I consult, write, and speak on running better technology businesses (tech firms and IT captives) and the things that make it possible: good governance behaviors (activist investing in IT), what matters most (results, not effort), how we organize (restructure from the technologically abstract to the business concrete), how we execute and manage (replacing industrial with professional), how we plan (debunking the myth of control), and how we pay the bills (capital-intensive financing and budgeting in an agile world). I am increasingly interested in robustness over optimization.

I work for ThoughtWorks, the global leader in software delivery and consulting.

Saturday, April 30, 2022

Has Labor Peaked?

I wrote some time ago that labor is enjoying a moment. New working habits developed out of need during the pandemic that in many ways increased quality of life for knowledge workers. Meanwhile, an expansion of job openings and a contraction in the labor participation rate created a supply-demand imbalance that favored labor.

There appears to be confusion of late as to how to read labor market dynamics. With fresh unionization wins and increased corporate commitment to location independent working, is labor power increasing? Or with a declining economy and more people returning to the workplace (as evidenced by increases in the labor participation rate) is labor power near its peak?

The question, has labor peaked?, intimates a return to the mean, specifically that labor power will revert to where it was pre-pandemic (i.e., “workers won’t continue to enjoy so much bargaining power.”) The argument goes that fewer people have left the workforce than have quit jobs for better ones; that hiring rates have increased along with exits; that the labor participation rate has ticked up slightly; that labor productivity has increased (thus lessening the need for labor); and that demand is cooling (per Q1 GDP numbers). Toss in 1970s sized inflation compelling retirees to return to the workforce and there’s an argument to be made that labor’s advantages will be short lived.

But this argument is purely economic, focusing on scarcity in the labor market that has created wage pressure. For one thing, it ignores potential structural economic changes yet to play out, such as the decoupling of supply chains in the wake of new geopolitical realities. For another, it ignores real structural changes in the labor market itself, things like labor demographics (migrations from high-tax to low-tax states), increased workplace control by the individual laborer (less direct supervision when working from home), and improvements in work/life balance.

The question, has labor peaked?, becomes relevant only when there is an outright contraction in the job market. For now, the better question to ask is how durable are the changes in the relationship between employers and employees? It isn’t so much whether labor has the upper hand as much as labor has more negotiating levers than it did just a few years ago. The fact that there hasn’t been a mad rush to return to pre-pandemic labor patterns suggests employers are responding to structural changes in labor market dynamics.

Trying to call a peak in labor power is a task wide of the mark. And for now, the more important question still seems some way off from being settled.

Thursday, March 31, 2022

Crowding Out

Tech has had a pretty easy ride for the last twenty years. It only took a couple of years for tech to recover from the 2001 dot-com crash. In the wake of the 2008 financial crisis, companies contracted their labor forces and locked in productivity gains with new tech. Mobile went big in 2009, forcing companies to invest. Then came data and AI, followed by cloud, followed by more data and AI. The rising tide has lifted a lot of tech boats, from infrastructure to SaaS to service providers.

The ride could get a little bumpy. Five forces have emerged that threaten to change the corporate investment profile in tech.

  1. Labor power: workers have power like they've not had since before the striking air traffic control workers were fired in the early 80s, from unions winning COLAs in their labor agreements to the number of people leaving their jobs and in many cases, leaving the workforce entirely. Labor is getting expensive.
  2. Interest rates: debt that rolls over will pay out a few more basis points in interest rates than the debt it replaces. Debt finance will become more expensive.
  3. Energy inflation: energy prices collapsed before the pandemic, only for supply to contract as energy consumption declined with the pandemic. It takes longer for production to resume than it does to shut it off. True, energy is less a factor on most company income statements than it was fifty years ago, but logistics and distribution firms - the companies that get raw materials to producers and physical products to markets - will feel the pinch.
  4. Supply chain problems: still with us, and not going away any time soon. Sanctions against Russia and deteriorating relations with China will at best add to the uncertainty, at worst create more substantive disruption. By way of example, the nickel market has had a rough ride. And there has been increasing speculation in the WSJ and FT of food shortages in parts of the world. As companies stockpile (inventory management priorities have shifted from “just in time” to “just in case”) and reshore supply chains, supply chain costs will rise. Supply will continue to be inconsistent at best, inflationary at worst.
  5. Increase in M2: adding fuel to all of these is a rise in M2 money supply. More money chasing fewer items drives up prices.

All of these except for interest rate rises have been with us for months, and we’ve lived with supply chain problems for well over a year now. These factors haven’t had much of an impact on corporate investment so far, largely because companies have successfully passed rising costs onto their customers. Even if real net income has contracted, nominal has not, so buybacks and dividends haven’t been crowded out by rising expenses.

But the economy remains in transition. Many companies are starting to see revenues fall from their pandemic highs. While rising interest rates may cool corporate spending, it has to cool a great deal to temper a labor market defined more by an absence of workers than an abundance of jobs. With real wages showing negative growth again, it will become more difficult for companies to pass along rising costs. Rising resistance to price increses will, in turn, put pressure on corporate income statements.

Of course, this could be the best opportunity for a company to invest in structural change to reduce labor and energy intensity, as well as to invest for greater vertical integration to have more control over upstream supply, with an eye toward ultimately changing its capital mix to favor equity over debt once that transformation is complete. That’s a big commitment to make in a period of uncertainty. Whereas COVID presented a do-or-die proposition to many companies, there is no cut-and-dried transformational investment thesis in this environment.

Monday, February 28, 2022


Silicon chips are in short supply, ports are congested, and as a result new cars are expensive. The shortage of new cars has more people buying used, and as a result, used cars are fetching ridiculously high prices as well. The same phenomenon of supply shortages and logistics bottlenecks have been playing out across lots of basics, manufacturing and agricultural industries for months now.

At the same time, we have M2 money supply like we’ve never seen. All that cash is pursuing few investment opportunities, which bids them up. Excess liquidity seeking returns has inflated assets from designer watches to corporate equity.

Supply shortages twined with excess capital have created inflation like we’ve not seen in nearly 40 years.

Included among the supply shortages is labor. The headline numbers in the labor market have been the number of people leaving the workforce and the labor participation rate: fewer people of eligible age are working than before the pandemic, and many have simply checked out of the labor market forever, electing to live off savings rather than income. This means those who are working can command higher wages. In the absence of productivity gains, higher wages contribute to the inflationary cycle, because producers have to pass the costs onto consumers. Inflationary cycles can be difficult to stop once they start.

But labor market tightness can do something else: it can be the genesis of innovation. When a business cannot source the labor it needs to operate, it innovates in operations to reduce labor intensity. By way of example, businesses contracted their labor forces (including the ranks of their core knowledge workers) in the wake of the 2008 financial crisis. While this reduced corporate labor spend, it put remaining workers under strain. Soon after the reductions-in-force, companies invested in technology to lock in productivity gains of that reduced force. Capitalizing those tech assets reduced their impact on the income statement while those investments were being made. Once recovery began and revenues rose, that tech kept costs contained, resulting in better cash flow from operations after the financial crisis than before.

We are potentially in an inverse of the same labor dynamics. Whereas in 2008 the corporate innovation cycle was driven by corporate downsizing of the labor force, today it is driven by the labor market downsizing itself. And just as in 2008, when it was a secular problem (finance had an abundance of labor, while tech did not), it is secular again today.

Among the labor markets suffering a supply shortage is K-12 education. Education has become a less attractive occupation since the pandemic. A highly educated cohort disgruntled with work is an attractive recruiting pool for all kinds of employers.

The exodus of people from the teaching profession has created a shortage of teachers. The K-12 operating model is based on physical classroom attendance of teacher and student at increasingly high leverage ratios - 20, 30, 35 students to one teacher. This model becomes vulnerable with a scarcity of teachers. Classroom dynamics - not to mention physical facilities - don’t scale beyond 35 or 40 K-12 students in a single classroom. If there are fewer people willing to teach in the traditional paradigm, then the teaching profession will be under pressure to change its paradigm in one way or another.

I’ve written before that technology is generally not a disruptive agent. Technology that is present when socioeconomic change is happening is simply in the right place at the right time. Where there are acute labor shortages today - public safety, education, restaurant dining - the socioeconomic change is certainly afoot. What isn’t obvious is whether the right tech is present to capitalize on it.

Monday, January 31, 2022

How City Hall Can Fight City Hall

I live in a rural area. There isn’t a whole lot of agriculture or heavy industry, but there are a lot of inland lakes and national and state forest acreage. No surprise that one of the principal industries here is tourism. It’s a year-round industry as the area supports fishing and hunting, silent and motorized water- and winter-sports, youth summer camps and RV parks. A great many of the local businesses cater to tourists, from bait shops to bars, resorts to equipment rental, boat docks and off-season boat storage.

Like any community, there is tension. One source of tension has to do with how the land is used. There are those who advocate for more motorized activities (e.g., open more roads to ATV / UTVs) and those who advocate for less (e.g., more no wake zones on lakes). To some extent, the motorized v non-motorized debate is a proxy fight for the tourism industry. It is believed that opening more roads for ATV usage will bring more people into town centers where they’ll spend money, at the cost of noise pollution. Similarly, it is believed that creating more no wake zones will reduce shoreline erosion beneficial to homeowner and habitat alike, at the cost of vacationer experience. The extent to which the tourist is accommodated is, like any economic issue, very complex: the year-round resident who is dependent directly or indirectly on tourism has different goals from those of the year-round resident who is not dependent on tourism, or the non-residents with a second home here, or the tourists who visit here for a myriad of reasons. While an economic phenomenon, it is inherently political, and there are no easy answers.

Unsurprisingly, some flashpoints have emerged. One, specifically regarding land usage, has to do with income properties. From roughly 2008 until 2019 or so, real estate in this area was inexpensive, a long-lived aftereffect of the 2008 financial crisis (fewer buyers) as well as changes in where and how people vacationed (fewer tourists). COVID-19 changed this. With international borders closed and vacation options limited, people vacationed where they had once spent their summers. Some stayed permanently. The property market went from stone cold to red hot in a matter of months as people gobbled up properties as first and second homes as a means of social distancing while working or vacationing.

COVID-19 also put a premium on rental properties. This created an acute supply shortage. Low interest rates and cash accumulated by households made for a lot of willing property investors. Quite a few bought properties, hired tradespeople to fix them up (or fixed them up themselves), and listed them on vacation rental property sites.

The trouble is, while the properties may have been improved, many didn’t get the building inspections required for an income property, nor the permits required to rent out the properties.

The zoning commission for at least one county here is treating this as a compliance problem, which of course it is. They’ve done an analysis (more about that in a bit) and concluded there are hundreds, possibly thousands of properties that are out of compliance. They have also concluded that the task of (a) ascertaining whether they are in fact out of compliance and (b) bringing them into compliance will be time consuming and difficult.

A different way of looking at this is as a fraud problem. Property owners without permits are defrauding the county (out of tax revenues) and their customers (that the property is up to building code, health & safety code, and the like).

Fraud management consists of three types of activity: prevention, detection, and investigation. Let’s start with detection. The county entered into an arrangement with a software company that analyzes rental property sites and county tax filings to identify (that is, detect) which properties are out of compliance (committing fraud). According to their analysis, there are somewhere between 700 and 2,000 potential income properties in the county without the appropriate inspections and permits.

This brings us to investigation. Two thousand properties potentially out of compliance may not sound like a lot, but it is when there are only a few building inspectors who work for the county. Plus, many of the property owners receiving citations in the mail are disputing them in court, delaying resolution and tying up an already limited staff of inspectors. This doesn’t just point out the problem of labor intensity of inspections as much as it makes clear how the scale of the problem has changed: something that had for decades been a problem at a human scale is now at machine scale. While scaling the detection of the problem was relatively easy, scaling the inspection will not. Sure, a small fleet of drones could probably assist with investigation and alleviate some of the labor intensity, but that would require the county to spend money on both labor and tech for a limited solution with no guarantee of results.

Which leads us to prevention, the third activity of fraud. The best way to make the investigation activity manageable is to prevent it from getting out of control in the first place. Yes, the numbers suggest it is already excessive, but the amount of undeveloped land in this area up for sale suggests there is room for more property development. Plus, per our earlier definition, fraud is committed with every rental of an out-of-compliance property, so in theory the intent would be to prevent the next rental of an out-of-compliance property.

Practically speaking, there is very little a single county or even a handful of counties with small tax bases can do to prevent fraud like this. Prevention will probably require state-level-legislation, and by several states. There have been similar actions taken by state governments. For example, in the past five years most states have enacted marketplace facilitator laws to make it easier for the multitude of state, county and municipal level departments-of-revenue to collect sales taxes from online marketplace retailers: instead of needing to collect from the individual merchants, the marketplace facilitator is responsible for collecting and remitting sales taxes. States could similarly enact legislation obligating property rental booking services to require listing owners to register valid permits at risk of penalty for non-compliance, and report rental data to counties where properties are rented. The onus would then arguably be on the vacation property listing sites to confirm merchant compliance, which would be checked via periodic audit similar to a sales tax audit of an online marketplace. There would still be leakage (there will always be) but not likely as much as there is today.

“You can’t fight city hall” has a different meaning today. Half a century ago, it meant the individual couldn’t expect to win a fight with a government bureaucracy. Today, a county bureaucracy can’t expect to win a fight against the modern day equivalent (socioeconomic trends of cheap capital and changing vacation patterns amplified by tech). But one thing has not changed: the underdog can only win by redefining the problem, and collaborating with many others to change the rules of the game.