Innovation Deficits and National Debts

Innovation Deficits and National DebtsThe US Government, along with many other governments around the world, is beginning to come to grips with its fiscal deficit, and, hopefully, its long term debt. A deficit is a current year short-fall that occurs when spending exceeds tax receipts. A debt, on the other hand, is the accumulated deficits. Both are pernicious, and both must be addressed, or, like Greece, we’ll all find ourselves in the uncomfortable situation of dramatic cuts in government services or paying extreme taxes to pay down our creditors.

Another factor you should watch closely is big business, at least in the US. Right now, many businesses are reporting exceptional profits in the face of a slow economy. I’ll argue they are doing this in many cases by driving two significant deficits, which are leading to debt. Neither of these deficits will show up as a negative on the balance sheet in the short term, but may cripple the firms in the long run.

The first deficit or debt is in information technology. Many firms are simply relying on existing software and existing systems to get them through these lean years, and are investing far too little in development and new systems. Many IT organizations are barely able to sustain their existing infrastructure, much less add new functionality. Many are also hoping to take advantage of a generational shift to the “cloud”, which they believe will dramatically reduce IT costs, but they aren’t taking into account the dramatic costs of shifting to the cloud. In the next few years the lack of investment in IT will be obvious and CEOs in the near future will have to invest in IT to continue to drive revenue and profits, demonstrating the deficit and debt around IT spending.

The other deficit or debt that is near and dear to my heart is the innovation deficit. In this economic environment most firms are satisfied with sustaining the status quo, and squeezing all the value that they can out of existing products or services. They use many arguments to demonstrate why innovation is currently too expensive, too difficult or too risky. Many executives know they need innovation in order to sustain growth and profits (see any recent CEO survey where 70% of CEOs demand more innovation), yet many CEOs also recognize that innovation isn’t getting done. For proof see the NSF survey where less than 25% of manufacturing firms and less than 10% of services firms report generating a new product. This deficit builds to an innovation “debt” or gap, which has several implications.

First, many firms that are leaders today aren’t innovating, and won’t have interesting and valuable new products and services to offer. To sustain themselves in the near future, they will have to acquire smaller firms with new offerings or risk the wrath of their customers. Second, new entrants and upstarts will cause radical disruptions because they bear less of the infrastructure cost and have less at risk when they innovate, so the table is set for disruption in any industry that isn’t very innovative now. Third, competitors in countries like India and China that are lending us money to drive our fiscal deficits are innovating, so we can expect more and more innovation from those firms and countries.

Right now many firms in the US are whistling past the graveyard, hoping to get through a tough economic climate and get back on solid footing. They are driving profits by squeezing more efficiency and returns from existing infrastructure and products, but at the same time creating an innovation deficit which they won’t be able to fill in the coming years. As nature abhors a vacuum, that innovation deficit or debt will be filled by someone, some firm or some country. Don’t kid yourself: short-term profits are coming at the risk of long term product and service innovation. Our businesses are creating an innovation debt to rival the debt rung up by our government, and sooner or later we will pay for the lack of investment.

Innovation, like tax collection, isn’t an on-again, off-again activity based on external conditions but a consistent requirement over time, which we may come to recognize at our peril.

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Jeffrey PhillipsJeffrey Phillips is a senior leader at OVO Innovation. OVO works with large distributed organizations to build innovation teams, processes and capabilities. Jeffrey is the author of “Make us more Innovative”, and

Jeffrey Phillips




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  1. rich servatius on September 6, 2011 at 9:56 am

    the usa has been outsourcing for far too long. companies as well as the government has allowed other counties access to our technology for so long that they have not only caught up to us, but surpassed us in many ways. Innovation, high demand for products, and cheap resources kept the usa in the economic forefront for decades. the high demand and innovation drove our manufacturing, while cheap resources allowed us to make, sell, and discard products. Our consumerism developed and now corporations are filling the demand with cheap labor from other countries and innovation is disappearing in the usa, while increasing in other countries that are following our past footsteps (China for example).

    I believe that the only way we will overcome our “laziness” is to start in elementary school by inspiring students in the sciences and continuing the inspiration all through education. Our education system is too broad and archaic now. Career counseling should start much earlier in life. Finding out what a student is capable of and inspiring that student towards a goal that suits the student should be one of our first goals.
    I also believe that our next step should be year around education. During the summer months the students should be studying strictly subjects that deal with their capabilities instead of a broad education.
    This will allow them to develop faster in some subjects, but will also weed out students that don’t make the grade if tracking and counseling are added all along their education years.

    When I was young computers were just being invented. The first calculator was being sold when I entered college. As a student, there was no information available to me concerning computer programming, design, or repair. There was no counseling at all for my first 13 years of school.
    It turns out that i wouldn’t have been a good computer programmer, builder, or repairman. But the interest was there as was the interest in the space program, cars, motors of any kind, and chemistry. History, geography, literature, and politics were boring subjects to our technology culture. The 1960’s changed our culture and our education system.

    Until we inspire our students into thinking that technology is great and not just computers; we will never regain our economic lead.

    Until we convince corporations that outsourcing is a bad idea; we will never regain our manufacturing capabilities and those corps. will eventually fail in the usa while succeeding in other countries. Already our tax laws allow a corp. to make billions out of country and not be taxable as long as the money doesn’t come into the usa. That lets corps. develop their out of country business and takes away in country business.
    But it makes money for investors..those corps. main goal. Soon no one will be able to make a profit strictly in country. Try to find products that are strictly made in the usa that are not food.

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