his piece that economists at “the epicenter of the financial crisis” — i.e. those working on Wall Street or in big investment houses — seem to be much more pessimistic than those elsewhere. If so, it also makes sense that the Treasury Secretary-designate Tim Geithner (and his crew) would be on the gloomy side, given his experience in the trenches as president of the New York Federal Reserve Bank.
December 10th, 2008 | Posted by stockThirsty for an investment that could actually perform well in a recession? UBS (UBS) analyst Kaumil S. Gajrawala serves up one possibility.
Beer maker Molson Coors’ (TAP) main brands include Coors Light, Canadian favorite Molson and Carling, which claims to be Britain’s number one lager. In late 2007, it created a joint venture with SABMiller (SAB.L) — called MillerCoors — to market both companies’ products, including Miller Lite, in the U.S.
In a Dec. 10 research note, Gajrawala makes shares of Molson Coors his “top pick.” Why?
1. The MillerCoors joint venture could create larger-than-expected cost savings. The merger of the two brewers’ marketing operations could save $1 billion over the next five years, Gajrawala estimates.
2. Conditions look right for beer makers generally:
In tough economic times, we expect consumers to shift alcoholic consumption to the ‘tried and true’ or what we would refer to as premium and sub-premium American beers like Coors Light, Miller Lite and Bud Light.
And Gajrawala says there is evidence that cheap beer is indeed making a comeback.
Data suggest beer volume is outpacing more-expensive wine and spirits. The volume of beer sold is recently up 3.1% to a two-and-a-half year high, Gajrawala notes, while beer pricing is up 5%.
Also, beer makers, which increased prices when commodity prices rose earlier in 2008, haven’t been forced to cut those prices later in the year. Cost-conscious consumers also seem to be buying in bulk with 12- and 24-packs of beer getting more popular.
There are worries for Molson Coors: Cost savings might not materialize and sales could suffer in Britain.
But if you’re worried about a serious recession, cheap beer might be one answer.
December 8th, 2008 | Posted by innovEditor’s note: This is the sixth in an eight-part series (BusinessWeek.com, 11/30/08) of Viewpoints by author Don Tapscott, who draws on the $4 million research project that inspired his new book, Grown Up Digital, to explain how digital technology has affected the children of the baby boomers, a group he calls the Net Generation.
Earlier this year, I sat with Best Buy (BBY) CEO Brad Anderson in a typical meeting with a roomful of managers. He did something that fellow CEOs might find unusual. He let a 23-year-old employee, Adam Mulder, speak passionately and at some length about changes he thought would improve sales of media products for the consumer electronics retailer. Throughout Mulder’s speech, Anderson took notes and asked thoughtful questions.
It was a small but telling example of how you have to manage young employees these days. Forget the old system of top-down supervising. If you want to hire and keep young people, you have to collaborate with them. What’s more, it’s worth it, because these kids have the quick, collaborative reflexes to help companies stay in business, as Best Buy has done.
“The Net Geners we hire have enormous knowledge, unprecedented information, and facility with tools that in some areas is superior to their seniors,” Anderson explains. “They’ve got a difference that produces unique insights. The future of this enterprise is dependent much more on him than on me.”
Most of Best Buy’s retail employees are between ages 16 and 24. These kinds of employees have changed the job of management for Anderson. It’s not about supervising employees anymore. It’s about creating a context that lets young people like Adam Mulder be successful. Besides, to Brad Anderson there is another practical reason to listen: “If I were to shut him down, he’d tell someone and soon everyone would know that I don’t listen,” Anderson says. “He can shut me down as the CEO. Having power means something very different than it used to.”
Anderson is listening carefully to these young people, and more CEOs should follow his example. It’s because the culture of youth, the young people who’ve grown up digital, may well become the new culture of work and the high-performance organization.
Look at what’s happened to work. It’s become more cognitively complex, more team-based and collaborative, more dependent on social skills, more time-pressured, more reliant on technological competence, and more mobile. It’s less dependent on geography. A growing number of firms are decentralizing their decision-making. Instead, people are communicating in a peer-to-peer fashion, rather than following old-fashioned lines of authority. They’re embracing new technologies that give employees the power to communicate easily and openly with people inside and outside the firm. In doing so, they are creating a new corporate meritocracy. It’s sweeping away the old hierarchical structures and connecting teams of individuals to a wealth of external networks.
The Net Generation, young people in their 20s who have grown up digital, is perfectly positioned for this kind of work. Having grown up digital, they expect to collaborate, wherever they are. They insist on speed. They’re innovative by nature. They think work—the work itself—should be fun and challenging.
Managing them successfully is, of course, a challenge. For starters, managers will have to rethink the traditional pillars of HR. As youth researcher and author Robert Barnard and I have concluded, the old model of employee development—recruit, train, supervise, and retain—is outdated. This is, after all, a generation that has grown with a digital technology that is, at its very core, interactive. These Net Geners expect a conversation, not a one-way lecture. So now employers have to think about a reciprocal relationship with their employees. This can mean customizing jobs, as Deloitte is doing. “We believe that it is a new strategy for the workforce of the 21st century, and the workforce of the 21st century is different than the workforce in the last century,” Deloitte CEO Jim Quigley told me.
Yet too many companies make no effort to learn from the Net Geners. Too often the young people go to work and hit a wall of corporate procedure and a deeply entrenched hierarchy that rewards those who command large numbers of followers. The widespread banning of Facebook at work is a classic example of misguided supervision. The Net Gen wants to take a digital break; the boomer employers shut them down. Get ready for the generational clash at work as a generational firewall builds up frustration.
To avoid this clash, the new credo for managing Net Geners should go like this: initiate, engage, collaborate, and evolve. What does this mean? Take a look at a new service called Rypple that is designed to replace the old-fashioned performance review. Instead of waiting an entire year to find out what the managers think of them, employees can send out a quick (50 words or less) question to people they trust—a manager, a co-worker sitting in the meeting, even a client or a supplier. The questions are supposed to be pointed: What can I improve? What did you like? The recipients can answer quickly and anonymously, and the employee can track performance over time. It’s just-in-time performance improvement—just the kind of regular feedback young people need to improve.
“We recognized, especially for the Net Gen, that work is learning, and learning is work,” says David Stein, Rypple’s co-founder. “They want useful feedback, frequently. However, current systems for feedback and development are exactly the opposite—infrequent, top-down, and vague—and they don’t have to be.”
Employers have two options. They can absorb the Net Gen way of doing things in a quick collaborative way, as Best Buy and Rypple’s clients are doing. Or they can stick to their old hierarchies, and reinforce the generational barrier that separates the managers from the newly hired minions. But if they do, they will forfeit the chance to learn from the Net Gen—to absorb both their mindset and their tools of collaboration.
I think the winners will be those companies that choose the Net Generation culture. Just watch: It will be the new culture of work.
Don Tapscott is the chairman of nGenera Insight and has written 12 books on the impact of the Internet on society. He is also an adjunct professor at the Rotman School of Management, University of Toronto. His 1996 book, Growing Up Digital, defined the Net Generation and the sequel, Grown Up Digital: How the Net Generation Is Changing Your World, was just released.
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