The use and abuse of scenarios

Although it is surprisingly hard to create good ones, they help you ask the right questions and prepare for the unexpected. That is hugely valuable.

November 2009 • Charles Roxburgh

Source: Strategy Practice

Scenarios are a powerful tool in the strategist’s armory. They are particularly useful in developing strategies to navigate the kinds of extreme events we have recently seen in the world economy. Scenarios enable the strategist to steer a course between the false certainty of a single forecast and the confused paralysis that often strike in troubled times. When well executed, scenarios boast a range of advantages—but they can also set traps for the unwary.

There is a significant amount of literature on scenarios: their origins in war games, their pioneering use by Shell, how to construct them, how to move from scenarios to decisions, and so on. Rather than attempt anything encyclopedic, which would require a book rather than a short article, I have put forward my personal convictions, based on experience in building scenarios over the past 25 years, about both the power and the dangers of scenarios, and how to sidestep those dangers. I close with some rules of thumb that help me—and will, I hope, help you—get the best out of scenarios.

The power of scenarios

Scenarios have three features that make them a particularly powerful tool for understanding uncertainty and developing strategy accordingly.

Scenarios expand your thinking

You will think more broadly if you develop a range of possible outcomes, each backed by the sequence of events that would lead to them. The exercise is particularly valuable because of a human quirk that leads us to expect that the future will resemble the past and that change will occur only gradually. By demonstrating how—and why—things could quite quickly become much better or worse, we increase our readiness for the range of possibilities the future may hold. You are obliged to ask yourself why the past might not be a helpful guide, and you may find some surprisingly compelling answers.

This quirk, along with other factors, was most powerfully illustrated in the recent meltdown. Many financial modelers had used data going back only a few years and were therefore entirely unprepared for what we have since seen. If they had asked themselves why the recent past might not serve as a good guide to the future, they would have remembered the Asian collapse of the late 1990s, the real-estate slump of the early 1990s, the crash of October 1987, and so on. The very process of developing scenarios generates deeper insight into the underlying drivers of change. Scenarios force companies to ask, “What would have to be true for the following outcome to emerge?” As a result, they find themselves testing a wide range of hypotheses involving changes in all sorts of underlying drivers. They learn which drivers matter and which do not—and what will actually affect those that matter enough to change the scenario.

Scenarios uncover inevitable or near-inevitable futures

A sufficiently broad scenario-building effort yields another valuable result. As the analysis underlying each scenario proceeds, you often identify some particularly powerful drivers of change. These drivers result in outcomes that are the inevitable consequence of events that have already happened, or of trends that are already well developed. Shell, the pioneer in scenario planning, described these as “predetermined outcomes” and captured the essence of this idea with the saying, “It has rained in the mountains, so it will flood in the plains.” In developing scenarios, companies should search for predetermined outcomes—particularly unexpected ones, which are often the most powerful source of new insight uncovered in the scenario-development process.

Broadly speaking, there are four kinds of predetermined outcomes: demographic trends, economic action and reaction, the reversal of unsustainable trends, and scheduled events (which may be beyond the typical planning horizon).

• Demography is destiny. Changes in population size and structure are among the few highly predictable aspects of the future. Some uncertainties exist (potential increases in longevity, for example), but only at the margin. Sometimes, the effects of these trends are far off—as with Social Security in the United States today—so they are generally ignored. When these trends grow near, however, their effects can be powerful indeed, as when the baby boom generation is on the brink of leaving the workforce.
• “You canna change the laws of economics!” Just as Scotty the engineer could not change the laws of physics when Captain Kirk¹ demanded more warp speed, so business leaders cannot assume away the laws of economics. If demand shoots up, prices will too—which will limit demand and drive increasing supply—with the result that demand, prices, or both will drop. Nothing increases in price forever, in real terms. We recently saw oil prices more than double and then sink back again by an equal amount. Price changes of this scale inevitably drive supply and demand reactions in every relevant value chain. As in physics, every economic action has a predetermined reaction. These reactions are often ignored in business strategy. If uncovered through scenario planning, however, they can generate powerful insights.
• “Trees don’t grow to the sky.” Business plans often extrapolate into the future trends that are clearly unsustainable. Economies are fundamentally cyclical, so beware of politicians bearing tales about the end of boom and bust. Equally, do not build a strategy based on the claim that the business cycle has been tamed. Often, optimistic projections are accompanied by bold claims of a new paradigm. Strategists need to be very cautious about alleged new paradigms. The appearance of even a genuine new paradigm almost always results in a speculative bubble. The “new economy” was a good example. More recently, securitization proved to be another sound idea that resulted in a speculative bubble. And in the past, many new, innovative technologies—railroads and radio, for example—were hailed as “new paradigms” and then promptly led to investment bubbles. A useful test is to project a trend at least 25 years out. Then ask how long can this trend really be sustained. Challenge yourself to try and prove why the shape of the future should be so fundamentally different from the more cyclical past. Chances are you won’t be able to, and this will open your eyes to the possibility of a break in the trend.
• Scheduled events may fall beyond typical planning horizons. There is also a simpler kind of predetermined outcome that does not involve any unalterable laws: scenarios must take into account scheduled events just beyond corporate planning horizons. A recent example, the results of which we have already seen, is reset dates on adjustable-rate mortgages. Well before the event, one could have predicted a spike in resets as mortgages sold in 2005 and 2006—the peak years—completed their low, three-year introductory rates. Something bad was going to happen to the economy in 2008. Right now, there is another important “timetable” to watch: the wave of large bond issues that has resulted from banks having to refinance hundreds of billions of dollars of maturing debt. Although these types of scheduled events ought to be common knowledge, they tend to be overlooked in planning exercises because they fall beyond the next 12 to 18 months. Scenarios should account for scheduled events that could have a big impact in the 24–60 month time frame.

While some errors can be avoided by recalling certain fundamental economic and demographic facts or scheduled events, problems of timing will continue to exist. Your company’s strategic planners may know that a massive dollar value of mortgages is about to reset. But when will the market actually wake up to this reality? Financial services cannot grow as a percentage of GDP forever. But at what percentage will this stop? We didn’t know before, and we still don’t know today. Still, the realization that something must happen, even if it is not clear when, leads to the inclusion of at least one scenario in which, say, financial services stop growing sooner rather than later.

Scenarios protect against ‘groupthink’

Often, the power structure within companies inhibits the free flow of debate. People in meetings typically agree with whatever the most senior person in the room says. In particularly hierarchical companies, employees will wait for the most senior executive to state an opinion before venturing their own—which then magically mirrors that of the senior person. Scenarios allow companies to break out of this trap by providing a political “safe haven” for contrarian thinking.

Scenarios allow people to challenge conventional wisdom

In large corporations, there is typically a very strong status quo bias. After all, large sums of money, and many senior executives’ careers, have been invested in the core assumptions underpinning the current strategy—which means that challenging these assumptions can be difficult. Scenarios provide a less threatening way to lay out alternative futures in which the these assumptions underpinning today’s strategy may no longer be true.

Avoiding the common traps in using scenarios

For all these benefits, there is a downside to scenarios. Inexperienced people and companies are prone to fall into a number of traps.

Don’t become paralyzed

Creating a range of scenarios that is appropriately broad, especially in today’s uncertain climate, can paralyze a company’s leadership. The tendency to think we know what is going to happen is in some ways a survival strategy: at least it makes us confident in our choices (however misplaced that confidence may be). In the face of a wide range of possible outcomes, there is a risk of acting like the proverbial deer in the headlights: the organization becomes confused and lacking in direction, and it changes nothing in its behavior as an uncertain future bears down upon it.

The answer is to pick the scenario whose outcome seems most likely and to base a plan upon that scenario. It should be buttressed with clear contingencies if another scenario—or one that hasn’t been imagined—begins to emerge instead. Ascertain the “no regrets” moves that are sound under all scenarios or as many as possible. Ultimately, the existence of multiple possibilities should not distract a company from having a clear plan.

Don’t let scenarios muddy communications

The former CEO of a global industrial company once suggested that scenarios are an abdication of leadership. His point was that a leader has to set a vision for the future and persuade people to follow it. Great leaders do not paint four alternative views of the future and then say, “Follow me, although I admit I’m not sure where we are going.”

Leaders can use scenarios without abdicating their leadership responsibilities but should not communicate with the organization via scenarios. You cannot stand up in front of an organization and say, “Things will be good, bad, or terrible, but I am not sure which.” Winston Churchill’s remarks about British aims in World War II—“Victory at all costs, victory in spite of all terror, victory however long and hard the road may be”—are instructive. By insisting on only one final outcome, Churchill was not refusing to acknowledge that a wide range of conditions might exist. What he did was to set forth a goal that he regarded as what we would call “robust under different scenarios.” He was acknowledging the range of uncertainties (“however long and hard the road may be”), and he resisted overoptimism (which affected many bank CEOs early in the recent crisis).

A chief executive, a prime minister, or a president must provide clear and inspiring leadership. That doesn’t mean these leaders should not study and prepare for a number of possibilities. Understanding the range of likely events will embolden corporate leaders to feel prepared against most eventualities and allow those leaders to communicate a single, bold goal convincingly.

One additional point about communication and scenarios is worth noting. Scenarios can help leaders avoid looking stupid. A wide range of scenarios—even if not publicly discussed—can help prevent leaders from making statements that can be proven wrong if one of the more extreme scenarios unfolds. For instance, one financial regulator boldly announced, early in the financial crisis, that its banking system was, at the time, capitalized to a level that made it bulletproof under all reasonable scenarios—only to announce, a few months later, that a further recapitalization was required. Similarly, the head of a large bank confidently suggested that the downturn was in its final phases shortly before the major indexes plummeted by 25 percent and we entered a new and even more dangerous phase of the crisis. Many CEOs have given hostages to fortune; scenarios would have helped them avoid doing so.

Don’t rely on an excessively narrow set of outcomes

The astute reader will have noticed that the above-mentioned financial regulator managed to embarrass itself even though it was using scenarios. One of the more dangerous traps of using them is that they can induce a sense of complacency, of having all your bets covered. In this regard at least, they are not so different from the value-at-risk models that left bankers feeling that all was well with their businesses—and for the same reason. Those models typically gave bankers probabilistic projections of what would happen 99 percent of the time. This induced a false sense of security about the potentially catastrophic effects of an event with a 1 percent probability. Creating scenarios that do not cover the full range of possibilities can leave you exposed exactly when scenarios provide most comfort.

One investment bank in 2001, for instance, modeled a 5 percent revenue decline as its worst case, which proved far too optimistic given the downturn that followed. Even when constructing scenarios, it is easy to be trapped by the past. We are typically too optimistic going into a downturn and too pessimistic on the way out. No one is immune to this trap, including professional builders of scenarios and the companies that use them. When the economy is heading into a downturn, pessimistic scenarios should always be pushed beyond what feels comfortable. When the economy has entered the downturn, there is a need for scenarios that may seem unreasonably optimistic.

The breadth of a scenario set can be tested by identifying extreme events—low-probability, high-impact outcomes—from the past 30 or 40 years and seeing whether the scenario set contains anything comparable. Obviously, such an event would never be a core scenario. But businesses ought to know what they would do, say, if some more virulent strain of avian flu were to emerge or if an unexpected geopolitical conflict exploded. Remember too that it would not take a pandemic or a terrorist attack to threaten the survival of many businesses. Sudden spikes in raw-material costs, unexpected price drops, major technological breakthroughs—any of these might take down many large businesses. Companies can’t build all possible events into their scenarios and should not spend too much time on the low-probability ones. But they must be sure of surviving high-severity outcomes, so such possibilities must be identified and kept on a watch list.

Don’t chop the tails off the distribution

In our experience, when people who are running businesses are presented with a range of scenarios, they tend to choose one or two immediately to the right and left of reality as they experience it at the time. They regard the extreme scenarios as a waste because “they won’t happen” or, if they do happen, “all bets are off.” By ignoring the outer scenarios and spending their energy on moderate improvements or deteriorations from the present, leaders leave themselves exposed to dramatic changes—particularly on the downside.

So strategists must include “stretch” scenarios while acknowledging their low probability. Remember, risk and probability are not the same thing. Because the risk of an event is equal to its probability times its magnitude, a low-probability event can still be disastrous if its effects are large enough.

Don’t discard scenarios too quickly

Sometimes the most interesting and insightful scenarios are the ones that initially seem the most unlikely. This raises the question of how long companies should hold on to a scenario. Scenarios ought to be treated dynamically. Depending on the level of detail they aspire to, some might have a shelf life numbered only in months. Others may be kept and reused over a period of years. To retain some relevance, a scenario must be a living thing. Companies don’t get a scenario “right”—they keep it useful. Scenarios get better if revised over time. It is useful to add one scenario for each that is discarded; a suite of roughly the same number of scenarios should be maintained at all times.

Remember when to avoid scenarios altogether

Finally, bear in mind the one instance in which strategists will not want to use scenarios: when uncertainty is so great that they cannot be built reliably at any level of detail.² Just as scenarios help to avoid groupthink, they can also generate a groupthink of their own. If everyone in an organization thinks the world can be categorized into four boxes on a quadrant, it may convince itself that only four outcomes or kinds of outcomes can happen. That’s very dangerous. Strategists should not think that they have all reasonable scenarios when there are quite different possibilities out there.

Don’t use a single variable

The future is multivariate, and there are elements strategists will miss. They should therefore avoid scenarios that fall on a single spectrum (“very good,” “good,” “not so good,” “very bad”). At least two variables should be used to construct scenarios—and the variables must not be dependent, or in reality there will be just one spectrum.

Some rules of thumb

Obviously, some general principles can be assembled from the points above: look for events that are certain or nearly certain to happen; make sure scenarios cover a broad range of outcomes; don’t ignore extremes; don’t discard scenarios too quickly just because short-term reality appears to refute them and never be embarrassed by a seemingly too pessimistic or optimistic scenario; understand when not enough is known to sketch out a scenario; and so on. But there are some additional rules of thumb that I have found particularly useful.

Always develop at least four scenarios

A scenario set should always contain at least four alternatives. Show three and people always pick the middle one. Four forces them to discover which way they truly lean—an important input into the discussion. Two is always too few unless there is only one big swing factor affecting the situation.

Technically, of course, many scenarios can be sketched out in almost any situation. All possible combinations of just three uncertainties will create 27 scenarios. But many of them will be impossible because the variables are rarely completely independent. Usually, the possibilities can be boiled down to four or five major possible futures.

“Crunch” the quadrants

Often people use a two-by-two matrix when presenting scenarios. But it is not routinely the case that there are just two major variables. In developing scenarios, it would be typical to identify three to five critical uncertainties. How to resolve this tension? One approach is to create multiple two-by-twos using all possible combinations of the four or five critical uncertainties. It will quickly become clear that some uncertainties are highly correlated and so can be combined—and that others are not principal drivers of the various scenarios. At minimum, this will allow for simplification. Sometimes, however, it is possible to uncover a real insight when trying to describe a quadrant created by an unusual combination of uncertainties.³

There should always be a base or central case

This point goes back to the chief executive, mentioned above, who claimed that scenarios were an abdication of responsibility. It is fine to put forward scenarios—it is, in fact, the responsible thing to do. But those who must weigh scenarios and reach decisions based on them expect and deserve to get a specific point of view about the future. The scenario that is highest in probability should always be identified, and that ought to become the base case. If that proves impossible, it should at least be feasible to fashion a “central” case—but there must be crystal clarity about the degree of certainty attached to it, the alternatives, and the resilience of any strategy to those alternatives.

Scenarios must have catchy names

The notion of attaching clever names to scenarios may well sound trivial. It is not. Unless scenarios become a living part of an organization, they are useless. And if they do not have snappy, memorable names, they will not enter the organization’s lexicon. Use two to four words—no more. Plays on film titles and historical events are recommended. Some names that I have used, and that appear to have stuck, are “Groundhog Day,” “the long chill,” “perfect summer,” “end of an era,” “silver age,” and “Mexican spring.”

Avoid long, descriptive titles. No one will remember “Restrengthening world economy at a lower level of overall growth.” And avoid boring “bull, bear, and base” scenarios, even though these are used by many stock analysts. If no snappy title seems to present itself (assuming that someone creative is available), the scenario is probably too diffuse and may contain elements of two different scenarios jammed together.

Learn from being totally wrong

Developing scenarios is an art rather than a science. People learn by experience. It is useful to look back at old scenarios and ask what, in retrospect, they missed. What could have been known at the time that would have made for better scenarios? Events will prove that some scenarios were too narrow or that one was thrown out too soon. The more comfortable an organization and its people are with mistakes and learning from them, the less likely it is to be mistaken again.

Listen to contrary voices

This is a good corrective to groupthink. We tend to dismiss the mavericks. Scenarios are there to make room for them. Maverick scenarios have the virtue of being surprising, which makes people think. If a company’s scenarios are all completely predictable (conventionally good, conventionally bad, and somewhere in the middle), they are not going to be valuable. The best scenarios are built on a new insight—either something predetermined that others have missed or an unobvious but critical uncertainty.

On one occasion, when oil was at $120 a barrel, we presented a scenario with oil at $70. Someone asked what would happen if oil dropped to $10 a barrel. We said that was unnecessarily radical. But we probably should not have been so dismissive, as oil promptly fell below $50 a barrel. We should have been more open to the possibility of this radical price swing—after all, oil has been at $10 a barrel well within living memory. Scenarios should not assume a short-term time series; they should go back as far as possible. If a data series going back 300 years is available, you should consider using it (they do exist for UK interest rates and UK government debt as a percentage of GDP and these long-term data series have certainly informed current debates about the possible interest rates and sustainable debt to GDP ratios). Most variables can only be supported by data going back tens of years—but even this is much more instructive than the meager data often used and helps broaden the range of possible outcomes.

Even modest environmental changes can have enormous impact

The best example of this principle is that specialist business models fail when the business environment changes. I call this the “saber-toothed tiger” problem. The saber-toothed tiger was a specialist killing machine, its big teeth perfectly evolved to capture large mammals. When the environment changed and the large mammals became extinct, saber-toothed tigers became extinct too—those large teeth were not as good for catching small, furry mammals. By contrast, the shark is a generalist killing machine—and so has remained highly successful for hundreds of millions of years.

A specialist business model can suffer the fate of the saber-toothed tiger if the environment changes. Many winning business models are highly specialized and precisely adapted to the current business environment. Therefore no one should ever assume that today’s winners will be in an advantaged position in all possible futures (or even most of them). Therefore, scenarios should be based on creative thinking about how predicted changes in the business environment will alter the competitive landscape. If the environment changes in a scenario but the competitors remain the same, that scenario may not be imaginative enough.

None of the above is rocket science. Why, then, don’t people routinely create robust sets of scenarios, create contingency plans for each of them, watch to see which scenario is emerging, and live by it? Scenarios are in fact harder than they look—harder to conceptualize, harder to build, and uncomfortably rich in shortcomings. A good one takes time to build, and so a whole set takes a correspondingly larger investment of time and energy.

Scenarios will not provide all of the answers, but they help executives ask better questions and prepare for the unexpected. And that makes them a very valuable tool indeed.

About the Author

Charles Roxburgh is a director in McKinsey’s London office.

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Notes

¹ For the uninitiated, Scotty and Captain Kirk are two characters from Star Trek, a famous US science fiction television series from the 1960s.

² For more, see the McKinsey Quarterly’s interview with author Hugh Courtney, “A fresh look at strategy under uncertainty.”

³ I am grateful to Pherson Associates, specifically Randy Pherson and Grace Scarborough, for bringing this technique to my attention. I have found it extremely powerful in a number of client settings.

© Copyright 1992-2009 McKinsey & Company

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The $64,000 question

Nov 2nd 2006
From The Economist print edition

Can private coaching get results that intelligence and hard work cannot?

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WHAT shape is an egg? Why is the sky blue? Students who have just applied to Oxford and Cambridge for next year are obsessed with such questions. And entrepreneurs who promise to help them find definitive answers for the interviews they hope to have are cashing in. Amid fierce competition (27,800 have applied for an estimated 6,500 Oxbridge places next year), pushy parents and pragmatic secondary schools are shelling out for private coaching.

Oxbridge Applications, an admissions consultancy started by James Uffindell in 1999, is thriving, with turnover last year of £450,000. The company says it helps a tenth of Oxbridge applicants each year, and this assistance does not come cheap. Commissioning a draft application costs £120 and, for those with rather more cash to splash, £850 buys a weekend preparing for the all-important college interview. A new company set up in January, the Oxford Mentoring Scheme, offers applicants year-round support. For £390, students are advised by Oxford graduates and put through mock interviews to practise their technique.

Such private-coaching firms are especially popular among state schools, who want to buy for their students the sort of intensive preparation that independent schools give their own Oxbridge hopefuls. Mr Uffindell says that two-thirds of his clients come from the state sector.

In America, making money out of the college-application process is a long-established business. Kaplan, founded 68 years ago, has helped around 3m students prepare for standardised scholastic-aptitude tests (SATs). Its business is booming now: revenues were $1.4 billion (£770m) in 2005, compared with $89m ten years ago.

But not everyone has embraced this American export. Many at Oxford and Cambridge fear that professional coaches make their universities seem inaccessible. These firms portray the interview process as mysterious and intimidating, and this deters potential applicants from poor and minority backgrounds, says Geoff Parks, director of admissions at Cambridge.

The value of such preparation is questioned too. Oxbridge Applications claims that its clients are twice as likely to be offered places as those who go into their interviews cold, but one Oxford fellow believes coaching is counterproductive. The interview process is designed to get beyond what a candidate has been taught, says Emma Smith, an English tutor at Hertford College.

Proponents of private coaching put such criticism down to Britain's fondness for the gifted amateur and a reluctance to call in professionals in order to maximise your advantages. Demand for private coaching looks set to rise as pressure on places among the dreaming spires intensifies. With applications for entrance to Oxford and Cambridge up by 4.3% this year, more students may decide to cast amateur status to the winds and go for the commercial competitive edge.

Capturing talent

Aug 16th 2007 | HONG KONG
From The Economist print edition

Despite its booming economies and huge numbers of people, Asia is suffering a big shortage of skills. And it is about to get worse

Imaginechina

IT SEEMS odd. In the world's most populous region the biggest problem facing employers is a shortage of people. Asia has more than half the planet's inhabitants and is home to many of the world's fastest-growing economies. But some businesses are being forced to reconsider just how quickly they will be able to grow, because they cannot find enough people with the skills they need.

In a recent survey, 600 chief executives of multinational companies with businesses across Asia said a shortage of qualified staff ranked as their biggest concern in China (see chart 1) and South-East Asia. It was their second-biggest headache in Japan (after cultural differences) and the fourth-biggest in India (after problems with infrastructure, bureaucracy and wage inflation). Across almost every industry and sector it was the same.

Old Asia-hands may find it easy to understand why there is such concern. The region's rapid economic growth has fished out the pool of available talent, they would say. But there is also a failure of education. Recent growth in many parts of Asia has been so great that it has rapidly transformed the type of skills needed by businesses. Schools and universities have been unable to keep up.

Taking wing

This is especially true for professional staff. Airlines are one example. With increasing deregulation, many new carriers are setting up and airlines are offering more services to meet demand. But there is a dreadful shortage of pilots. According to Alteon Training, the commercial-pilot training arm of Boeing, India has fewer than 3,000 pilots today but will need more than 12,000 by 2025. China will need to find an average of 2,200 new pilots a year just to keep up with the growth in air travel, which means it will need more than 40,000 pilots by 2025. In the meantime, with big international airlines training only a few hundred pilots a year, Asian airlines have taken to poaching them, often from each other. Philippine Airlines, for instance, lost 75 pilots to overseas airlines during the past three years. China has been trying to lure pilots from Brazil, among other places.

Similar problems are bedevilling the legal profession, which is suffering from a grave shortage of lawyers and judges. This can cause a long backlog of cases and other complications in what are sometimes rudimentary legal systems. It can damage the way business is done, for instance in dealing with intellectual property or settling contract disputes. According to the All-China Lawyers Association, the country has only 122,000 lawyers. That is 70,000 fewer than California where the population is only 37m (against China's 1.3 billion). Many business people might argue that California is overlawyered, but there are parts of China without any lawyers at all.

A report presented at the Chinese Party Congress in March by the Jiu San Society, a group of progressive Chinese intellectuals, stressed the shortage of doctors. There are only 4,000 general practitioners in China. But if the government is to achieve its ambition of establishing community hospitals for the country's 500m urban residents, it will need 160,000 doctors to staff them. There is a huge shortage of nursing staff as well.

The scarcity of accountants is already having a regional impact. In order to list their shares in Hong Kong or Shanghai, many Chinese companies are busy preparing internationally acceptable accounts and statutory reports. With the country's own bean-counters trained in Communist-era systems—which never paid heed to capitalist ideas like profits or assets—accountants are being lured to the mainland from Hong Kong and the rest of the region. A senior manager at one of the big audit firms recently arrived in Hong Kong after a long stint in Russia, took one look at his firm's ambitious growth plans and asked: “How are we going to do this without enough staff?”

Technical skills, particularly in information technology, are lacking in many parts of the region, even India. One of the main concerns is that there are not enough skilled graduates to fill all the jobs being created in a vibrant sector. Nasscom, which represents India's software companies, has estimated that there could be a shortfall of 500,000 IT professionals by 2010. This means companies recruiting at job fairs in India are having to make lucrative offers to capture the most promising students. Even a junior software-engineer can expect to take home $45,000 a year.

There is also a severe shortage of good managers. A study by the McKinsey Global Institute predicts that 75,000 business leaders will be needed in China in the next ten years. It estimates the current stock at just 3,000 to 5,000. And that assessment could prove optimistic. The study, which covered a broad spectrum of businesses and surveyed more than 80 human-resources managers, found that less than “10% of Chinese job candidates, on average, were suitable for work in a foreign company.” In engineering, for example, graduates were criticised for being too immersed in theory and not enough in practice. It concluded that the available pool of engineering talent in China was no larger than that in Britain, which now has a mostly service economy.

China is even suffering from something of a brain drain. In recent years the Chinese have been able to travel abroad more freely to study and acquire skills. But many do not return. A recent report by the Chinese Academy of Social Sciences found that between 1978 and 2006, just over 1m Chinese went to study overseas and some 70% of them did not go back. The brightest are often tempted to stay abroad by local employers, because the competition for jobs has become global.

The skills shortage comes in two forms: higher staff turnover and rising wage costs. Pay rates for senior staff in many parts of Asia already exceed those for similar staff in much of Europe. The going rate for a human-resources director working for a medium-to-large multinational in Shanghai is now $250,000 a year, and that is for “someone who has probably never even left China,” says Vanessa Moriel, the managing partner of Human Capital Partners, a Shanghai-based consulting firm. The chief executive of an international business based in India can expect to earn $400,000-500,000, with many earning well over $750,000, according to Korn/Ferry, a consultancy. For a chief finance officer the average pay is now $194,000 in China, $159,000 in Thailand, $157,000 in Malaysia and $73,000 in India. Wages for lower-level staff are also rising quickly, increasing by 14% in Indonesia last year, 11% in India and 8% in China—well above the rates of inflation in each country.

Another year, another job

A high staff-turnover rate helps to force up wage costs, and turnover-rates can exceed 30% a year in some places in Asia. Fiducia, a Hong Kong-based consultancy, reckons that the additional hiring and training costs of operating in Asia add a further 15% to the basic costs of employing someone. Factories in southern China now plan for a 4% loss of staff just in the week immediately after Chinese New Year, because people seem to like to start the new year with a new job. In middle management, the average retention period of an employee in Shanghai is just 1.8 years, with human-resources managers among the most difficult to keep. Some job applicants are known as “jumpers” because of their tendency to switch jobs every two years.

Struggling with high staff-turnover is harder still when many firms are also trying to expand. Last year Flextronics, a big electronics manufacturer, wanted to increase staff numbers in Shenzhen from 27,000 to 43,000. But to get a net increase of 16,000 people, it had to hire more than 20,000 because over the same period it had 4,000 employees leave.

As well as excessive wage inflation there is also “title inflation” and “responsibility inflation”. Relatively inexperienced local managers are sometimes given ever-grander titles—much to the chagrin of their counterparts from Europe and America, who can find themselves sitting beside much less able and more junior colleagues described as “Senior Executive Vice President” or “Regional Chairman”. But these honours are handed out for a reason: many employers in Asia have found that awarding new titles to employees every 18 months or so can be a good way to keep them.

Giving greater responsibility to staff is more troublesome. Yet many inexperienced managers in China are being given powerful regional roles or are promoted to positions where they lack sufficient knowledge or ability. Even though they may not seem ready for the job, it is often seen as the only way to keep them on the payroll.

A problem for years to come

As if all this were not bad enough, the Asian talent shortage is set to get worse. The predicted inflow of investment, together with the growth of local companies and the rising expectations of foreign investors—especially as other markets are slowing—mean that the pressure to find and keep staff is mounting.

Demography will also play a big role, especially as labour forces in both China and Japan shrink over the next two decades. This means, for instance, that the already difficult job of finding creative software-engineers will become ever harder in northern Asia, which in turn will increase demand for staff in India and other markets where demographic problems do not exist.

But that only points to an even bigger threat which may take a generation to fix: education. In much of South-East Asia most people are educated only to the age of 12. More than half of the women in India are illiterate. Nearly two-thirds of the children in government primary schools in India cannot read a simple story. Half cannot solve simple numerical problems.

China's educational difficulties are different—and often linked to the country's history. Universities were closed during the Cultural Revolution and few well-educated people entered the workforce for over a decade. This has resulted in a lost generation of business people between the ages of 50 and 60, exactly the age group from where many of China's corporate leaders should be drawn today.

Those who were children (and typically without siblings because of China's one-child policy) after the Cultural Revolution have other things to deal with. Their parents had often been sent for re-education in the fields and many were brought up far away from home by strangers. Perhaps in response to this harshness, they have brought up their own children rather indulgently. What is known as the “little emperor syndrome” is a particular weakness in boys. Many older Chinese believe this younger generation, doted on by grandparents and parents, lacks a work ethic. It has even become a bit of a slur to say of someone that “they were born in the 1980s”.

Girls born after the Cultural Revolution are much less likely to have been spoilt, which means some employers see them as good hires. Liam Casey, the boss of PCH China Solutions, a contract-manufacturer in southern China, says he once noticed in a shopping mall that there were typically groups of seven people or groups of three. The groups of seven consisted of two sets of grandparents, parents and a boy. Those of three comprised parents and a daughter. He says he realised then that girls were valued less by society and that if he hired them and showed them loyalty, they would be more loyal in return. This is one reason, he says, that his business has much lower rates of staff turnover than his rivals' businesses do.

But even hiring women is getting harder. In Zhuhai another foreign manufacturer which hires staff from all over China says it prefers to recruit women too. The managers believe that women are generally harder-working and tend to stay longer. But schools and universities have cottoned on to this now and set quotas on the number of women that firms can recruit. The company says that for every group of women it selects, it now has to hire a share of men too.

Team building

In the face of so many problems, what can employers do? Building a skilled workforce is as much about a company's general attitude as its tactics, says Michael Bekins, the managing director of Korn/Ferry in Hong Kong. The first part of that mindset is realising that retention is more important than recruitment, he says. He thinks all managers in Asia should be explicitly measured on their ability to keep a team together.

Some ways of doing that are more obvious than others. Paying higher wages to employees, say most managers and recruitment specialists, is certainly not enough. Pay should be seen as only part of any package. Delaying bonus payments with a reward at the end of say, three years, can work well, but increases costs. Offering career planning, training, “personal-development road maps”, mentoring and the rest of the modern HR kitbag seems to go down well (see chart 2), though managing expectations is critical. One company in South-East Asia has a “welcome the boomerangers” policy, making it easy for anyone who has left to come back. The big accounting firms have programmes to keep in touch with people who leave.

Some employers argue that you should focus on the family not just the employee. Offering support for children's education and helping the families of staff resettle can build loyalty. With expatriates, this is crucial. According to one consultant, 85% of expatriates in China leave because their families do not like living there. Life can be especially hard in smaller cities, where there are few other foreigners, international schools or decent restaurants and little to do in your time off. Many spouses complain of feeling like prisoners in their gated communities while their partners are away, heady with the thrill of running the firm's fastest-growing division.

There are less obvious ways to keep people too. A prestigious brand can be valuable in more ways than one; Asians seem attracted to the idea of working for well-known firms. Having a fashionable office can be a big help. And providing courses in stress management or etiquette can be attractive. So is giving staff club memberships. Even providing staff with the latest PDAs and mobile phones can work wonders (see chart 2). And, if a company has a canteen, it should make sure it hires a good chef.

One of the more creative options for employers is to offer flexible working hours and sabbaticals. Although these are unusual in Asia, they can help staff who have young children or elderly parents to care for. But there are some dangers. It is common, especially in China, for employees to run private businesses on the side. Giving them more time for outside activities may not be in a company's best interests. It could also be counterproductive in some parts of Asia, were workers want a job in order to make as much money as fast as they can.

Hiring Asians who have been educated overseas and bringing them back does not always work. They often expect to be paid a lot. Some demand expatriate packages with paid flights back to America or Europe. They may also be out of touch with local developments. But the biggest difficulty is that their colleagues frequently resent them. This is especially so in China, where one of the politer names for returning people is hai gui or sea turtles. A similar attitude sometimes turns up in India too. Companies find that the turtles tend to fit in best in the finance industry or in privately owned businesses.

With such a mismatch between supply and demand in Asia's labour markets, companies will have to become better at hiring good staff and keeping them. But as some companies will always be better at this than others, the job-hopping and poaching are set to continue for many years, until education and training catch up. The consequences of that are stark. “It will limit the growth. It has to,” says Korn/Ferry's Mr Bekins. Which means that without talented recruiting policies, some firms may end up scaling back their bold Asian growth-plans.

Closing the knowledge gap

Nov 19th 2008

Queen Rania of Jordan urges the Arab world to embrace innovation in education

The first day of school. Waleed trudges through the gates, head down and shoulders slumped. But as he enters the school yard, he notices something has changed. The building’s cracked walls have been fixed and painted. The concrete yard has become a playground. In a few moments, he will enter a renovated classroom. Over the next few weeks, he will take part in computer labs, be mentored by volunteers from some of Jordan’s biggest companies and join in extracurricular music and sports with students from a private school that is “twinning” with his. In 2009, for the first time, Waleed will look forward to going to school.

The transformation has been wrought by Madrasati (“My School” in Arabic), a national programme I launched in 2008 which links businesses, local leaders and communities in support of Jordan’s neediest public schools. Collaborative planning helps to turn dilapidated neighbourhoods into vibrant community hubs. Madrasati is based on the simple idea that every citizen has a stake in our children’s education.

Regrettably, this spirit of shared responsibility is still nascent in my part of the world. Despite our significant investments in education and our successes in boosting enrolment and gender parity, Arab educational systems lag behind those of many other regions. The result is a knowledge gap that holds the Arab world back. I believe that closing this gap must be among the Arab region’s top priorities—not only for 2009, but for years to come.

Across the Arab states, almost 57m adults are illiterate, two-thirds of them women. More than 6m children are not enrolled in primary school, the majority of them girls. Too many Arab school systems are based on rote learning, instead of encouraging our children to question, explore and create. We’ve also failed to build strong bridges between schools and the private sector—with the paradox that even as we produce more graduates than ever, unemployment among the young is especially high, and many of our brightest students end up pursuing careers abroad.

Clearly, we cannot afford to keep squandering so much of our talent. With more than half our region’s population under the age of 25, the next 15 years give the Arab world a promising demographic edge: we will have the highest ratio of potential workers to dependants of any region in the world. But in order to make the most of this, we must create real opportunity for our youth.

That is why I believe the Arab world must embrace what I’ll call “the three Rs 2.0”—not simply ensuring the fundamentals of reading, writing and arithmetic, but revamping our curricula, rewarding our best teachers and reinforcing the link between our classrooms of today and the workplaces of tomorrow.

With more than half our region’s population under the age of 25, the next 15 years give the Arab world a promising demographic edge

It’s a daunting agenda, but Jordan has shown that real change can take root in desert soil—and that innovative educational practices can be exported region-wide.

The lamp of learning

In 2003, for example, we launched the Jordan Education Initiative (JEI), combining public-sector commitment with private-sector creativity to bring internet-enabled learning to our schools. Today, JEI technology is in more than 100 schools nationwide—allowing science teachers to bring virtual experiments to the classroom, and humanities teachers to draw on innovative e-curricula. More than just wiring schools, JEI is sparking new ways of teaching, and the model is now being replicated in Egypt, Palestine and India.

INJAZ, another example of dynamic partnership for learning, connects students with private-sector volunteers who offer seminars on topics from economics to ethics to entrepreneurship—as well as on practical skills like public speaking or writing résumés. Founded in Jordan in 1999, INJAZ has spread to 12 other Arab countries and aims to reach 1m Arab youths a year by 2018.

At the same time, we’re investing in the people who bring the Arab world’s classrooms to life. In collaboration with Columbia University’s Teachers College, a new Jordanian teaching academy will soon train teachers from across the region.

Other Arab nations are taking important and innovative steps of their own, from Yemen waiving tuition fees for young girls and Egypt creating more girl-friendly schools to Morocco targeting literacy programmes at disadvantaged populations. In Dubai, the Mohammed bin Rashid al Maktoum Foundation aims to invest $10 billion towards building Arab knowledge capital through teacher training, scholarships, research grants, youth leadership development, and more. In Qatar, a 2,500-acre Education City is home to branch campuses of some of the world’s top academic and research institutions.

In 2009 such initiatives must gather momentum, reigniting the lamp of learning and discovery that lights the Arab world’s way ahead. We in Jordan will do our part.

Spreading the gospel

Jul 31st 2008 | MEXICO CITY AND NEW YORK
From The Economist print edition

An effort to promote entrepreneurship in the developing world is bearing fruit

www.endeavor.org

Spoleto juggles with its strategy

EARLIER this year Mario Chady faced a crucial decision. Having built up Spoleto, his chain of casual Italian restaurants, to 150 outlets in Brazil, and opened in Mexico and Spain, the time had come for Mr Chady, based in Rio de Janeiro, to choose between expanding into America or putting the idea on hold for at least 18 months. To help make up his mind, he asked for help from an organisation called Endeavor, which had chosen him as a potential “high-impact entrepreneur” in 2003.

Endeavor is a non-profit group based in New York dedicated to promoting entrepreneurship in emerging economies. It had already supplied three teams of students from the Massachusetts Institute of Technology to help Mr Chady craft a strategy for America. But as he spoke to members of the Endeavor network, ranging from leading Brazilian business tycoons to fellow up-and-coming entrepreneurs, he became convinced that it was the right strategy but the wrong time. Mr Chady decided to concentrate on expanding even faster in Brazil, and leave America for later. “The US economy is not at a very good stage, whereas Brazil is very hot now. Endeavor helped me see this,” he says.

It is routine for entrepreneurs to consult their networks of mentors in Silicon Valley. But in much of the world, such networks are notable by their absence—and so, too, are examples of Silicon Valley-style successful entrepreneurship. Changing this was why Endeavor was created in 1997.

“Why can’t the next Silicon Valley pop up in Cairo or São Paulo or Johannesburg?” asks Linda Rottenberg, who co-founded Endeavor with Peter Kellner, a venture capitalist. Fresh from Yale, she was working in Buenos Aires for Ashoka, an organisation that supports social entrepreneurs—people with innovative, usually non-profit ideas for solving social problems—and concluded that ordinary entrepreneurs needed a similar support system. Much of the difference between countries such as America, where entrepreneurship thrives, and those where it does not is cultural rather than regulatory, she believes. In many emerging economies, business tends to be dominated by a closed elite hostile to new entrepreneurs—and failure is stigmatised, rather than being a badge of honour, as it is in Silicon Valley.

The making of a start-up

Getting Endeavor started required some classic start-up doggedness of its own. At first, the philanthropic foundations Ms Rottenberg courted regarded the project as too elitist. “They complained that we were only trying to build a middle class, not to help the poor, despite all the academic evidence that a strong middle class is essential to prosperity,” she recalls. Eventually Stephan Schmidheiny, a Swiss industrialist who has given away a large chunk of his fortune in Latin America, was persuaded to provide some seed capital, and Endeavor was up and running, initially in Argentina and Chile. Today it operates in 11 countries, including South Africa, Turkey and, most recently, Jordan.

Endeavor’s magic works most powerfully in its selection process. Entrepreneurs are screened first by a national panel of successful businessmen, and then, if they are short-listed, by an international panel. So far over 18,000 entrepreneurs have been screened but fewer than 400 have been chosen. The aim is to identify those who can succeed on a scale that will make them into national role models, and then provide them with every possible support. But the process is designed to benefit all entrants, by helping them define their visions more clearly.

Endeavor’s national boards are rosters of leading tycoons—the founders of InBev in Brazil, Jennifer Oppenheimer in South Africa and Lorenzo Zambrano, boss of Cemex, in Mexico, for example. The international board, chaired by Edgar Bronfman Jr, boss of Warner Music, is even more august. At a selection meeting in Turkey in June, the panel included Daniel Och, a hedge-fund boss, Naguib Sawiris of Egypt’s Orascom Telecom, Brian Swette, the chairman of Burger King, and Ali Koç of Koç Holdings. “It is a lot of fun. You go to all these nice places in the world, find all these young enthusiastic people, who you get to help. Sometimes you invest, maybe make some money,” says Ali Mehmet Babaoglu, a Turkish textile tycoon.

Once the selection process is over, these business figures then become mentors to the entrepreneurs. “Endeavor’s genius has been to get the establishment in these countries together, not to kill these entrepreneurial companies but to support them,” says Bill Sahlman, a professor at Harvard Business School who was recruited as an adviser early on.

Endeavor’s entrepreneurs—who collectively now control companies with combined revenues of $2.4 billion and 91,000 employees, earning on average ten times the minimum wage in their country—rarely say they would not have succeeded without Endeavor. But they all believe they got bigger much sooner thanks to its endorsement and support. Leonardo Shapiro ofVeriFone, a maker of online credit-card payment systems, describes as “priceless” the advice he got from Pedro Aspe, a former finance minister of Mexico, before he flew to meet a potential American buyer of his firm, and the legal help Endeavor arranged from White & Case, which although not pro bono “was at a very interesting discount, and pay it when you can.”

One of Endeavor’s earliest successes was Wenceslao Casares, who sold Patagon, his Argentine internet brokerage, to Banco Santander for $705m at the peak of the dotcom bubble. He believes Endeavor has started to change cultural attitudes in the countries where it has been active for a while, mostly in Latin America. “When I said I was going to start a business, it was against everyone’s advice, from my family to my university,” he says. “Now, go to the same university and the same professors will tell you that one of their goals is to produce good entrepreneurs.”

Brazil is perhaps most vibrant of all. Endeavor’s successes include Leila Velez, who grew up in a favela and whose beauty salon firm, Beleza Natural, now has revenues of $30m, and Bento Koike, whose wind-turbine-blade manufacturing firm, Tecsis, recently struck a $1 billion deal to supply mighty General Electric.

Going global

Endeavor has “created islands of hope,” says Mr Casares. Now it must find ways to “change continents, not just little islands.” This has been recognised by Endeavor’s global board, which recently adopted an ambitious plan to expand to 25 countries by 2015. Endeavor is confident that it now knows how to adapt its model to new countries, having learnt from early stumbles in Chile, South Africa and Turkey. Fadi Ghandour, the Jordanian boss of Aramex, a logistics firm, believes there is much potential in the Arab world, which is full of young would-be entrepreneurs who have “discovered the new thing, that it pays to have an idea, not rely on land or investing.”

Funding has long been a problem for Endeavor. As a non-profit, it has to rely on donors—many recruited through a glitzy annual gala in New York—which has been tough at times, as in the months after the terrorist attacks of September 11th 2001. Would it make more sense to be a for-profit operation? Endeavor has struggled constantly with whether to pursue profits, but each time has concluded no, says Ms Rottenberg, who also says she declined the chance to set up a $100m fund focused on emerging-market entrepreneurs. “If Endeavor had been an investor, rather than an independent, objective, non-profit enabler, it would not have been trusted by the business elite, or the entrepreneurs,” she insists. “Trust is everything.”

Happily, Endeavor has high hopes of moving onto a stronger financial footing. In some countries where it operates, starting with Brazil, successful entrepreneurs are signing up to a “give back” programme, donating 2% of their equity to Endeavor. With luck this could soon make the national operations self-sustaining. Moreover, on July 31st Omidyar Network, the philanthropic organisation set up by Pierre Omidyar, who made his money in Silicon Valley by founding eBay, announced a $10m investment to build up the capacity of Endeavor’s global operations. “Endeavor is already having a significant impact,” says Matt Bannick, managing partner at Omidyar Network. “Given capital, it could grow rapidly.” Watch this space.

Krista Goon

A mentor is someone who helps you see what you can't and tells you about the pitfalls before you encounter them. A mentor is like a parent and teacher rolled into one. He/she looks out for you and looks after you yet never interfering or telling you what you should do. He/she merely advises in the kindest and gentlest way but allows you to grow and makes decisions on your own.

Like an angel, he/she is never too far to ask for advice or help though the mentor should resist from offering financial

assistance. The mentor should be wise enough to step back and let the mentee learn sometimes. The mentor should point the mentee in the right direction but it is entirely up to the mentee to take the path. He/she never stinges on sharing (advice or resources) all he/she knows about what the mentee wants to know.

A mentor is someone you can turn to for advice because his experience, skills and commonsense far surpass one's own. ;-) We don't need to make the same mistakes or go through the same problems because we can learn from a mentor.