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Workstyle Reforms and Digital Transformation Opportunities

Martin Schulz
Senior Research Fellow

Wednesday, May 23, 2018

Workstyle reforms have an important impact on productivity and the “future of work” around the world. In the middle of an ICT revolution, they move beyond traditional work-hour, wage and labor flexibility targets. So far, it is mostly employers who have gained from increasing ICT-based workplace flexibility. In tighter labor markets, employees now demand more flexibility and skill support for themselves. To support employers and employees more equally, workstyle reforms now focus on the adoption of new technologies to increase productivity while at the same time supporting skill development to improve capabilities and work-life balance of employees. A FRI survey shows that corporate digitalization initiatives indeed have the potential to increase productivity more strongly when employee flexibility, skill development and work-life balance are taken into account at the same time.

Workstyle reforms have helped corporate flexibility

“Workstyle reforms” around the world are moving the targets of spring labor negotiations well beyond the money. In Japan, a heated debate about limiting overtime for regular staff while at the same time allowing more work-time flexibility for skilled employees show how difficult it has become to share the benefits of productivity and modern work-life evenly. Instead of embracing work flexibility and betting on possible income gains when productivity increases, many employees and their unions fear that half-baked work-hour initiatives could further increase work-related stress while productivity gains grow only corporate profits.

In Germany, labor disputes this spring have even resulted in several forceful strikes. The most controversial demands there, too, were not related to higher wages. Employees and their unions rather asked for more time and flexibility to look after children, ailing parents, or advance their careers through further learning. Against initial opposition of employers, employees gained the right to temporarily (for two years) reduce workhours with only limited losses in incomes and guarantees to return to fulltime work later. In a follow-up, the government even plans to write a right to switch forth and back between fulltime and part-time work into the labor law.

Such reform initiatives are a major change compared to labor market developments during the last 15 years. Starting in the US, Internet-based workstyles had greatly expanded the possibilities for companies to cut operational cost and increase flexibility in work conditions. At the top-end of the labor market, starting with the Internet giants Apple, Amazon and Google and their growing need for technology skills, flexible but extremely demanding positions for core-employees were created. The result was a “war for talent” for top skilled workers, which leveraged wages at the top-end but also left many employees in the middle exhausted. At the other end of the labor market, in delivery fulfillment centers and online customer services, positions became organized much more flexibly and filled with limited contract or independent workers from the “gig economy.” Gradually, even typical middle-class jobs in traditional operations seemed to become vulnerable to challenging work conditions that resulted in deteriorating work-life balance and strained family situations.

In Japan’s and Germany’s rather protected labor markets, this initial wave of “workstyle reforms” resulted in even more sweeping changes than in the US with its more flexible base. “Dual” labor markets evolved where growing numbers of employees could only get temporary contracts or part-time employment, while many existing jobs and occupations remained well-protected. In Japan, the share of flexible contracts quickly approached 40% of employment because companies greatly reduced the hiring “lifetime” employees in the “employment ice age” while restructuring their operations.

In Germany, major labor market reforms were initiated after 2000 when the country felt to fall behind its European peers in terms of growth and productivity. A highly successful “Agenda 2010” reform package focused on reducing chronically high unemployment by limiting the social safety network while increasing overall workplace flexibility significantly. Companies started to reorganize not just part-time work but also work-time hours of core employees on basis of “working time accounts” that allowed for workload shifts along labor demand and the business cycle. The widely praised results were a strong drop in unemployment and a more stable labor market with increasing levels of employment even through the global financial crisis that would have hit the export country much more strongly otherwise. The “flexibility” burden fell heavily on employees, however, and resulted in a decisive election loss for the government and a gradual roll-back of many reform elements that were seen as burdensome for employees over the last decade.

Workstyle reforms now need to support employees

After the global financial crisis, another wave of “workstyle” reforms, this time driven by progressive industry initiatives, therefore focused on shared gains of technology and digital productivity opportunities. The initiatives built on the positive opportunities of digital consumer platforms and the Internet of Things (IoT), which had already strongly contributed to consumer gains through free access to information, communication and even more competitive prices for traditional products. Industry and many services became seen as inflexible laggards that organized work in “silos” with strict hierarchies while being out of touch of evolving “eco systems” in digital markets. With machines becoming smarter and automated production lines more flexible, employee time that was consumed by repetitive tasks could be freed to develop their skills, take on new tasks, and add value through innovation.

In Germany, an “Industry 4.0” initiative rapidly gained support from all sides and was quickly followed by “Work 4.0” and “Education 4.0” initiatives. They promise to spread digitalization gains to employees by developing skills, expanding lifelong learning and broadening career development. Especially women, who had been disadvantaged by work life interruptions for child rearing, and temporary staff, who had been shut out of companies’ regular skill development programs, are thought to gain from digital work styles. In Japan today, the hoped-for benefits of “Society 5.0” even include solutions for skills gaps through AI (Artificial Intelligence) and contributions to the quality of life by smarter services throughout all levels of social life.

Workstyle improvements through lifelong learning

Beyond the hype and more realistically, this new wave of workstyle reforms is trying to spread the highly successful digital work styles of the US “millennial” generation (especially at advanced technology companies such as Apple, Amazon, Google), while looking for ways to mitigate the risks of workplace disruptions that came with it. In Germany, university reform has evolved as a core element for better skill development of employees and collaboration with corporations. “Dual” education programs have been expanded from their traditional focus on apprentice and training programs for (sub) high school graduates to the university level. “Dual” universities now educate students while working and learning at local companies.

Perhaps even more importantly, (senior) employees are increasingly attending university programs to upgrade their skills and to cooperate in project and development programs. Local innovation centers for co-innovation between companies, universities, and local governments have become pilot programs that are run by universities and research networks such as the Fraunhofer Group. The SME 4.0 Center of Excellence in Stuttgart, for example, is one of 11 centers co-funded by the government and run locally. It provides advice on digitalization while running joint projects with SMEs on standardization, operation innovation, electro mobility and future workstyles.

In France, where insider-outsider regulations in the labor market are particularly limiting for a broad range of temporary workers, the government went a step further to support skill development of employees on an individual level throughout the life-cycle by introducing “personal training accounts.” The idea is to support the increasingly independent work and life styles of non-core employees by providing education credits that can be used more independently from employers and the employment situation. Workers receive training subsidies into their accounts that can be used for a growing variety of training programs as part of their career development long after their initial high-school or university education.

France has already been a successful pioneer in workstyle reforms when developing childcare opportunities along with corporate work flexibility for women by providing nurseries and starting public (kindergarten) education at age three. The current skill initiative recognizes, however, that careers of mothers often remained stuck below their potentials. Limiting worktime hours for family responsibilities and more complex lifecycle planning kept them off career tracks and out of long-term corporate skill development programs. Worktime flexibility therefore needs to allow for upgrades in terms of skills and career as well. In today’s ageing societies, effective workstyle reforms need to open up for family planning time as much as they have to support long-term skill development programs.

Work style reforms for growth and the future of work

The review of workstyle reforms around the world seems to suggest two fundamental ingredients for effective work style reforms:

  • Spread the benefits and potentials of already widely available digital technologies and platforms as broadly as possible to realize productivity and innovation gains that build the basis for future growth.
  • Develop the skills of employees across the lifecycle and make sure that the benefits in flexibility and productivity are mutually shared between companies and employees.

Such broad workstyle reforms certainly seem challenging. Most governments already struggle with their basic “digitalization” strategies that have to build better infrastructures, standards and data security. Now, they would have to find ways to overcome an inherited “digital divide” between companies with increasingly outdated skills and their digital “disruptors.” They would also have to close the gap between employees with lacking ICT skills and younger “digital natives.” To achieve this, education would have to expand from teaching the young in a quite regulated and centralized environment (universities) to much more individualized and dispersed lifecycle learning in cooperation with corporations. Labor market regulations would have to shift significantly, too. The professionalization of workstyles with flatter hierarchies, potentially more changes of employment situations, and closer cooperation between partner companies as well as individual contractors requires much more individualized protection of rights, skills, and personal data.

While such reform challenges seem daunting in a traditional context, they are quickly becoming necessities in a digital economy. Bridging the “digital divide”, for example, seems quite possible, even without much government intervention. At a time of digital revolutions in consumer markets, digital technologies are quickly becoming “general technologies” with low entrance barriers. It has never been easier, for example, to run the entire back- and front-office of a retail shop or restaurants on a set of devices as simple as an iPad almost for free. For companies with motivated employees, no matter their size, capital situation or age, digital opportunities seem to vastly outnumber the existing skill challenges.

Gains from digital workstyles

For many traditional companies, digital transformation always seemed daunting because necessary skill sets remained different from daily work skill. ICT systems also tended to be expensive beyond their systems costs because they created “digital twins” that required constant maintenance and with only limited interfaces to many operations. This situation is now changing with the move to largely maintenance-free cloud-based systems on the corporate side and the move of employees to digital consumer platforms that are turning them into (at least partial) “digital natives” in their private lives.

What’s still largely missing, however, is the integration of corporate workstyles and operations into the new world of digital information, communication and markets. Given the advantages of digital consumer platforms, consumer-facing companies in retail and services have become the initial followers of a broad digital transformation, while other traditional companies now follow at a distance by studying related opportunities and best practices. Clearly, the government can play an important role in this transformation by providing information and support for SMEs that are not directly pulled into digital markets by consumer demands.

The situation is not too different for employees, either. In their private lives, the benefits of digitalization are highly visible. In their work lives, however, they still need proof that the productivity gains from new technologies do not only go to employers or even threaten their workplaces. Reassurance about the benefits of digitalization and motivation for actively contributing to the process therefore requires the sharing of additional value between companies and employees. Essentially, employees need to be able to take (part) of the “ownership” of ICT systems and their returns – as in their private lives.

On consumer platforms of Apple, Google and Amazon, companies and consumers are sharing the benefits of digitalization comparatively easily. Both sides can gain from “network effects” that add new value at almost no additional cost when new users contribute to information, content and sales. Economies of scale form, going global further resulted in tremendous investment opportunities for companies and cost-savings for consumers. As a result, companies were willing to provide their growing systems and many services for free, while consumers were willing to provide information, content, and even free work by checking information, editing, and writing reviews.

Traditional companies cannot hope for similar gains from economies of scale. On the contrary, they often face higher costs of digitalization, and network effects often work against them when “digital native” companies threaten to enter their markets. They are able, however, to gain from “consumer rents” and technologies that are created on digital platforms of internet giants and their ecosystems. By adopting internet technologies, such as cloud computing, at extremely low costs and freeriding on the huge advancements of ICT user interfaces and system usability (consumerization), they can improve and integrate their IT systems beyond anything possible before. Bring-your-own-device (BYOD) ICT systems, for example, are initially hard to setup and secure, but offer tremendous potential in terms of flexibility, mobility and interactivity with employees at very low operations costs.

For traditional companies, “network effects” therefore evolve differently than for the “digital natives.” While they should strive to remain leaders in their own markets, they are followers on digital trends. As consumers do, they use the technologies “invented elsewhere” to gain from “consumer rents” in terms of usability, information, and market access. But as companies do, they invest into building their ecosystems and innovation around their products and services. For them, digital workstyles provide new value when their employees become more productive and innovative while augmenting existing processes and ecosystems. Matching the usability of their systems with their employees’ skills and demands therefore becomes as important as sharing the benefits by actively developing skills and careers as well as improving the work-life balance in their ecosystems.

FRI survey of digital transformation and workstyle reforms

To learn about the best “human centric” strategies of digital transformation and workstyle reforms for traditional corporations, FRI has conducted and analyzed a major survey of 1200 employees in Japan as well as in Germany with almost 100 digital transformation and work-life related questions. The results show that high-level ICT systems were not the most significant ingredient of digital success among advanced companies – especially in Japan. Instead, companies with user friendly ICT systems that support employee workplace productivity and mobility turned out to be among the leaders of digitalization gains. Companies with “easy to use” ICT systems in the survey were eight times more likely to be among a group of “Digital Leaders” (about a quarter of companies in our survey) than companies with less user-friendly systems!

Among the successful companies, ICT-based flexibility also seems to add to the work-life balance of employees and allows for more opportunities to learn about new technologies. Furthermore, personal work engagement was twice as likely to be high at companies that supported professional development, reintegration after temporary leave, and learning with external resources and partners. For effective ICT-based management, we found strong correlations to improvements in management communications and feedback, as well as collaboration with external partners.

In Germany, the same potentials of ICT for workplace improvements seem to be at work. Companies are, however, already more advanced in their use of collaboration with external partners for co-creation and innovation. In Germany, successful companies also seem to be able to motivate employees not just at work but also in their private lives by stimulating their professional interests beyond the narrow field of their work. Traditional German “professionalism” in work skills seems to be at work in the digital world as well.

Figure 1: FRI Digital transformation and skills survey: Impact of user friendly systems

 20180523

Note: FRI (2017) survey of 1200 employees in ICT using sectors in Japan and in Germany. Percent of valid positive replies (strongly agree & agree). “Easy ICT” companies are selected by the reply “My company’s ICT systems are easy to use.”

The graph plots the positive replies (strongly agree & agree) to a number of our questions for Japanese, German and Japanese companies with “Easy to use ICT systems.” In direct comparison, Germany seems to be ahead of Japan in terms of digital transformation and workplace productivity on most levels. This is not the case, however, for Japanese companies that were able to do something as “simple” as making their systems more user friendly. Of these companies, 89% of their employees think that digitalization has a positive impact, and 81% even think that their companies are among the “digital leaders in their field.” It is also remarkable that most of these companies support lifelong learning, and see benefits of the use of ICT for external partner collaboration. A surprisingly big gap to companies with more complicated ICT platforms is related to a productivity measure that benefits employees directly: ICT improves work-life balance at companies with a progressive use of their systems in Japan and Germany.

Lessons for workstyle reforms

Lessons from workstyle reforms around the world and our survey results can be summarized as follows:

  • Workstyle reforms need to support employees. Productivity gains for companies are important, of course, but benefits need to be shared with employees by developing their professional skills and work-life balance.
  • Companies can achieve workstyle related gains by adopting more user-friendly (or consumer oriented) ICT platforms. The current wave of “consumerization” of ICT platforms supports this trend because employees have already migrated to smartphone-based consumer platforms.
  • Cloud-based systems should be used to open companies for more effective external partner cooperation, including value co-creation and innovation.

The government, finally, only plays a supporting, but very important role. It needs to provide the infrastructures for digital workstyles and set the standards for secure ICT-based external partner cooperation (Industry 4.0, Society 5.0). Perhaps most importantly in the long run, it needs to improve company-university cooperation to develop lifelong learning schemes for senior employees and personal career tracks for employees who have been shut out of traditional careers for too long.

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