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Go with the flow: How global networks will change IT

McKinsey measures cross-border "global flows" and says digitizing them will remake entire economies -- and pose new challenges for IT.

Everyone talks about globalization, but few try to put numbers on it or analyze its effects on economies and individuals. But that's what the McKinsey Global Institute has done in another impressive report by a large team of analysts and academics. Their ambitious goal: quantify the flow of goods, services, finance and people across the borders of 195 countries, then try to figure out what it all means.

The report, Global flows in a digital age: How trade, finance, people and data connect the world economy, was produced by the research division of the McKinsey & Company management consultancy. It begins by pointing out that while global networks have historically been important -- think of the Silk Road through Asia – "today the web of cross-border exchanges has exploded in scope and complexity." Nowadays, 35% of trade crosses borders, compared to 20% in 1990. One-third of financial transactions and a fifth of Internet traffic is international.

David EssexDavid Essex

The study's relevance to IT wasn't obvious until McKinsey laid out how the four flows of goods and services ("trade"), finance and people are being digitized in global networks and thus transformed. The spread of Internet-connected technology is reshaping industries and the comparative advantages of countries and regions, not to mention business models. This fifth cross-border flow measured by McKinsey -- data and communication -- is the one IT strategists must harness to get ahead of the increasingly technology-driven nature of globalization.

It's important to note, however, that labor (the people in the report's title) and services are a fraction of the size of the other three flows because both are tied to relatively immobile human capital. The McKinsey authors didn't say so quite in this way, but this might suggest that IT data networking efforts should focus on exchanging money, remote services and knowledge with people across the globe. (Outsourcing stands to gain as fewer people need to emigrate to find work.) Companies should partner more with overseas providers for locally delivered services, manufacturing and distribution, but use the Internet to coordinate. This won't come as a shock to companies that have been doing the latter for years, but they might find themselves blindsided by a scrappy little competitor coming at them from the other end of a fiber-optic cable in an emerging market. McKinsey suggested such threats could come from other industries as companies use digital technology to diversify in ways that weren't possible before.

Nowadays, 35% of trade crosses borders, compared to 20% in 1990. One-third of financial transactions and a fifth of Internet traffic is international.

The report said two major forces are accelerating this growth in cross-border flows: global prosperity -- 1.8 billion more people, mostly in emerging markets, will join the consumer class by 2025 -- and increasingly pervasive Internet connectivity and digital technology. More than two-thirds of the world's population has a mobile phone and cross-border Internet traffic grew 18-fold between 2005 and 2012; in addition, international Skype calls are up 500% since 2008.

The most impressive figure is the 500 times leap in global data traffic, starting from a mere 84 PB per month in 2000 to 40,000 PB in 2012.

Global networks for a digital world

Moving things across borders adds value in itself. McKinsey pegged the economic value of flows of goods, services and finance at $26 trillion in 2012 and estimated that they add 15% to 25% to the annual growth of the world's gross domestic product. What's more, the knowledge-intensive portion of these global flows increasingly dominates and is growing faster than the labor- and capital-intensive ones. A labor-intensive flow is manufacturing moving to low-wage countries, for example, while countries rich in natural resources -- a type of capital -- benefit from the flow of their commodities.

What's and significant for IT professionals and corporate leaders is how much digitization is transforming and enriching these traditional flows. For one thing, it reduces the marginal cost of manufacturing and distribution. Some digital flows are entirely goods, others are transformations of physical flows, while still others change goods into services. One scenario in McKinsey's models showed the flow of digitally delivered services outpacing the flow of goods. "Digital wrappers" such as radio frequency identification tags make existing physical flows more valuable.

Manufacturing and logistics are particularly impacted as some of their physical flows turn into "virtual" flows, a phenomenon that other analyst firms such as IDC have noted in their coverage of globally connected product lifecycle management (PLM), manufacturing execution systems (MES) and supply chain technology, which can help avoid the needless transporting of people, goods and know-how by transmitting bits and bytes instead. Integrated MES and PLM systems, for example, can help a manufacturer deliver the exact same designs and production plans to facilities in China and Canada.

The dramatic broadening and deepening of global flows will demand investments and policies from companies and governments to improve data quality, privacy and security, for example.

McKinsey offered a few more recommendations:

  • Invest more in emerging markets: A 2010 McKinsey study showed 100 large companies with headquarters in developed countries only derived 17% of their revenue from emerging regions, despite their being the source of most of the world's economic growth in the coming decades.
  • Focus on the mega-cities in emerging countries, which is where most of the opportunities are centered.
  • Give full attention to the potential of digital technology to fuel a globalization strategy. Internet and social media-based companies have increased the international portion of their annual revenues six to seven times faster than traditional companies.
  • Have a strategy for processing electronic payments in emerging countries where penetration is low, but is expected to skyrocket.

More on globalization and IT

Learn about last year's McKinsey study on global tech trends

Read a guide to global supply chain management

See an expert video on global supply chains

Proponents of talent management technology might have added it to the list of digital platforms that McKinsey said companies will need to go with the flow. A distributed, Web-based system for recruiting, retaining, training and managing workers can enable companies to take their talent strategies global and tap into the new pools of labor and know-how that they will need to serve emerging markets.

It no longer matters much where the intelligence is located geographically and whether it resides in people's heads or Google's data centers. Fewer goods will have to cross borders if the exact same technology for producing them can be replicated anywhere it is profitable.

The slogan "think globally, act locally" seems more meaningful than ever, but in this context it is more about economic opportunity than environmental responsibility. The "glocalization" strategy long employed by businesses to understand the local needs of overseas markets doesn't capture the new reality either. Now it's more about how place means nothing -- except when it means everything. The challenge for business and IT leaders will be to know the difference.

David Essex is executive editor of three of TechTarget's business application websites. You can reach him at dessex@techtarget.com and on Twitter @dessexTT.

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