The Ivey Interview: Robert Kennedy

Ivey Dean Bob Kennedy

Following an extensive international search by Western University, Robert (Bob) Kennedy officially became the new dean of Ivey Business School on October 1, 2013. The former head of the William Davidson Institute (WDI) at the University of Michigan’s Ross School of Business—who holds a Ph.D. in Business Economics from Harvard and a Masters in Management from MIT—brought extensive expertise on globalization with him. In this issue of IBJ, Ivey’s first academic dean in more than a decade discusses emerging market opportunities and the growing trend of offshoring services.  He also highlights the unique challenges facing business schools and the global economy.

IVEY: Let’s start with the obvious. What is it like being an American named Robert Kennedy?

BOB KENNEDY: Well, I am actually Robert Kennedy III, so I wasn’t named after the former U.S. Attorney General. That said, I do occasionally get very good restaurant reservations, especially in Boston.

IVEY:  As Ivey’s first academic dean in many years, you have said that one of your priorities is promoting the business school’s thought leadership. Your own expertise involves emerging markets and globalization. Following the financial crisis, globalization became a dirty word to many people. How do you see it?

RK:  Globalization is controversial, but it’s also one of the most important things a country can do to increase living standards. Keep in mind that comparative advantage is one key to getting rich as a nation. History tells us that the only way that countries get rich is by specializing in things that they do really well, while relying on other nations for things that they don’t do really well. Globalization is disruptive in the short run.  If you have an industry that’s not globally competitive, it will suffer when you open up to trade and investment and there will be related job losses. But the overall economy will benefit from better and cheaper resources from abroad.  That is, unless you work hard to avoid the short-term pain you will not enjoy the long-term gains.

IVEY:  From a business perspective, would you agree that managers need to understand that globalization is a process that will continue, whether people like it or not?

RK:  Yes. It’s like medicine that is really, really unpleasant. In the short term, you may feel better not taking it. But you have to take it to survive and thrive long term. Look at the United States, the European Union, China and India. They have all taken their medicine and opened up to the global economy. That’s when their economies really started to thrive, after letting foreign investment in and going after trade – both imports and exports. So while globalization causes discomfort, it’s really, really important for long-term growth.

IVEY: Can you tell us a bit about your book The Services Shift?

RK:  It’s a practitioner-focused book based on my research. Traditionally, globalization has occurred in resources and manufacturing. But it started to impact services in the 1980s and the impact has since accelerated. My book is about understanding what it means for managers in the developed world and what it means for opportunities in the developing world.

IVEY: What are the major takeaways?

RK: There are a few.  First, we have already observed a lot of offshoring in areas such as call centres and back-office accounting. We are going to see a lot more of it because the economic drivers behind the trend aren’t going away.

Second, to get the work overseas, firms have to put in new IT systems and digitize processes.  These steps typically generate a much larger return than the savings realized on labour. The real payoff is better tracking and more efficiency.

A third big takeaway is that managers need different skills. Someone sitting in a cubicle, managing via an analytical dashboard, can control a billion dollars’ worth of spend and manage several thousand people, inside and outside your company, all around the world. Managing a distributed network like this is very different than managing an environment in which you can walk around and get to know everyone who works for you.

IVEY:  Did the financial crisis reduce speed of the shift?  Or alter its characteristics in any way?

RK:  It caused a bit of a pause, mostly because the financial services sector was hit really hard and many of the largest offshoring clients are from the sector. The overall trend has resumed and continues. So there was a hiccup, but it hasn’t changed the trajectory.

IVEY: Your book notes offshoring is a game most companies must play. What about universities?

RK: Technology is clearly having a significant impact on certain segments of the education market. Learning basic statistics or accounting and other “tool-kit” learning can be done very effectively with electronic platforms. Massive open online courses, or MOOCs, are also garnering a lot of attention. Community colleges might be threatened.

Business schools like Ivey will be less affected. Our Case Method of Learning revolves around debate, which is incredibly hard to replicate online, at least effectively. And that’s only one of the things we do here. While we teach our students how to fill up their basic tool kit, we do much more than that. Students learn everything from how to make analytical arguments to how to respectfully disagree with people. They also learn in teams, which is important. The student with the highest IQ is unlikely to be the best student in every class because people are good at different things. Students go through an experience at Ivey that really sets them up to be successful in business. Some of it is content and some is process. And after they graduate, they become part of the Ivey network. Our alums are very successful, they come here to mentor and recruit, they do deals together and start business together, and those are things that you can’t replicate online.

IVEY:  Your book points out that some services we might have thought were safe, like equity research, now appear vulnerable to offshoring.  What’s the most startling example that you know about?

RK:  Genomics research was a surprise.  This is an area where you pretty much need a Ph.D. to contribute. It’s really high-end knowledge work. Nevertheless, some related work has moved offshore, where pharmaceutical companies have set up research labs to help design drugs and test drugs. When people think of trade, and particularly when they think of trade in services, what they imagine heading offshore is just low-end stuff like call centres. In reality, and there’s a whole chapter in my book on this, what makes an activity or a task amenable to going offshore doesn’t have anything to do with being low end. It has more to do with whether or not you have to be physically present.

IVEY: Generally speaking, will the service shift benefit all nations?

RK:  Some nations benefit more than others. Looking at the developing world, what really positions a country well for the services shift is having three foundational elements in place:  one, a relatively large English-speaking population; two, a reasonable higher-education infrastructure; and three, a relatively tech-savvy environment.  So, places like India, the Philippines, South Africa, and some parts of Egypt, Israel and Jordan are all well-positioned to attract a lot of business.

IVEY: What about developed nations like Canada?

RK: Developed nations benefit in a couple of ways. For example, if incomes go up in India or China, citizens of these countries import more of the stuff we’re good at producing – ranging from business education to banking services. It is true that if a developed nation manufacturer moves to offshore some activities, it hurts the people who are displaced from those specific jobs. But if a company like GM can take 40 or 50 per cent out of their accounting costs by moving some accounting operations to India, everyone who still works at GM is much better off because the company becomes more profitable, more nimble. Moving R&D offshore often shortens development cycles by half or two-thirds, so products make it to market quicker.  So there are obvious gains to both developed and developing nations.

IVEY: What other Canadian sectors stand to really benefit?

RK:  Canada is good at a bunch of things. Energy and natural resources are good examples. Financial services are another.  Education and manufactured goods also have huge exports.  If globalization raises incomes in the developing world, exports will rise in all these sectors, and the country will benefit.

IVEY: Where should international businesses focus their globalization efforts?

RK: About ten years ago, an article on the BRIC countries came out. It noted four countries—Brazil, Russia, India and China—have both the size and economic policies that would drive growth and transform the global economy. Today, almost no one thinks BRIC nations will be the fastest growing over the next 30 or 40 years. But if you are a large multinational with a 15 or 20-year view, you don’t go tiny. So BRIC nations became the focus of emerging market strategies because they are large enough to move the dial and they had economic houses in relatively good order. But for major companies, BRIC should just be a starting point. If you really want a global strategy, you take a 20 or 30-year view that looks beyond just four emerging nations.

IVEY: What other markets should companies target?

RK: A large multinational can’t really afford to ignore countries like Turkey, Indonesia, Nigeria, Kenya, Vietnam and South Africa. They are not as big as China or India, but they are very large and substantial countries that are growing quickly.

IVEY:  Do you see an eventual global comeback for unions?

RK:  Not really. The heyday of unions was from the late 40s, or early 50s, through the oil stocks in the 70s. The post-war period supported the heyday because 80 per cent of the world’s manufacturing capacity was destroyed in the war. North America basically supplied industrial goods to the world in the post-war period. And because geographic options were so limited, unions became very strong. Since the 80s, however, unions have been on the defensive because companies gained more choices. I am not saying unions are going away, but labour has less leverage to fight for increased wages and benefits in a globalized world with manufacturing opportunities spread out.

IVEY: Were you always interested in political science and economics?

RK:  When I was little I wanted to be a scientist or an astronaut. Then I went to an all-male Jesuit high school, where I was fascinated to learn about markets and the role of political power and regulation. Because I was really good in math and science, I figured I’d be an engineer. But I was really attracted to economics and political science and ended up getting degrees in both of these areas.

IVEY: As an economist, what worries you most when looking at the world stage?

RK:  The situation in Ukraine is obviously a concern. But at this point, severe imbalances in the global financial system are my major economic worry. The United States has a huge savings shortage driven by huge government deficits and low personal savings rates.  China and most of East Asia, on the other hand, have huge savings surpluses. That’s not sustainable. I don’t know how this will all unwind, but when the lending to the US slows down, interest rates will rise and I think the world’s largest economy is going to have an extended period of stagnation.

IVEY:  Do you think America’s days as manager of the world’s reserve currency are numbered?

RK: That’s a complicated question.  For the last 20 years or so, the international role of the United States—economically, militarily, culturally—has been almost unprecedented. A decline in American influence is inevitable. China is going to play a larger role. India is going to play a larger role. If Europe gets its act together, it has the potential to play a larger role. So looking forward two or three decades, I see a system with a few large influential players. But the US economy is still going to be by far the most important. China may pass America on total GDP, but that’s because they have four and a half times as many people.

IVEY: What else concerns you economically?

RK: Europe’s relatively generous social welfare system is not sustainable because the EU population is aging rapidly and the continent is below the replacement birth rate. So who will fund all those promises European governments have made to their people?  European economies are much less conducive to immigration or bringing other people in to do the work, so debt-to-GDP ratios are going to become an even bigger issue. It might take decades, but eventually this issue will lead to a dramatic restructuring of their social welfare systems.

IVEY: Do you think we’ve seen the last of the recent crisis involving Portugal, Ireland, Italy, Greece and Spain, the so-called economic PIIGS?

RK:  Well, the worst is over. Not over, but we’re past the worst point, certainly for Ireland and probably for Italy. There are still pretty big imbalances in Greece and enough to worry about in Spain and Portugal. These countries still have unsustainable debt levels.  How that is resolved, I think, is going to unfold over the next five to seven years.

IVEY: What about the political implications?

RK: That’s a wild card. It is easy for economists to say what troubled nations must do, but there is always public resentment over cuts to government services and other austerity programs. So nations like Greece can’t easily do what needs to be done because unpopular governments get overthrown. They don’t have the resources to make good on the promises they have made.  But that doesn’t make people any less mad about having promises made to them broken.  Even when resentment is irrational (because the money is not there), it still exists and plays a role.

IVEY: The same thing can be said about German resentment over supporting bailouts, right?

RK:  I agree with that. The Germans clearly benefited from exporting to Greece when it was spending money it couldn’t afford. But just because German exporters benefited doesn’t mean German banks feel an obligation to write off tens of billions of dollars. I don’t think there is an “aha” way to resolve this situation with everyone coming out ahead. It’s going to be a slow motion grind with periodic interruptions of economic turmoil for the next five to ten years.

IVEY: What are your thoughts on China?

RK: China is actually third on my list of big economic concerns. There is a dichotomy between the economy—where large portions of it are very Wild West, very free market, with very aggressive firms—and politics, which is still fairly centrally controlled. At some point, the economy and government system must come more into alignment. Either the politicians will move to exert more control over the economy, which would be hard, or the freedoms that citizens are used to in the market will lead to pressure for more political freedom. How the tension between economics and politics gets resolved is going to be something that will affect the whole world.

IVEY: We see the impact of emergency central bank policies in asset levels and stock markets. Do you think official inflation will eventually come back to haunt us?

RK:  I don’t know if it will haunt us. I hesitate to say there is going to be hyperinflation. But if I had to bet whether inflation would be higher or lower in five years, I’d go with higher. There has been a flood of liquidity since 2008, and a lot of it has gone into assets like houses and stocks that are not counted in the official inflation rate. When the economy starts to do a little bit better, there will be a lot of pent-up demand and people will spend more on goods and services. That’s when we will start to see inflation rise.

IVEY: You have had a successful career as a consultant, venture capitalist and academic. What attracted you to the Dean position at Ivey?

RK: I have moved back and forth between academia and the business sector throughout my career. And I have watched many schools become much more narrowly academic with less to say to students and business leaders. But Ivey is one of a handful of schools that continue to really engage businesses with work that is appropriate for facing real-world problems (others include Harvard Business School and Darden at the University of Virginia). That was a major attraction.

A second factor is that my father was Dean of Arts and Sciences at Creighton University in Omaha, so I’ve seen the impact that a successful Dean can have. I’ve been told I have a talent for administration. I was part of the Dean’s operating committee at Michigan, where I ran all the global programs. I’ve always been fascinated with how you run a business school as an organization. So the job matched my interests.

Third, my predecessor, Carol Stephenson, and her team anticipated changes in the education market prior to the financial crisis. They grew and reorganized the HBA program, they restructured the MBA program, and those are both working very well. So while the business education sector is in transition, Ivey is in good shape with strong programs and an incredible network of alums and recruiters. Ivey has a great foundation on which to build. After all the change in the past decade, the opportunity is to raise the school’s profile on the knowledge creation side of our “teacher-scholar” model.  That fits my skill set, so I jumped at the opportunity.

IVEY: Where will you focus your energy? 

RK: To be an elite business school, you need strong programs, a strong community of alumni and recruiters and strong knowledge creation. Ivey is doing great on the first two, so the opportunity is with the third leg of the stool. We can really build up Ivey’s already strong reputation for thought leadership. Another thing I will be doing is expanding our comparison group. Ivey has traditionally aspired to be best in Canada. But we compete globally for top-notch faculty and top-notch students, particularly at the graduate level. Our comparison group needs to be the top 10 or the top 25 schools in the world. It’s really important for us to benchmark versus global leaders, not just Canadian leaders. Ivey is perfectly capable of competing with that group.

IVEY: Do you have a particular management style?

RK:  Before I was an academic, I ran back office operations at Chase and I did some consulting and venture capital work. I learned you can’t manage the org chart. It’s important to have one-on-one relationships. When working with a new team, I tend to be pretty involved in details because I don’t know everyone’s skill set or how they match up with challenges we face. But once I have confidence in my team and we agree on both the vision and how to get there, I work really hard to back off and let people manage their own operations.

IVEY:  What was your most challenging assignment as a consultant and what did you learn from it?

RK:  Right after business school, I worked at a consulting firm for a few years.  One project involved performing due diligence at a South African conglomerate that had been advised to acquire an insurance operation.  It was only my second project as manager, and my team only had two weeks to get the job done because of regulatory deadlines. We worked about 20 hours a day for two or three weeks, then concluded the acquisition didn’t make any sense. We recommended killing it.

The guy who hired us had brought us in because he had some doubts, but we had to fight the rest of the management team, who were all 100 per cent behind this idea.  This was awkward because I was about 26 at the time. Number one, I learned to keep my own counsel. I was hired to have an independent opinion, not take a poll. Number two, I learned the importance of taking yourself to where the data and the analysis lead you. Received wisdom is not always the right place to go. You can’t just go with your gut. You have to do your homework.  Finally, although the four-person team hated the long hours and relentless push for better data and analysis, when the project was over, most agreed it was the best work they’d ever done.

IVEY:  What about your first job?

RK:  My first real job was detasselling corn for 75 cents an hour when I was a 14 year-old in Nebraska.  I quickly learned that I had no interest in manual labour. And that taught me to find a job that I can wake up and look forward to going to every day. You won’t do your best work if you are just showing up.  I’ve been lucky in that, since college, I’ve always had jobs where that is true.