Home 2003 December

As the calendar prepares to turn to 2004, economic analysts project that the regional recovery that has been predicted for the past 18 to 24 months will finally materialize. Those business owners looking for a return to the halcyon days of 1999 and 2000 are due for a disappointment, however; this recovery will be far less pronounced.
’It’s six months out.’

Area business owners have been hearing that now for at least two years. They have it heard so often, many are becoming more than a little skeptical.

It, of course, is the recovery from the recession-turned-economic-downturn that started, by most accounts, in early 2001. This prolonged period of sluggishness will come to an end early next year — if it hasn’t officially ended already, say economic analysts who tell BusinessWest there is plenty of evidence to suggest that things have started to turn around and that it is time to believe the ’six months out’ talk.

Indeed, the technology sector that has been mired in a slump since the end of the Y2K craze is finally showing signs of life. Meanwhile, manufacturers that have been stymied by a persistent lack of confidence among business owners say orders are starting to come in again (see related story, page 19). And the tourism industry, which is becoming one of the pillars of the region’s economy, has outperformed the rest of the state again in 2003 and is looking toward a stout 2004, buoyed by the Women’s U.S. Open to be played next June in South Hadley (see related story, page 9).

Overall, analysts say, the question isn’t whether there will be a rebound, but what kind of upturn it will be.

In short, no one is using the word ’robust to describe the year ahead, and experts say those pining for a return to the glory days of 1999 and 2000 should adjust their thinking.

The phrase being bandied about is "jobless recovery," and analysts insist it is not an oxymoron. Ever-improving technology and enhanced productivity that allows companies to do more with fewer people mean that the economy may well rebound, but without significant new employment.

However, many we spoke with said the recovery won’t be entirely jobless. Manufacturers are expected to do some hiring, and the tourism and service sectors should also add jobs, although they will not be high-wage positions (see related story, page 22). Meanwhile, some are predicting that the availability of land in Western Mass., a statewide commitment to developing a biotech sector, and the sky-high price of housing in the Boston area may finally prompt some companies to take a hard look at the Pioneer Valley as a place to locate.

In general, analysts are predicting a decent bounce for the state’s economy in the year ahead — especially if the current surge in technology spending continues. The Pioneer Valley, which didn’t have so far to fall during the downturn because of the diversity of its economy and less dependence on technology-related businesses, won’t see as significant an upturn.

"Though current conditions are bad and consumer and business expectations are weak, the excesses of the technology bubble may be nearly wrung out of the economy," Alan Clayton Matthews, an assistant professor and the director of quantitative methods in the Public Policy Program at UMass Boston, wrote in the latest issue of Massachusetts Benchmarks, a quarterly report of the state’s economy. "Technology spending appears to be headed back into growth after crashing in 2001 and remaining stagnant through 2002. The Massachusetts economy should begin to turn around accordingly.

"The state is in the process of recovery," he told BusinessWest. "But it won’t feel like it until we see some jobs."

Spending Time

Many of the analysts who spoke with BusinessWest said the recession, or economic downturn, that has visited the region — and the rest of the country to one degree or another — has been unique in many ways, especially with regard to consumer spending and housing prices.

In short, consumers never really stopped spending, and housing prices never declined, said Matthews, who termed this an "investment recession." Indeed, auto sales have been steady — helped along by special financing packages spawned by 9/11 and continued through 2003 — while sales of most other goods, boosted by numerous tax cuts and checks to families from the federal government, have remained strong. The problem has been business spending, said Andre Mayer, senior vice president for Research at the Associated Industries of Mass. (AIM). He told BusinessWest that many employers simply haven’t had the confidence (or the need, in many cases) to move forward with hiring, expansions, new equipment purchases, or investments in technology. If most business owners can become true believers in the economic recovery, then it may become a self-fulfilling prophecy.

"The slow pace of progress in this state has many business owners reluctant to get on the bandwagon," he said. "They want more evidence that things are turning around."

What has really hurt Massachusetts in this recession and kept it from recovering as quickly and profoundly as the rest of the country, said Mayer, has been the concentration of technology-related businesses here. Boston has been especially hard hit, but every region, including the Pioneer Valley, which is far less dependent on that sector, has felt an impact.

But recent statistics show technology spending is on the rise nationally, said Matthews, and that bodes well for the Bay State’s economy.

"U.S. investment spending for information and processing equipment was up 15.4% in the third quarter this year, and it was up 15.5% in the second quarter," he said. "That’s two quarters in a row of very strong growth in investment spending, and all indications show that this will continue."

Another healthy indicator is the Federal Reserve Board’s Index of Industrial Production, said Matthews. That barometer has an ’information and processing business equipment’ component, and that number has been growing since the beginning of the year at a rate of 9.5%. Meanwhile, shipments recorded nationally by the Computers and Electronics Industrial Sector — the largest manufacturing group in the Commonwealth — were up 16.2% for the first eight months of the year.

"New orders are up, and unfilled orders are also up," he said, adding that inventories are very low across the technology sector. "That means that these new orders will have to come out of production."

What all this means for the Western Mass. economy remains to be seen, said Matthews, but generally, what’s good for one part of the state is good for the whole state.

Charting Progress

There are other positive signs of turnaround beyond the technology sector, said Mayer, pointing to improvement in many foreign economies, especially Japan’s.

"It’s been a problem for all of us that Japan has been in a recession for 10 years," he said, noting that exports statewide improved markedly in the first three quarters of 2003. "It looks like the world’s economy is climbing its way back to growth without one big engine to pull it; instead, it’s a lot of little engines pulling together, and I think the Western Mass. economy is well-positioned to take advantage of all this."

As for the outlook on jobs, most analysts say there will be some growth locally, if only because companies that are already stretched thin will not be able to handle a larger volume of orders without adding personnel.

"Companies are pressing people very hard already," said Mayer. "The notion that there won’t be any job growth because improved productivity can make up the difference when orders come in is simply not true."

Allan Blair, director of the Economic Development Council of Western Mass. (EDC), concurred, but told BusinessWest that if there is to be any significant job growth, it must come from new businesses coming into the area. And he and others say conditions are ripe for cultivating new jobs.

For starters, the state is making a real commitment to growing its biotech industry, and the recently passed economic stimulus package contains many incentives for entrepreneurs in that sector. The Pioneer Valley has a suitable infrastructure for that industry to develop, said Blair, noting the research facilities created by Baystate Health System and UMass.

Another factor working in the region’s favor is the still-escalating price of residential real estate in the Boston area, which is making it difficult for some companies to locate there.

"There is a phrase people are using these days — ’drive till you qualify,’" said John Mullin, director of the Center for Economic Development at UMass, referring to the fact that people who can’t afford homes in Boston are lengthening their commute to communities where prices are lower. That same phenomenon should help attract companies to Western Mass.

"I’ve heard more anecdotally than ever before about businesses looking at the western part of the state," he said. "And the prices in Boston are part of the reason why."

Blair said the continued marketing of the Hartford-Springfield Economic Partnership — the Knowledge Corridor — will also pay dividends in the near future. He said site selectors are becoming increasingly aware of the region, and the statistics concerning it, including everything from the number of college students to the price of doing business, are starting to turn heads.

The Bottom Line

While analysts were adding the necessary caveats about any projections for 2004 — and predicating their expectations on no further terrorist attacks or escalating global conflicts — they were generally in agreement that things would improve in 2004.

The question is: how much will they improve?

Few are expecting anything spectacular, but they spoke for area business owners when they said that any upward movement would be appreciated.

And this time, people can believe it when they hear the phrase, ’it’s six months out.’ That’s because, in many respects, it’s already here.

Sections Supplements

MassMutual Chairman Robert O’Connell, speaking last month before a group of area CEOs, planning leaders, and business students at Bay Path College, said that to foster innovation, companies must create a culture where ideas — good and bad — are welcome, and where risk is carefully balanced with caution.

Robert O’Connell says that if a company wants to grow, it must encourage — or at least not discourage — really bad ideas.

That’s because most good ideas start off as bad ones that are later refined and reshaped, said O’Connell, CEO of MassMutual. "Hardly anyone has come up with an absolutely fully thought-out, totally creative idea that is finished and doesn’t require any modification," he explained. "Every good idea starts out as a bad idea, and that’s why you have to nurture and encourage the bad ones — find the kernel of good in an idea and focus on that."

O’Connell passed along that thought and many others at the first of a series of lectures on innovation and creativity sponsored by Bay Path College. The school made innovation the focal point of its annual women’s conference last April, and has made a commitment to following up with new programs designed to educate local companies about ways to think outside the box.

"Innovation is what drives every successful company," said Bay Path President Carol Leary, noting that additional lectures on creative thinking are planned for the years ahead. "Ideas can come from anywhere, but people need to be inspired Ö they need to know that their ideas will be listened to and acted upon."

O’Connell told a large group of area CEOs, planning leaders, and Bay Path business students that companies can learn how to become innovative, especially if given the proper incentive. At MassMutual, for example, O’Connell, who took the helm in 2000, set policy dictating that the company generate at least one third of its annual revenue from products or services that didn’t exist three years prior.

That goal might have appeared unrealistic at the time, especially with a sluggish economy and stalled stock market. However, the company not only met that benchmark, it exceeded it, with roughly half its total revenue in 2002 — some $20 billion — coming from new products.

The key to such success, said O’Connell, is establishing a culture that is receptive to creative thoughts, accepting of change, and able to carefully blend both caution and boldness.

In Good Company

Those two corporate character traits are in fact compatible, he said, noting that companies must be cautious with their core service or product, but at the same time bold with concepts for creating new customers and revenue.

MassMutual, for example, has set policy that limits its exposure in any given investment to $50 million. That limits the risk in some ways, said O’Connell, but it does not prevent the company from being innovative and creating new products.

"Risk is a very delicate thing," he explained. "You don’t want to encourage people to take unreasonable risks, but risk is part of everyday life; doing nothing is a risk, and maybe the greatest risk of all.

"What you have to do is create an atmosphere where people feel comfortable taking chances," he continued, "and that as long as they do it prudently, as long as they do it carefully, and as long as they’re not making the same mistakes over and over again, they’re not going to be punished."

One of the keys to establishing such a culture is not only encouraging ideas, but showing people what to do with an idea once they come up with one. "A lot of people don’t know what to do with an idea, and they don’t know how to fight for it," O’Connell explained, adding that the second part of that equation is critical. "If you’re not going to fight for an idea, how can you expect management to fight for it?"

A company must also understand that not every idea — or every risk taken — is going to work out.

"We spent more than $50 million on a bad idea that turned out to be a really bad idea, and we had to kill it eventually," said O’Connell. "But we didn’t shoot the person who came up with the bad idea Ö he’s now one of the senior executives of the company, running a highly successful business enterprise. And he’s coming up with lots of new, good ideas.

"Our retirement services division had one failure followed up by a whole host of successes because people were not afraid to try different things," he continued. "We’re now one of the leaders in retirement services, and we’re regularly taking business away from our competitors — companies who didn’t even know who we were a few years ago — all as a result of encouraging bad ideas.

Companies must also learn how not to kill ideas, said O’Connell, noting that it is often much easier to dismiss a notion as impractical than to see past potential problems and find a way to make something work.

"If it’s a good idea, you know someone’s going to try to kill it," he said. "How do you get employees through all that? You do it by making creativity the core of everything you do. When that happens, you begin to see people get passionate, you begin to see people getting excited because it is fun to think of something new — it’s fun to look around and say, ’that is the way it is because I decided to do that, because I recommended that.’"

To foster ideas and properly process them, MassMutual has created its Center for Innovation, which is actually one of those good ideas that someone at the company came up with. It’s a new department tasked with helping employees to shepherd their ideas from grassroots incubation to corporate implementation.

The center, staffed with five full-time employees, set the tone for its mission with an internal ad that asked the company’s 4,000 or so employees: ’what’s your boring idea?’

Most companies don’t have the resources to create a formal center for innovation, said O’Connell, but they can adopt the same general philosophy — one of encouraging ideas and then creating a road map for taking those ideas to fruition.

The goal for all companies should be to create what O’Connell called a "comfort zone," where ideas can be fostered and mistakes can be tolerated but not encouraged.

Thought Process

O’Connell told his audience that if a company, large or small, wants to create such a comfort zone, it should start by essentially changing everything.

"You change the wallpaper, the carpeting, the parking, the menu in the cafeteria, the holiday schedule — you change everything," he said. That’s what we did at MassMutual — we changed people’s parking spaces, we made changes with the elevators, we changed the colors on the walls Ö doors that used to be closed were left open. We changed every tiny piece of the company.

"How does having doors open that used to be closed make a company innovative?" he continued. "Because people come in, they look all around, and they say, ’this place is changing.’ And the more people experience change and creativity and innovation all around themselves, the more they are likely to say, ’this is a company that’s receptive to really bold, new ideas.’"

Beyond all that change, companies must also remember that it’s often little ideas — or the sum of many little ideas — that make the difference, said O’Connell, citing the example of Disney Corp., which subjects employees assigned to cleaning streets to five days of training. The topic that the company spends more time on than any other, he said, is making sure these workers know how to operate the most popular camera models on the market.

"Most of the pictures taken at Disney have the whole family in them, and that’s why," he said. "This comes from focusing on the customer, but also focusing on the little things."

Another step in the process is to set "absolutely ridiculous" goals, but reward very small steps, said O’Connell, noting that people respond to a vision — especially an ambitious one — that a company sets.

Several years ago, when MassMutual, then with $6 billion in revenues, set policy that one-third of future revenue would be from products not created three years prior, senior executives were stunned, he said, but they responded. "We stimulated people by building it into their compensation system and building it into their rewards. They now knew that this was going to be something they would have to devote a lot of time to — and that the company would be receptive to. And the ideas started coming."

Part of the process of implementing ideas is moving them forward, said O’Connell, noting again that coming up with a concept is merely the first part of the equation. Company executives must be willing to accept what appears to be a bad idea and look for that kernel of good that could convert it into a good idea. Meanwhile, those who have an idea must take possession of it and fight for it.

"People will say, ’I had an idea, but the boss killed it,’" said O’Connell. "That’s not the boss’s fault; it’s your fault."

In summation, O’Connell said the innovation process, again, begins with creating an atmosphere where people are encouraged to look hard at what they’re doing and find ways to do it better. He summoned a Ben Franklin quote — "I have never failed; I’ve merely discovered 10,000 things that didn’t work" — to get his point across.

"Just because something doesn’t work, you can’t be afraid to take a risk and try something else," he said, noting that companies that have such attitudes establish an environment where people want to come to work, and will stretch their imaginations when they get there.

"The ultimate conclusion is the creation of an organization where virtually everybody — from the waiter in the cafeteria to the executive running the largest profit center — feels in their heart that they are achieving more than they thought they could ever possibly achieve," he continued. "They are accomplishing things and learning things and making suggestions that they never thought they’d ever think of. When you’ve accomplished that, you’ve got a turned-on organization."

And a company that is sufficiently turned on has a better opportunity to attract top talent, said O’Connell, noting that MassMutual is competing with companies across the country and around the world for workers, and the culture — or comfort zone — that has been created is definitely an asset.

"We have an environment, a culture, and a population that people want to be part of," he explained. "People don’t just move for numbers, they don’t just move for all the statistics you share; they move because they sense this is a place they want to be."

Critical Thinking

O’Connell surprised those in attendance, especially Bay Path officials and students, by announcing that MassMutual would fund four $2,500 scholarships for students who offer the most innovative ideas for the college. He called it the "creativity challenge."

O’Connell said later that the gesture was made as a way to show how simply innovation can be inspired — with real rewards. Four students will certainly benefit from the exercise, he said, but the college will be the larger winner, not only because it will have four new ideas to work with, but because it will make progress in creating a culture where innovation is part of the school’s fabric.

And where bad ideas are always welcome.