Underground Markets: A Macro Risk Factor or a Better Supply Chain Model?

January 17, 2012 § Leave a comment

Recently, I read through the latest World Economic Forum “Global Risks 2011”  report which is an initiative of the Risk Response Network.  It’s an impressive assessment of global risks produced in cooperation with Marsh & McLennan, Swiss Re, Wharton Center for Risk Management, University of Pennsylvania and Zurich Financial.  What is compelling about the report is it is not simply a survey result or a list ranking, rather it details and illustrates the interrelationships between risk areas; identifying the causes in an effort to identify points of intervention.  The report highlights response strategies and even proposes long term approaches.

As with any risk report, it has a tendency to feel alarmist, but its value and content cannot be dismissed and its emphasis on response is encouraging.  The two most significant risks the report identifies are relative to economic disparity and global governance.  The main point being that while we are achieving greater degrees of globalization and inherent connectedness, the benefits are narrowly spread with a small minority benefitting disproportionately.  Global governance is a key challenge as each country has differing ideas on how to promote sustainable, inclusive growth.

The Rise of the Informal Economy

The report goes on to highlight a number of risks including the “illegal economy”.  The illegal economy risk includes a cluster of risks: political stability of states, illicit trade, organized crime and corruption.  Specifically, the issue lies with the failure of global governance to manage the growing level of illegal trade activities.  In a recent book by Robert Neuwirth entitled, “Stealth of Nations: The Global Rise of the Informal Economy”, the author estimates that off-the-books business amounts to trillions of dollars of commerce and employs half of all the world’s workers.  If the underground markets were a single political entity, it’s roughly $10 trillion economy would trail only the US in total size.   Further, it’s thought to represent in the range of 7-10% of the global economy and it’s growing.  To be clear, underground markets are not only dealing in illegal substances, crime, prostitution or drugs.  It’s mostly dealing in legal products.  Some of the examples Mr. Neuwirth provide include:

  • Thousands of Africans head to China each year to buy cell phones, auto parts, and other products that they will import to their home countries through a clandestine global back channel.
  • Hundreds of Paraguayan merchants smuggle computers, electronics, and clothing across the border to Brazil.  
  • Scores of laid-off San Franciscans, working without any licenses, use Twitter to sell home-cooked foods.  
  • Dozens of major multinationals sell products through unregistered kiosks and street vendors around the world.

A Global Risk?

Are the underground markets really a global macro-economic risk?  Mr. Neuwirth makes solid arguments that these markets provide jobs and goods that are essential to these populations and that it is the corrupt authorities in most developing countries that are being worked around.  In some ways, it can be argued that these unlicensed vendors and importers are the purest of capitalists; innovatively providing goods by avoiding intervention.  In a recent interview in WIRED magazine, Mr. Neuwirth points out that Procter & Gamble, Unilever, Colgate-Palmolive and other consumer products companies are selling through small unregistered, unlicensed stores in parts of the developing world.   He goes on to point out that P&G’s sales in these unlicensed market’s make up the greatest percentage of the company’s sales worldwide.  I found this tidbit shocking.  Really, a company that brings in over $80 Billion in revenue a year is actually pulling in most of its revenue through unlicensed channels?  Now, that doesn’t mean P&G is directly selling through those channels, but they sell through distributors that may use others that do sell through to unlicensed vendors who don’t pay taxes.

The WEF concludes that illicit trade has a major effect on fragile country states given that the high value of commerce and resulting high loss of tax revenues impinge on national salaries and government budgets.  An example that’s included in the report is that of Kyrgyzstan.  “Members of the Forum’s Global Agenda Councils argue that the undermining of state leadership and economic growth by corrupt officials and organized crime contributed significantly to social tensions which erupted in violent conflict in June 2010, causing widespread destruction, hundreds of civilian deaths and the displacement of 400,000 ethnic Uzbeks.” 

The Threat to Quality and Public Safety

So, if you were guess what type of goods top the list of sales that take place in these underground markets, what would you guess? Cocaine? Opium? Software Piracy? Cigarettes smuggling? Small arms?  Topping the list with a rough estimate of $200 billion in value is counterfeit pharmaceutical drugs.  Just behind at $190 billion is prostitution.   Which leads me to the next serious risk issue if global efforts don’t improve to govern these markets: quality.  I’m not qualified to address the quality of prostitution, but let’s consider the quality of counterfeit pharmaceuticals and the general issue of public safety.  If these markets go unregulated and unmonitored, we are likely to see terrible abuse by profiteers whose only concern is to bring high value products to market quickly.  No regulation also means an inability to create safe work environments and to protect rights of laborers all along the supply chain.

On the other hand, the vast majority of workers and consumers in developing countries thrive because of these markets.  A strong effort to disrupt or disband these markets would cause a high degree of distress in communities that rely on these markets for access to essential goods.  But in return, without tax revenue that can only be gathered from legitimate, licensed businesses can governments function and provide oversight services that would benefit quality and public safety concerns.  It’s an endless loop as we say in the software world; a true catch-22.   Even relatively well functioning supply chain operations at pharmaceutical companies in developed countries are consistently challenged to maintain a high degree of quality (note recent impact of product recalls at Novartis).  Considering how much effort and money is spent on quality assurance, inspections, and FDA audits on legitimate pharmaceuticals, it’s beyond scary to consider the quality of counterfeit pharmaceuticals that are circulating in illicit markets.

Within the US, in the state of California, we’ve seen recent evidence of solutions such as bringing the trade of marijuana within the framework of the law.  Potential results include ensuring quality and safety for the public, raising tax revenue and reducing the profits of organized crime.  Still, the issue of economic disparity is a much tougher nut to crack.  Widening gaps in income within all economies provide incentive for lower income individuals to work outside of established trade structures.  This incentive leads to greater illicit trade which in turn hinders a government’s ability to effectively tax businesses and provide services such as regulatory oversight. 

Can We Govern Illicit Markets?  And If So, Should We?

These are obviously very difficult challenges, but ones that the WEF is analyzing in an effort to form solutions.  The relationships between economic disparity, illicit commercial trade, public safety and government corruption becomes glaringly clear.  How can the global community govern these illicit markets?  They exist everywhere to some degree, even in the US where informal markets are estimated to account for 10-20% of GDP.  One solution that WEF recommends is to strengthen financial systems.  The implication is that weakened systems are the result of the heightened volatility and risk deriving from the recent capital markets crisis.  With diminished confidence comes incentive to work outside the system.  Some suggestions include:

  • Better surveillance of the financial sector, including all systemically relevant players
  • Tighter capital and liquidity ratios for all banking institutions (including non-banks), with higher ratios for systemically relevant institutions
  • Risk retention for securitization (so-called “skin in the game”)
  • Improved transparency and counterparty risk management in “over-the-counter” derivative markets

Perhaps the most interesting part of this global risk challenge is how interrelated these issues are.  The influence that government corruption has on illicit markets is direct, but not the only factor.  Further, the ability of governments to regulate, control and tax this commerce is not straight-forward and overly severe policies can prove detrimental to workers and consumers.  And how much do other factors such as financial stability contribute to activity moving outside conventional channels?  There is no certain view on these underground markets as we must consider why they exist, for whom they exist and how valuable they are for the good of all.

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Make It Work

November 17, 2011 § Leave a comment

I’m old enough to have been on the leading edge of personal computing technology.  At eighteen years old, I sold my beloved drum kit to buy one of the first IBM PC computers; no hard drive, just two floppy drives, one for the program and one for data.  I was obsessed with specifications and design; reading every computer magazine I could find – comparing the Commodore 64 to the Kaypro II or maybe the TRS-80.  These early machines had big differences and like the early days of the automobile, you had to be part engineer to know what you were looking at.  For the next twenty plus years, while consolidation occurred and the PC, Windows platform dominated, hardware specifications was always a big factor when choosing a computer.  Clock speed, chip type, drive capacity, cache, video card, etc, all became a part of the lexicon for computer shoppers.  But this has changed in a big way the past few years; and good riddance.  MG Siegler’s recent post on techcrunch, clearly articulates this change in the computer market.  In reading this post, it brought me back to when I first adopted portable digital music technology, using MP3 and varying devices. 

The iPod Experience

The iPod had been released, but I was still very much a PC guy and I just wanted to small player that fit in my pocket and cost no more than about $150.  I bought a product from a company called Digital River which used Microsoft Media Player or some earlier version of it and had loads of problems.  Often times songs didn’t sync or were lost.  As a user, I found the method of ripping music, loading them to the player and managing my music very confusing and it simply did not work as I would expect.  Ultimately, my user experience was poor and after several other attempts at using other Microsoft platform products, I eventually ended up with an iPod.  Once I had that first iPod, it was clear to me that the platform worked well and my experience was dramatically improved.  What Apple understood was how to take the product from the end user experience perspective and make it easy and pleasurable.  The design work that went into the iPod was not only elegant and simple, the entire ecosystem that included iTunes was also a vast improvement over the alternatives.  Quite simply, it worked.  And it worked significantly better than anything out there. 

Now, as I’m working with software technology within Life Sciences companies, I’m seeing similar trends in approach.  No longer is it as important to focus on and flaunt the incremental improvements in specifications as it is to understand and address end-user experiences.  Product design and specifications are not only about the specifications; but how end users respond to the product itself.  Last week I spent time meeting with a medical device manufacturer, discussing my company’s software product, but we took a break at one point.  Members of one of the product teams tested a product in our conference room and one of our team members was asked to test the product and provide feedback from the user perspective.   He was able to give the product team advice on what he was experiencing and how it was working for him.  Ultimately, the product’s success in the market will be determined more about how the user reacts to using the product –  more so than the specifications that are listed on the label.

Talking Cars

Mr. Daniel R. Matlis has again written an apropos article entitled, “Is That Car a Medical Device?”.  Here, he interviews Robert B. McCray, President and CEO of the Wireless Life Sciences Alliance, WLSA.  It’s a fascinating view into what is happening on the forefront of medical device development and how wireless technology is improving patient’s health management.  The key development with these technologies is not just the capabilities these devices can deliver, but how the patient experiences the device’s use that will determine its success.  Mr. Matlis notes, “A great example of the use of convergence [medical technology, connectivity and consumer devices] to support this challenge is Ford’s In-Car Health and Wellness Solutions. Researchers at Ford, in partnership with Medtronic and WellDoc, have developed a series of in-car health and wellness apps and services aimed at monitoring people with chronic illnesses or medical disorders so they can manage their condition while on the go.”  Several major advancements are at work with these developments; increased speed of information to patients, improved monitoring of their conditions, decreased therapeutics and treatments for patients through lower need for diagnoses.   Perhaps most importantly, patients will not require as many diagnoses and treatments with real-time monitoring.  In turn, it’s the experience of patients that what will drive adoption for these technologies.

The Internet of Things

The expression, “The Internet of Things” sounds kind of goofy – a bit like the title of a children’s book.  This phrase is commonly used to describe the connectivity of the wide variety of devices to the web.  Whether through 3G, 4G, or Wi-Fi, varying appliances, medical devices, automobiles, you name it, are quickly coming online.  They are sending status messages; in TIBCO terms, “events”, to the web.  For example, I recently purchased an all electric vehicle, the Nissan Leaf.  One of the features of the car is that it sends data wirelessly about the current state of the battery.  Using an iPhone app, I can get full details on the battery’s charge status and I can opt to get text messages or email notifications when certain events or thresholds are crossed.  This capability adds tremendous value to my experience as I feel in greater control over the state of battery life remaining which is the biggest concern when owning this type of car.  Similarly, medical devices such as glucose monitors can be enabled to send data directly to the web and alerting patients via text, email or even having their car speak to them if and when specific conditions exist.  Now, I’m not certain of the exact capabilities that WLSA, Ford or others will bring to market, but one thing is certain: the customer experience will determine how well the product is accepted and demanded in the marketplace.

Making it Work with all that data

When I wrote this title, I couldn’t help hearing the voice of Tim Gunn from the show “Project Runway” uttering his famous tag line.  At the end of the day, organizations who are bringing products to market are seeing a massive opportunity coupled with a massive challenge.  The convergence of medical devices, consumer devices, and ubiquitous connectivity brings enormous potential and with it the challenge of handling a tidal wave of event data that is frequently sent by a massive volume of devices.  How should data be managed?  Again, taking the customer perspective, the end user wants this data to be monitored and reported immediately for specific conditions.  Especially, when we’re talking about medical devices that are monitoring critical patient physical conditions – the response must be fast.  Patients cannot have the data sent to some massive data repository, stored and then queried periodically.  This is the method of data storage and search that is quickly becoming antiquated. 

21st Century Architecture

Capabilities exist with TIBCOs platform to perform what is referred to as pattern event matching or complex event processing (CEP).  These capabilities allow organizations to look at patterns within sets of events that may indicate specific conditions.  Within the Life Sciences sector, the movement towards creating greater value and usability with connected devices is growing.  The software platform that supports these capabilities is critical toward realizing that value.  In order for medical device companies to provide near real-time status to a patient, the system must utilize software that cannot only capture that data, but analyze it as it is received and trigger actions based on user-driven rules.  For instance, using the glucose monitor example, every patient may have specific requirements that they want to personally set for when and how they are notified by the device.  Providing a platform that allows the user to easily set those rules and modify them whenever they choose enables a positive user experience.  For insurers, patients that are able to personally manage their condition will require less professional consultation and thus will reduce the overall care expense.

As Life Sciences and other sectors fully adopt 21st century information architecture, I see an evolving process management paradigm which in turn brings us new customer experiences.  As any good Six Sigma expert would tell you, the customer experience drives the requirements for quality.  Make it work for the customer experience and then you know you’re on to something.

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