The year ahead is going to be a tumultuous one, challenging in political, economic, and financial terms. Despite this, there are opportunities for those prepared to take advantage of them, because uncertain times mean that market share is up for grabs. And no, it’s not a coincidence that there are 12 trends for 2012. I discarded a bunch more, but it’s such a catchy title I couldn’t resist.

I’m going to approach these 12 trends with three objectives: What is important? Why is it important? And what does it mean to you?

And I’m going to start with the bad news, and end with the silver linings.

1)    Declining American influence – America’s absolute and relative influence in geopolitics, economics, finance, and the military is declining for a host of reasons: the rise of competing powers like China, India, Brazil, and others; the very expensive military adventures in Iraq and Afghanistan, which have sapped America’s willingness to engage in aggressive political and/or military action; the Arab Spring, which eliminated Middle Eastern strongmen like Mubarak who followed America’s political lead, and the continued stalemate over the fate of the Palestinians, means that America’s influence over this critical and unstable region is at or near an all-time low; the Great Recession, which has sapped America’s economic and financial clout; and the dysfunctional stand-off between Republicans and Democrats that has frequently led to policy paralysis.

The implications of this are a less stable, more dangerous world. America may have gone back and forth on whether it wanted to be the world’s policeman, even though it truly was the global cop, and it’s inability to fill that role now means that the world is a more dangerous place.

This sets the stage for sticky situations to emerge, such as the twin nuclear threats from a suddenly even less-stable North Korea, and the only slightly more stable and geopolitically ambitious theocracy in Iran. It also leaves more elbow room for the ever-ambitious China to expand its power and influence, notably in south Asia and the South China Sea. It also leaves critical global issues, like what to do about climate change, without essential leadership.

The implications of this is a world where there are more likely to be more, and more serious, geopolitical, financial, and economic crises, and greater uncertainty in virtually every aspect of life. Others may not always have agreed with American policies, but they will miss America’s steadying influence as it ebbs from their lives.

2)    Ho-hum! Just another financial crisis (European edition) – The daily drumbeat of scary headlines dealing with the financial crises in Europe have gradually deadened everyone’s awareness for how dangerous the situation truly is. In particular, Angela Merkel is juggling hand-grenades, and hoping that she won’t drop any, and that none of them will go off unexpectedly. Germany is the only European country with the potential to stop the rolling crises that are affecting Europe, and then only if Merkel acts in a timely basis. To do this, she must let Greece go bankrupt instead of propping it up, shore up the banks, notably German banks, that have bought far too many dodgy EU bonds in the past, allow the European Central Bank (ECB) to become a lender of last resort, with the ability to stop a run on European bonds, and halt the bond market attacks on other European countries, starting with Portugal and Ireland, but extending to the much bigger countries like Spain, Italy, and even France. But Germany doesn’t want to do these things, and German voters are adamant that they won’t subsidize what they see as the lazy, profligate lifestyles of southern Europeans. But if Germany doesn’t act, and in a timely fashion, it may lose the ability to act at all, and come under attack from the bond markets as well. Indeed, German bonds are no longer being bought with as much enthusiasm as they were even two months ago. If Germany doesn’t act soon, it may lose the ability to do so at all.

Remember what happened in the American financial markets in 2008? If Germany doesn’t act in time, we could see the same kind of thing happen in 2012, this time starting with a run on European government bonds. From there a run could spread to those banks – American as well as European – that hold too many of these bonds. And once such a run started, the most dangerous question of all would emerge: “Who’s next?” Investors, frightened by the panic, would look to sell any and every questionable credit, and their attention might turn to the various U.S. state and local governments, like Illinois, California, and Harrisburg, Pennsylvania, among many others, that are struggling with their finances.

The U.S. Federal Reserve has become the de facto lender of last resort to the entire developed world, and would undoubtedly step in and support the banks and markets with everything they had. But this time, remembering the callous, greedy ingratitude of last rescue of the banking industry, American voters and the American Congress would likely tell the banks to drop dead. It was a hard enough last time to get Congress to bail out the banks; this time I suspect it would be impossible, even though failing banks would take the global economy down with them. Moreover, the Fed doesn’t have anywhere near as many bullets today as they did in 2008, and Fed Chairman Bernanke already has some Republicans, notably Ron Paul, baying for his blood over the quantitative easing from the last crisis.

The danger here is frighteningly real, and even greater than the risks we faced in the panic of 2008. Yet, the steady drip of crisis headlines and last-minute rescues has left many people convinced that nothing will happen. If it does, it will catch people flat-footed, not because they didn’t know there was a crisis, but because they have been hearing about it for over two years now, and have tuned it out. We could muddle through, and probably will – but the risks are far higher than most people realize. It will be important to have thought out a Plan B to deal with the unthinkable, if it happens, one that prepares you and your finances for a bigger repeat of the 2008 panic. Again, it probably won’t happen – but it’s better to have a plan and not need it, than need a plan and not have it.

3)    Yes, China’s influence will continue to rise, but…  Napoleon famously said, “China is a sleeping giant. Let it sleep.” Well, China’s very much awake now, and throwing her weight around – although cautiously. If I were (God forbid) Emperor of China, I would require my minions to tread cautiously, to smile a lot at our trading partners and neighbors, and to make our gains slowly, one salami slice at a time, never appearing too greedy or overreaching. I would practice soft diplomacy, offering aid and comfort where I could do so cheaply, loudly proclaiming our respect for other countries’ internal policies, taking leadership positions in things, like climate change, where I knew I was going to have to make changes anyway, and generally trying to look like a good global citizen. I would act, in short, as if time were on my side, and I was going to be the next Big Thing.

And generally speaking, that is precisely what China is doing – except that every once in a while the mask slips, and the avarice and aggression shows, as with the boundary disputes with other countries, especially as related to the South “China” Sea, which China (the nation) seems to be trying to interpret literally as being a Chinese lake.

But China has an Achilles’ heel – several of them, in fact – and does not have (much) time on its side. Its biggest weakness is that it is aging faster than any other significant country on Earth. Because of its One Child policy, China’s population is expected to peak, and begin declining, sometime around 2020 – within the next 10 years. And its labor force is already in decline, even as the demands for higher wages push its cost structures higher.

Meanwhile, although there is a great deal of pride in China’s new affluence among the Chinese, that affluence is not evenly spread, and there is unrest among those who remain poor. Add to this the widespread corruption of Chinese officials at all levels, which often provokes revolts, like the one in Wukan, which leads to simmering dissatisfaction among many Chinese.

This will further be exacerbated by the fact that China’s factories are automating almost as quickly as those of the developed world, which threatens to slow the rate of job creation, productivity, and affluence markedly over the next 10 years. Yet, China dare not automate; to do so would mean a loss of competitiveness, which would produce even worse results as industries would move elsewhere.
So, with that in mind, what would I, as self-appointed Emperor of China, do? Worry about a future I couldn’t control, and for which I could not see a clear path forward. The next 10 years will mark the beginning of the end of China’s ascension, and if I were Emperor, I’d think about retiring to some warm, cushy haven before the revolution came. Chinese Spring, anyone?

The implications are for China to step up its attempts to increase power and influence, and throw its weight around even more actively before that power starts to wane, but as quietly as possible. Look for China to try to make this the China Decade, especially in finance, trade, and geopolitics, as it attempts to pull in as much as it can while it can.

4)    American Spring? Meanwhile, closer to home, while those on the political right like to dismiss the Occupy movement (e.g., Occupy Wall Street), the fact that the movement happened at all is the most significant part of it. Indeed, Time magazine made protestors its “Person of the Year”, and that’s not restricted to just the Arab countries. The Occupy movement and protests against cut-backs in many developed countries had many of the earmarks of the Arab Spring: protestors saying that their governments serve an elite clique and not the people; lots of people, especially young men, who cannot find work despite months or years of trying; and a belief that the political system is neither representative nor responsive. Just because winter has fallen, and the Occupy settlements have been disbanded does not mean that the dissatisfaction has gone away. And with increasingly dysfunctional government in America, the potential is there for a much stronger protest movement against the System, however that is defined. American Spring, perhaps? It sounds unlikely, but not as unlikely now as it did before, and it won’t be restricted to America for discontent will grow in all developed countries.

This is especially true as the boomers move towards retirement, only to find that their either don’t have the resources to retire and that no one is going to donate them, or that the civil servant pensions that they were promised are unaffordable.

The protest movements have only just begun, and they are going to be acrimonious, disruptive, and at times hijack the political process.

5)    Mixed signals for both weaker – and stronger – economic growth.  Europe and its prospects are dragging the global economy down. The uncertainty in Europe, combined with the painful budget cuts in Greece, Ireland, Portugal, Italy, Spain, and the United Kingdom, mean that Europe is now in recession and a drag on the global economy.

Meanwhile, China, which had been concerned about inflation, and hence was hiking interest rates in a bid to slow it, has now reversed itself, which I can only interpret as concern that growth will slow more than they want. That’s a potential positive, as it will add stimulus to the global economy.

Canada, which has to date seemed to skate above most of the problems of the rest of the developed world, now seems to be experiencing slower growth, with an unexpected jump in the unemployment rate, while its housing market is looking pricey, frothy, dangerous, and much like America’s prior to the collapse in 2008, especially in condo development in its major cities like Toronto, Vancouver, and Calgary. Moreover, its consumer debt levels are exceeding the levels of American consumers in 2007, and no less a figure than Mark Carney, the highly respected Governor of the Bank of Canada, has warned consumers and banks alike to cut back on consumer borrowing. Canada could be arriving late for the financial meltdown of 2008 – but if its consumers don’t mend their ways, they will get there.

And yet, America, which until 2008 was seen as the world’s engine of growth, seems to be picking up for no specific reason. Actually, this was almost inevitable because of the natural dynamism and entrepreneurship of the American economy. What has prevented America from rebounding earlier, or more strongly, has been the housing market, which is still in horrendous shape – but slowly improving.

So how will this balance out through 2012? Assuming that Europe doesn’t crash and burn, and drag everyone else down with it, and that Iran doesn’t precipitate a significant war in the Middle East, then America will continue to recover, its jobless rate will continue to decline (slowly), the world will lick its (economic) wounds, and things will slowly get better.

Accordingly, while I continue to counsel my clients to have a Plan B in their back pocket if things do go bad, my primary advice is the prepare now for better times ahead. There are problems – big problems – ahead, and the American election in 2012 is not going to help, but for 2012 we are likely to see an improving environment, and opportunities re-emerging for those with the courage to grasp them, as I outline in Trend #7 below.

6)    Climate change accelerates – and the consequences will multiply. The most significant and portentous climate news of 2011 was the discovery of methane gas bubbling up in the Arctic Ocean off the north coasts of both Siberia and Alaska. Methane is a far more potent greenhouse gas than carbon dioxide, and the melting of the Arctic ice cap, combined with the rise in the temperature of the Arctic Ocean, has started to release methane from the ocean floor. As well, as temperatures rise in the northern polar regions of Siberia, Alaska, and Canada, the permafrost melts, releasing even more methane into the atmosphere. The amounts of methane that could be released by both sea floor methyl hydrates and permafrost are staggeringly huge, and could dramatically accelerate the rate of climate change. If this trend continues, not only will the debate over climate change be over, but humanity will be forced to race to keep up with the potential changes.

As it happens, the vast majority of climate scientists – something approaching 95% – now agree that climate change is happening, and that humanity is at the very least a significant contributor to it. Since I speak to lots of different kinds of audiences, I can tell you that most groups now accept that climate change is happening, even those that have been among the most vocal doubters. The doubts they now raise are more along the lines of whether humanity is to blame. But from my point of view, it no longer matters: if your house is on fire, you don’t throw gasoline on the fire, regardless of how it started. That’s roughly the position we’re in now.

In 2012, we will get more information about the release of methane, and can only pray for good news. Meanwhile, brace yourself for more strange, and increasingly extreme weather. And because climate is a chaotic system (where chaos theory is a branch of mathematics), it is literally unpredictable. This means we can’t tell whether we will get floods or drought, hurricanes or tornados, or something else unforeseen. But it won’t be business as usual, either.

7)    Innovation as Steve Jobs’ legacy.  Jobs didn’t invent innovation, but he sure popularized it! Innovation has become a corporate religion in recent years, and with good reason: innovation can allow you to disrupt the marketplace, scoop up market share, increase profits, and win friends and influence people, just as Jobs and Apple have done. Yet, innovation is hard, especially because there’s a natural resistance to change and to the real risk-taking that innovation requires.

But if there is a theme for the corporate world in 2012, it is that now is the time to get serious about innovation. As an innovation specialist who runs seminars and workshops for corporate clients, I’m seeing this on a daily basis in genetic and medical research, agriculture, the automotive industry, the insurance industry and finance generally, plus just about every other sector of the economy. And technology itself embodies innovation. Indeed, the idea of a technological company not working hard at innovation seems like recipe for extinction. The world is changing rapidly, and there are lots of new opportunities – and disasters – out there. It’s raining soup, but if you just stand there, looking up in surprise, you’ll drown!

8)    Who dares, wins. Such is the motto of Britain’s fabled SAS – one of the world’s premier commando groups. But their motto applies equally to unsettled times. During such times, it’s easy and very, very tempting to hunker down, conserving cash, and wait for lazy, easy times to return. But study after study shows that companies that continue to market aggressively, and pursue research into new ideas, new products, and better results for their customers make far more inroads with modest expenditures during bad times than spending far more during good times, when everyone else is competing hard. Moreover, loyalty is won when times are bad, both among consumers, and among employees. And best of all, you can often accomplish a great deal with careful planning and foresight rather than lavish expenditures. This is where strategic planning comes to the fore. The time to be thoughtfully aggressive is when your competitors are playing turtle.

9)    The Red Invaders. The emergence of a Chinese middle class not only means upward pressure on food and fuel prices, it also means a vast invasion of Chinese tourists bearing money. For those countries and regions able to attract such tourists, it means a new source of revenue, and a big shot in the arm. And, as with all ethnic groups, it also means serving them the way they want to be served in terms of language, food, and customs. To the winner go the mega-spoils.

10) Haggling returns to North American retailing. Smart retailers are recognizing that it’s no longer enough to post a sign saying “10% off” to attract consumers, but that consumers are more demanding now, and are moving away from the traditional “no haggle” approach to buying. Moreover, haggling offers two additional benefits to consumers: it’s become somewhat of a game where they can enjoy the thrill of the hunt; and it offers bragging rights when talking with their friends. As a result, haggling has been emerging in two different ways, one passive, and the other active.

The passive form of haggling is to wait for sales. You can witness this almost anywhere when consumers see an item they like in a store, and ask if it’s on sale. When they’re told that it’s not, they turn up their noses, and say they’ll wait until it is. This might be described as “temporal haggling”, where the consumer is saying, “I’ll wait until you lower the price before I buy it. And if you don’t lower it enough, I won’t buy it.” Smart stores are responding in creative ways. Some salespeople say, “No, that’s not on sale, but it will be starting next week,” which amounts to a counter-offer. A smart consumer will reply by saying, “Can you put it aside for me until then?”, implicitly offering to buy it if they do. Some salespeople say no, others say “Sure.” The net result is that store and consumer have haggled over the price to agree on a sale/purchase. Yet the smart retailer actually has an advantage in this exchange: they get to name the sale price in temporal haggling.

By comparison, in active, more traditional haggling the consumer takes the initiative, saying something like “What’s your best price on this widget?” If the salesperson replies with the sticker price, the haggle is over and the consumer leaves. If the salesperson names a price, the consumer responds dismissively, and says, “I wouldn’t pay a nickel over $X for that”, and the salesperson can choose to respond or not. This is, as I say, traditional marketplace haggling.

If a retailer wants to capitalize on the re-emergence of haggling into the North American marketplace, they need to anticipate it, and come up with a range of responses. One might be to say, “We can’t discount this item today, but it is going on sale next week. Would you like to put a deposit on it to hold it until then?” The retailer regains the initiative this way, and moves towards a close. Or better still, the retailer should look for a way to add value rather than cut price by making a counter-offer like, “No, I’m sorry, we can’t discount that item. But we can offer you a 50% discount on a matching accessory if you buy it.”

Regardless of approach, though, retailers should be prepared to return to marketplace haggling, and have a range of responses ready to deal with it. Consumers, as always, should decide what they want, and what their bottom line is in getting it.

11) Health care magic blossoms. Putting aside the issue of cost, which concerns everyone, the ability of health care to solve problems is beginning to move at computer speeds, in part because IT is increasingly being used by doctors, nurses, hospitals – and patients – to manage health care, and in part because research is increasingly being done using smart, powerful computer tools to perform research and execute treatments. Among the changes in the immediate future of health care are:

• The rapidly rising ability to repair failing hearts and minds (or at least brains) and other organs with stem cells. Stem cell treatments are starting to move out of the laboratory and into the operating room, and 2012 will see hundreds of people receiving this kind of therapy.
• Similarly, 3D printers, which have been in development for roughly 20 years, are now good enough that they are starting to be used to create replacement organs from a patient’s own tissue. This will gradually move into mainstream medicine, with replacement hearts, livers, and kidneys being at the top of the list.
• Quadriplegics will increasingly be able to interact with the world through prosthetics controlled by thought alone, either through electrodes that interpret brain wave patterns, or implanted chips which interpret specific thought-impulses.
• Retinal implants are starting to emerge that can help blind people discern light, shapes, and some objects. The implication is that we may be able to help aging boomers improve their failing eyesight as they age – one of the biggest complaints of old age!
• Health care is increasingly falling into the hands of the patient – literally. Smartphones, which are fundamentally wearable computers with all the capabilities of what used to be called “supercomputers”, can now work with Bluetooth-enabled sensors to monitor various aspects of health, from the vigor of your workout, to the health of your heart, to the level of your blood sugar. This will lead to a revolution in health management, with consumers sometimes way out in front of practitioner.
• Likewise, as patients become more and more comfortable with researching medical conditions and treatments online; they are demanding an increasing role in their own diagnosis and treatment; becoming active, important advocates for fund-raising and acceptance of treatments; and blunt critics of health care practitioners through social media and word of mouth. Smart practitioners are accepting this trend and rolling with it. Old school practitioners are resisting, but may wind up steamrolled by it.
• Crowdsourcing of tough diagnoses, and novel solutions to the medical and financial problems of health care promise to open yet another front in the health care revolution. This follows on with the success of crowdsourcing in helping leading-edge research scientists in astronomy (galaxyzoo.org) and protein research (Foldit game softwear).
• Sequencing your genome gets cheap. Sequencing the first genome cost billions of dollars and took decades to perform (culminating in the Human Genome Project). Today it costs about $1,000 (although analysis costs significantly more). Within 10 years, it will cost $100, and analysis will cost about $500 more, and will provide you a complete run-down of where your vulnerabilities lie, and what you can do to forestall future health problems. For 2012, we will see incremental advances towards that goal, with major diseases identified, and a short list of things you do – and don’t – want to do or eat prescribed. This is the true beginning of personalized medicine, and it will revolutionize health care.

12) Technology accelerates in 2012. It’s hard to know what to leave out: electronic mind-reading? Glasses that emit sounds and smells to allow you to enhance social media? The proliferating tablets and smartphones with ever-more wondrous abilities? Here’s a partial list of things I think demonstrate trends that will become increasingly important:

• 3D printers – As well as making replacement organs, 3D printers are coming into the price range of consumers, and may mean that you can buy your own desktop factory. Need a replacement screw for a door? Make it yourself. Need to duplicate a key? Ditto. See a nifty device on TV? Download the plans and make it yourself. Of course, who knows what the ink cartridges will cost.
• Near-eye monitors – These look like glasses, but are computer monitors. They’re the lineal descendents of jet fighter heads-up displays, and will revolutionize the way we use computers, particularly smartphones, but have been hampered by high costs. Prices are starting to approach luxury consumer levels, so applications will start to appear in things like immersive gaming, personal entertainment theaters, medical imaging, and augmented reality.
• Augmented reality through your smartphone – Augmented reality is overlaying information on top of the view from your Mark 1 eyeball, much as Google Street View overlays the names of shops on a photo. You’ll be able to hold up your smartphone’s camera and have your phone overlay directions, stores, infrastructure views, or whatever else might be useful to you. This gets better when you can view the results in your near-eye monitors.
• Cloud computing explodes – Owning a computer is so 2010. Cloud computing is rapidly placing the resources of today’s supercomputers in your hands for pennies a minute. One researcher used one of the commercial clouds to try to break his password to a social media website by brute force, just to see if he could do it. Using the cloud and standard code-breaking techniques he did it in minutes, and it cost him 39¢. As the tools to harness this power get more powerful and easier to use, the potential of the cloud will be adapted by more and more users.
• Siri & copycats + babbling to your smartphone – Siri is an application of the iPhone 4S that allows you to speak to your iPhone and get it to do things for you. This might be setting a count-down timer, converting milliliters to fluid ounces, finding an address and directions from your present location, or looking up a phone number (all of which I’ve done). Apple is offering this technology as a beta version now, but every Siri request goes through Apple’s servers. This means the potential exists to assess what people want to do, and come up with solutions, improving the results really quickly, making personal avatars (also called PDAs, butlers, or assistants) much more valuable in short order. And that means everyone will rush into the field. This will lead to lots of really bad copycat applications, but ultimately a revolution in how we use technology.
• Biometric passwords – Our world is becoming so full of passwords that need to be foolproof (meaning our tendency to forget them) that biometric passwords are almost inevitable, and they are beginning to appear. They will be expensive at first, but gradually retina, fingerprint, voiceprint, and other means of making sure you are you will become cheap and commonplace, and then you will become your own password, no memory required.
• Robots – Everyday robots are here, but they are clunky, expensive, or just plain cute. That’s changing very quickly, and 2012 will see more and more of them appearing in more and more places. Typically these will be commercial settings, but health care is one place where robots make sense and will be used. Rosie the Robot won’t be washing your dishes this year, but she’s coming – if you’re willing to pony up the equivalent of the price of a luxury car.

Like all years, there will be good news and bad in 2011. Because of the bad planning, bad judgment, and bad behavior of previous years and decades, some of the potential bad news is very scary indeed, as I’ll get to in a moment. The odds are that 2011 will be a not bad year, but the risks are higher than normal for economies emerging from a recession. I’m going to deal with the scarier parts first, and then move on to happier things, so bear with me.

GEOPOLITICS

North Korea has worn out everyone’s patience, including China’s, but nobody knows what to do about it. As well Kim Jong Il and his anointed successor have grown up being told that they are always right, and everything they want to do is perfect, which makes them unlikely to listen to even allies (or ally) like China when they don’t like what China has to say. As a result, while the odds are against it, and some kind of negotiated stand-down is still the most likely outcome, North Korea’s narcissist leader could go too far and finally provoke a disaster, up to and including a shooting war. This is specially true now that South Koreans have turned hostile to North Korea because of it’s recent killing of South Koreans.

Iran will continue to work towards nuclear weapons, plus the missiles to deliver them, no matter what anyone says to them. Nobody in the Middle East or the West wants that. The critical question is: do China and Russia put their narrow self-interests before peace, or do they work to stop what could lead to a potential (nuclear) war in the region?

What seems like a revolution in a country that rarely makes news in the West, Tunisia, could become a massive problem for America, and complicate the entire geopolitical equation. What started as food riots in Tunisia rapidly became political protests, and led to the ouster of the former president, Zine El Abidine Ben Ali. As this gained attention elsewhere, the long-suppressed opposition to Hosni Mubarack’s American-backed dictatorship in Egypt flared up. America is now in a position of supporting a despot against what could become a popular uprising. This not only makes it look hypocritical for cheering on democratic uprisings in places like the Ukraine and Iran, but is a big risk for them going forward. If Mubarack falls, he’s likely to be replaced by a government far less amenable to Washington, and much more hostile to Israel. This could seriously complicate the Middle Eastern political situation, especially in the wake of the PLO’s embarrassment by Israel, as revealed by leaks about concessions that PLO leaders were prepared to make to get a Palestinian state. Moreover, there are now protests in the streets of Yemen. This could be the beginning of the end for the satrapies of the Middle East, redrawing the map of one of the key flashpoints of global geopolitics. And if Saudi Arabia’s monarch were to go, you could add real uncertainty to the price of oil, and the strength of the global recovery.

ECONOMY & FINANCE

Canada spent 2010 crowing about what a great country it is, how well it fared in the Great Recession, and how sound it’s public finances and banks are. We may well eat those words in 2011 as our economy slows down, the price of oil goes up, increasing tension between oil-producing and manufacturing provinces, and consumers find that they are struggling with too much debt. If we’re truly unlucky, we could have the crash that everyone else had in 2008.

As well, the unfunded liabilities of retirement benefits promised to civil servants are starting to come home to roost. Already in developed countries around the world, stories are starting to appear about the unpopularity of high salaries and retirement benefits accruing to civil servants. This will continue to grow as a story – and as a fiscal reality at federal, state/provincial, and municipal levels of government. Ultimately, these stresses will lead to pitched political battles, with civil servants rightly pointing to the fact that they have firm contracts for these benefits which can’t be rolled back after-the-fact, and critics rightly pointing out that governments can’t afford to fulfill the promises they’ve made. As this problem continues to gain prominence, as it has in the financial crises in Europe, it will raise the noise level of the debate everywhere else. We’ve already seen the final resolution in a parallel case: the unions of the American car companies gave back the store when the alternative was to bankrupt those paying for pensions and benefits. But it’s going to be a long, painful, noisy road before we get there.

America’s financial position could get even worse than it was in 2008, only this time it will be the state governments in trouble rather than banks and car companies. The list is led by Illinois, California, and New York, but more than half of all state governments are in some financial difficulty, and not all of this is related to the anemic recovery. The over-promises made by governments to their civil services, as just noted, is now threatening to overwhelm state finances. There’s a very real chance of multiple state insolvencies in 2011, leading to a run on state and municipal credits, and potentially triggering a run on the dollar and US Treasuries. What happens after that is anyone’s guess.

Meanwhile, the situation of the PIIGS of Europe isn’t getting any better. Bond investors aren’t buying the Euro bail-outs of Ireland and Greece, and it becomes a question of whether the skepticism stops there, or whether it spreads to Italy, Portugal (already under scrutiny), and, most importantly, Spain, the fourth largest economy in the Euro-zone. The real risk is that someone that the market isn’t already worried about, like Belgium, goes belly-up. If that happened, it would throw everyone’s credit into question, and could trigger a run on almost all Euro-credits (possibly exception Germany). And if there’s a run on Euro-credits, it could trigger a run on the Euro – but if that happens at the same time as a run on the dollar, where do currency traders flee? There are no other currencies capable of taking the gaffe. Gold, of course, would skyrocket, but there just isn’t enough gold to absorb the demand – but that would leave an awful lot of unhappy investors looking for alternatives, and crowding into niche currencies like Swiss francs and Canadian dollars, spreading the pain by forcing their currencies to shoot up.

If none of these disasters occur – and it’s hard to see how we can dodge all of these bullets – then the global economy will continue to improve. (Admittedly, this is a little like saying “If we don’t die, we’ll be fine.”) America’s economy will grow, but not terribly quickly. Projections range from 1.5% to 3.5%, which really indicates how uncertain the outlook is. I would estimate that, absent major shocks from the issues above, the U.S. economy will grow closer to the high end at something close to 3-3 ½ %. This will lower unemployment, but very slowly, leaving a lot of dissatisfied Americans, and threatening Obama’s re-election in 2012.

And the U.S. Congress is likely to be more than slightly fractious, with the Tea Party ideologues trying to run Congress on right-wing ideals and running smack into the real world of congressional politics. This is going to lead to widespread frustration on many fronts, and from all parties involved. It’s going to be particularly interesting to watch the Republican party try to digest the Tea Party-ites, while the Tea Party tries to take over the GOP. I suspect the GOP will win through sheer size and inertia, but will use the Tea Partiers as shock troops in the war against evil (the Democrats) and the devil (Obama).

A related question will be: Can anyone in the Republican party stop Sarah Palin? They’re scared to death she’ll win the nomination – and blow the election. What Americans should be more afraid of is if she wins the nomination, and then wins the election. Everyone I talk to about this says that it’s not possible (except for die-hard right wing-nuts who say “Please God!”), but stranger things have happened in electoral politics.

TRADE & EMPLOYMENT

Tensions between trading partners over competitive devaluations, notably between China, America, and the Euro block, will rise. If cool heads do not prevail, we could see a full-out currency war, and, if protectionists, who are in the ascendant everywhere (“American jobs for Americans!”), get their way, it could degenerate into a 1930s-style trade war with disastrous results.

There’s another aspect of the employment picture that is also worrying. What we are seeing is a massive change in the world of work. As the Rapidly Developing Countries (“RDCs”) like China, India, Brazil, Mexico, and so on, expand their economies, and take on increasingly sophisticated jobs at wage rates that are significantly below those of the developed countries, jobs have migrated, and will continue to migrate, from developed countries to RDCs. In effect, a global economy implies a global labor force. What we are now witnessing is wages in the RDCs rising, and wages in the developed world falling – an equalization of the disparities in wage rates. Since workers in developed countries won’t like this, it is going to further exacerbate the acrimony between trading partners.

TECHNOLOGY

There are a number of technological developments that will start to emerge in 2011, and continue through the decade. The first is that television broadcasters and their delivery people – being satellite and cable providers – are fighting a running (and ultimately losing) battle against online video. Smartphones already offer TV without a television, and in the home users are increasingly going to turn to devices like Apple TV and Google TV, combined with services like iTunes, YouTube, and Netflix, for their video entertainment. Given that this also opens up their living rooms to Internet shopping, it’s going to be difficult time for traditional TV suppliers. It’s also going to be an even greater reason why video production companies are going to gradually move away from TV distributors: they can start having relationships with individual video consumers instead of broadcasting through middlemen.

Another extension of something we’ve already seen is augmented reality, which is adding information to the real world. Hence you might look at a picture of an intersection on your smartphone while you’re getting driving directions, and have arrows and labels appear on the photo (or live) image of your location, identifying the stores (or addresses), and possibly listing items that are on sale you might be interested in. Location advertising is catching on, and will become bigger over time, in part because merchants (and cellphone suppliers) want it. How eager consumers are for this is going to be the real determining factor.

The real advance in augmented reality, though, as well as many other potential applications, will come if consumers adopt near-eye video monitors. Near-eye video means putting an eye-sized video screen right up in front of your eye, which means that a small image can look very big. If such monitors are clear except when there are images for display, they could look like a pair of ordinary glasses, but act as computer (or video) monitors. If that were to happen, augmented reality could become an everyday tool. The real key is whether consumers want near-eye video; the technology has been kicking around for years as the lineal descendent of jet fighter pilots’ heads-up displays. So far, though, consumers have shown little interest. On the other hand, 3D images have been around since the 1800s, but only recently have consumers found a form they were willing to accept. The same is true of ebooks (about which more in a moment), which have been kicking around for well over a decade, but didn’t make the grade until Amazon and Apple made them desirable. What technology will be capable of in the future is relatively simple to foresee. What consumers will want, especially with technologies they’ve never experienced, is much harder to project.

Perhaps the biggest technological change coming in this decade is going to be the arrival of everyday robots and computer intelligences. This marks the full emergence of the Third Industrial revolution. The first, which blossomed in the 19th century, was when humans used machines to augment their muscles. The second emerged in the 1960s when machines (computers) helped humans manipulate information and make decisions. The third will happen when seemingly intelligent computers make the decisions and act on them autonomously, while humans set objectives, but leave implementation to the computer. Functioning robots, as opposed to prototypes and toys, already exist, but they are expensive, and used only in specialized situations. As computing power continues its faster-than-exponential increase, and decision-making and self-learning software becomes more sophisticated, robots, computer intelligences, and automation will begin to appear in industrial, commercial, and health care facilities. This will lead to two major effects: First, it will lead to a significant increase in the standard of living by increasing worker productivity. And second, it will throw more and more people out of work as automation becomes financially preferable to human workers, and in a steadily widening range of jobs. This is going to cause the divide between those who are gainfully employed (the well-off, and the so-called “gold collar” workers) and everyone else to expand dramatically. This is a recipe for political and social instability.

Meanwhile, social media will continue to expand, and their influence will become more pervasive. The pressure for another means of communicating beyond keyboarding, text, and screens is building, but so far, no one has come up with a better interface between users and computers. Near-eye monitors, verbal commands, virtual keyboards, and gesture commands have been tried, but have not gained much traction. It may be that Microsoft’s Kinect™ may be the beginning of something big, if it can translate into an interface that is used in serious computing as well as gaming. Perhaps Apple will, once again, revolutionize computing with a new interface. If someone does come up with a more intuitive computer interface that is faster, slicker, and more natural than typing, then social media will explode like a gasoline fire on a hot, windy night.

And ebooks have finally arrived, after many years of false promise and false starts. As happened in music, Apple didn’t invent the ebook, and wasn’t the first mover, but has produced the most popular device for it in the iPad that will only get better in successive versions. What hasn’t happened quite yet is for ebooks to become something more than text on a screen and printed words on a page. There is a hybrid out there, waiting to be invented, that is significantly more powerful than either medium alone. We may see it emerge in 2011.

The revolution in health care is only getting started. Computer intelligences are going to start being used to identify new epidemics as they emerging, and to analyze the microbes involved to find cures in record time. A new technology, called Genetic Programming (“GP”) is about to emerge on the health care scene, and will first produce diagnostics and prognostics in the treatment of cancer, and eventually revolutionize cancer treatments and drugs themselves before moving on to other areas, such as diabetes and other diseases.

Meanwhile, the continuing struggle to find enough money to finance all the health care that consumers (and voters) want in the aging developed economies is going to heat up. Ironically, there are lots of ways of improving both the effectiveness and the efficiency in health care, but our social structures have become so calcified, and health care has become so politicized, that it’s impeding real improvements. It’s ironic that this is happening simultaneously with a technological revolution in health care that promises so much.

© Copyright, IF Research, January 2011

The next 10 years will dramatically change your life and almost everything in it. And while there are lots of things likely to change, I’d like to focus on 10 that will be of particular importance to you personally, to our society, and to the meeting planners generally.

Someone always benefits from change – and those who will benefit most will be those who prepare most successfully for what’s to come. Since I’m necessarily going to have to be brief, I would encourage you to contact me if you’d like to discuss any or all of these 10 points.

1. Everyday robots

The first thing you need to know is that we are about to experience the emergence of what might be called “everyday robots” and computer intelligences. We’ve been raised on the idea of robots, and they’ve always been just beyond the horizon, like flying cars, vacations on the moon, and the three-day workweek. We grew up with pulp fiction fantasies about what robots would be like, such as Rosie the Robot from The Jetsons, the Terminator from the governor’s mansion in California, or the classic Isaac Asimov I, Robot series of stories. But over the next 10 years, we are going to experience an increase in computing power of roughly 1000 times, and that means that that the hesitant, clumsy robots that are now appearing in laboratories will get dramatically better over the next decade, improving about as quickly as an 18 month-old toddler improves at walking. Robots will first be used with applications in the military, police, health care, and be created by hobbyists for fun. Much of the non-military development is in Japan, because they have, by many measures, the oldest population in the world, and need arms and legs to do things.

Aside from the sex trade, which seems to soak up new technologies and harness them for sexploitation, the development of robots for civilian use will start primarily in the workplace, especially in fields like health care. (I’ll deal with sex robots at a later date, because they are a real prospect.) It will take time for robots to come to households, because they will cost about as much as a car. But the business potential of another household possession in a field that may become as important as the automotive industry is going to drive development. And along with everyday robots, we will also get computer intelligences that rival human intelligence in certain, tightly defined areas. This leads to my second point.

2. Dramatic increases in productivity

Related to the rise of robots will be automation and dramatic increases in productivity, which has several implications. The first is that increased productivity will lead to cheaper goods and services, which will produce a substantial increase in your standard of living and a much higher level of wealth – if you have a job or occupation. But greater productivity also implies that companies won’t need to employ as many people, which will mean that many jobs will disappear, replaced by automation.

Traditionally, automation has led to new jobs with better wages and prospects appearing, and that will happen – but these new jobs will also require more education, more intellect, and more creativity. This means that people who don’t have appropriate skill sets will become chronically unemployed or underemployed. This could make it even harder for young people, just finishing their formal educations, to get their feet on the bottom rungs of the employment ladder.

In the meeting industry, it also means smart tools for planning your conferences and running your business. Think of having an automated assistant that can do a lot of the routine work in organizing a conference, including the routine interactions with hotels, travel agencies, printers, communicating with conferees, and so on, leaving you to do the tougher creative work, and to focus on the human, interpersonal aspects of your job

3. The ascent of women

Next is the ascent of women and different ways of doing business. The first part of this is the decline of men, as men seem to be harmed more by environmental degradation than women. Based on research that is only just starting to emerge, two to four times more boys than girls are afflicted by attention-deficit disorders and hyperactivity disorders in America. Sperm counts are dropping in many parts of the world, and testosterone levels are lower. Testicular cancer is higher in many places. And the birth rate of boys in many countries, including America and Japan, is far lower than statistical variance should allow. We don’t really know why this is happening, but researchers are theorizing that males are more vulnerable to new chemicals, such as synthetic hormones, that are making their way into the biosphere.

Meanwhile, girls have better roles models now than ever before in our society, up to, but not quite including president of the United States. More businesses are being started by women than men, and the businesses started by women are more likely to survive, so that over time, more and more businesses will be headed by women. But the clincher is that almost 60% of college and university students are women, and the ratio is even higher in most graduate fields. As a result, a steadily rising share of tomorrow’s leaders will be women, which will lead to a cultural shift. Without being too glib, I think it’s safe to say that women have a different way of thinking and acting in the world than men, and this power shift to women is going to change the way our society – and this industry – behaves.

4. The health care revolution

Point four is the health care revolution, starting with customized drugs and treatments. Herceptin is a drug used to treat breast cancer – but it is only used with patients that have two particular genetic markers. If you don’t have these two specific genetic characteristics, there’s no point in giving you Herceptin, because it won’t help you. And it’s the precursor of customized drugs. They will be dramatically more effective – and, at least initially, dramatically more expensive as well because the research costs will have to be spread over a much smaller population.

Meanwhile, decoding your personal DNA is rapidly becoming affordable. You can already get genetic tests that show whether you are susceptible to certain kinds of diseases, such as Alzheimers, ALS ( Lou Gherig’s disease), or Huntington’s. But whereas it took decades, and billions of dollars to decode the first human genome, within 10 years, having your personal genome fully decoded will cost about $1000 or less, and take a few hours, bringing it into the realm of the possible. And this cascade of data about you will, gradually, allow us not only to ascertain what diseases you need to guard against, but also which lifestyle choices, including foods, will work best for you.

And a third leg of the future of health care is the wearable computer companion to monitor your health and guard against threats. There are already smartphone applications to monitor heart rate, blood sugar, calories burned, and so on. These are going to become increasingly sophisticated, and will, over time, become dedicated to monitoring your health, heartbeat-by-heartbeat, and intervening as necessary to reduce the risks of health crises, such as heart attacks or strokes, as well as to advise you on optimal health management.

These three things, combined with electronic health records, will, over time, produce the greatest tool for health treatment and research humanity has ever had: a global system to identify health risks, and find cures or treatments for them in something approaching real time. And I fully expect that they will eventually lead to life expectancies of 120 years and more, although this development will take much more than just 10 years. Which leads me to my next point.

5. Transhumanism

Like my previous point, this is going to start over the next 10 years, but will carry on into the indefinite future as we learn more, and figure out what to do with what we know. Transhumanism is the school of thought that science and technology are going to allow us to first cope with disabilities, and then to augment and exceed our natural abilities. Some of this, such as stem cell therapies, will mean using biological mechanisms to repair our own bodies. Beyond that, transhumanism also projects that we will use artificial means to augment our abilities. It has already started with devices that help us survive. Some, like heart pacemakers, have been around for decades. Others, like brain pacemakers to prevent seizures, are relatively new. Next are prosthetics. Of course, the oldest prosthetics, like peg legs and hook hands, have been around since Disney invented pirates, but I’m talking about arms and legs controlled by thoughts and nerves. Prosthetic arms & legs will act and seem natural.

As we move towards computers that can read your intentions and interpret your thoughts, we get into interesting man-machine combinations. Eventually we will be able to choose, by an act of will, to control distant machines and mechanisms by thought. We’ll be able to use the power of computers to augment the speed with which we think, and the depth of things we can “remember.” Imagine, for instance, being able to Google something on the Internet just by thinking a query, and getting the answer either whispered into your ear, or displayed on contact lenses on your eyes that act as a computer monitor. There are already prototypes of precursors of these things, from thought-controlled wheelchairs for paraplegics, to memory glasses that can remind the forgetful who the person in front of them is. As I said, this is a brand new field, so I doubt if you’ll need to worry about the Borg just yet.

6. Critical economic uncertainties

The headlines this spring have centered on whether we’re likely to have a double-dip recession, and the financial and fiscal crises of the PIIGS of Europe (Portugal, Ireland, Italy, Greece, and Spain). These uncertainties are caused by too much debt borrowed by consumers and governments alike.

Having too much debt is like having a rowboat that’s heavily loaded – it doesn’t take much to swamp it completely, and it doesn’t have much resilience. Moreover, it takes a long time to bail out of debt, so these problems are not going to go away overnight. Accordingly, in your plans and planning, I would strongly recommend that you be prepared for repeated, periodic shocks and crises that lead to financial upheaval, and economic slowdowns or outright recessions over the next decade. Believe me, I don’t like this prospect, but I think it’s better to be prepared for shocks than to be caught by surprise by them. You need to have plans in place for dealing with such upheavals and slowdowns, or else you’ll be flattened by them.

7. Growing political and social turmoil

In addition to the potential for new crises and turmoil in the global economy and global markets, there is also the potential for increased financial and political turmoil in the developed countries. Not only is the U.S. federal government, among other nations, running up unprecedented amounts of debt, increasing its financial vulnerability, but many of America’s individual states are in a squeeze. This is happening not just because of the Great Recession, but also because they’ve been too generous with pensions and benefits to their retirees over the years. For example, by 2018, the state of Illinois will have to pay $14 billion a year for benefits for retired state employees, which is more than a third of the state’s total revenues, and could bankrupt it, much as happened to General Motors.

And in a larger sense, there are going to be growing conflicts between public sector retirees, who mostly have decent pensions, and private sector retirees, who mostly don’t yet will be paying taxes to support their civil servant neighbors. As well, there will be conflict between aging boomers, who will vote for generous Social Security payments and unlimited health care, and their children who will be paying taxes for benefits they don’t believe they will ever receive. Accordingly, the political situation in most developed countries will likely get worse – hard as that is to believe!

8. Climate change accelerates

Within 10 years, the debate on climate change will be effectively over except for those who are willfully choosing to ignore evidence. It’s already clear from changes happening in the polar regions that climate change is happening, and climatologists are astonished by how fast they are occurring. Change may come not only more rapidly than we expect, but faster than we can adapt. I suspect we’re in for a wild ride, and that will almost certainly force changes on us that we will find difficult. We will also find some changes that are helpful, such as longer growing seasons in parts of North America – particularly the northern tier of Midwestern American states and the Prairies of Canada – IF we get the right rainfall patterns, which may also change. But it’s also clear that many of the changes will be harmful to us and the way we live.

I also suspect it is going to force us to make significant changes to our lifestyles, imposing Green Economy ideals on even disbelievers. This doesn’t have to be a bad thing, because another name for “pollution” is “waste,” and by decreasing waste, we can actually increase profits. Specifically for the meeting industry, I would suggest that we need to develop a “green index” to indicate the environmental cost per participant of conferences as a means of first measuring, then pushing for improved efficiencies.

9. The energy revolution

We’ve already seen with natural gas that new technologies can revolutionize even well-established industries – but that’s not going to be enough. If you look at the long-term cost of oil over the past 150 years, you can see that, with the added demand from rapidly developing countries like China and India, coupled with the sheer volume of energy we need to add each year just to maintain our lifestyles, we will push up the price of oil at a remarkable rate – at least for the next several years, until we come up with good energy substittues.

Now, let me reassure you – we are not running out of oil, because almost ¾ of the Earth’s surface is covered in water. We haven’t discovered or exploited the vast majority of the oil under that water. But we are running out of cheap oil. The BP oil spill in the Gulf of Mexico is an example of the problems ahead. More expensive petroleum will provoke us to develop new ways of using energy more efficiently – so called “negawatts” – as well as developing new sources of energy. It’s astonishing what demand for a critical resource can do, but it’s going to take time to displace oil from the center of our energy equation.

For this industry, though, it’s also going to mean that travel is going to become more expensive. We will see more moves towards virtual meetings, more local meetings, and regional satellite meetings that combine through telecommunications into national conventions. Start thinking about, and looking for ways of stretching travel dollars, because it’s going to be a fact of life.

10. The purpose of life

When people ask the question, “What is the purpose of life?”, they are starting off in the wrong direction with an improperly formed question. This is not a question at all, but a statement: Life is purpose. Without purpose, there is no life.

But this raises a different question: What’s my purpose? And this is a question that can’t be answered by looking out there, but in here, inside yourself. I got this from a wise man, Viktor Frankl, in a book called Man’s Search for Meaning. And here’s the question he posed that you should ask yourself: “It’s not a matter of what you can expect of life, but what can life expect of you?” It may be that you think your purpose is to bring home a paycheck, and that’s certainly important. But I would urge you to stop and think about what life can expect of you, what you feel is your calling, and then be guided by this sense of purpose.

The decade ahead is going to be radically, remarkably, dangerously different than any period you’ve lived through or have experience with. And it’s going to offer opportunities that you cannot now anticipate. If you don’t have a clear sense of where you are going and why, and are not prepared for the challenges we face and the opportunities ahead, you will be devastated by what’s to come.

Someone always benefits from change. Let it be you.

Good luck, and God speed. Thank you.

There are three principal issues that will drive health care over the next quarter century: an aging population; technology; and money. They are linked, but different. Let’s start with demographics.

For the past 20 years or so we’ve lived in a period of relative demographic calm because most of the key generations have stayed within a single phase of their life cycle. This is about to change, as three of the key demographic cohorts are about to undergo major demographic transitions. The first group is mature adults (those born 1938 or before, currently in their 70s and up), who have been described as the “oldest elderly.” A steadily rising percentage of this group are now moving into the stage where they can no longer manage their lives and affairs without assistance.

There will be a dramatic increase in demand for services for this group, especially in chronic care facilities, as this group is growing faster, in percentage terms, than any other age group in the population. Moreover, the children of this group are the boomers, and we boomers are not known for our sweet reasonableness. This means boomer children will demand government help in coping with their parents. The net result is going to be a steadily increasing demand for help with the oldest elderly in our population.

Trouble ahead for boomers – and everyone else

Next are the baby boomers themselves (born 1947 to 1967, turning 43 at the low end and 63 at the high end). In 10 years’ time, they’ll be between 53 and 73. This means the leading edge boomers are now entering the transition to retirement. By my estimates, the annual cost of health care per person remains relatively level until about age 55, at which point it starts going up almost exponentially. The boomers, the largest generation in history, are now entering the high rent district of health care, and although I’ve seen reports that claim that health care costs are going up because of the increasing costs of treatment, and not because of an aging population, I flatly don’t believe it. As one example, the Government of Ontario, in a 2005 publication, projected that health care spending there will rise to more than 55% of program spending (i.e., total spending excluding debt service) by fiscal 2024-25, and I believe this underestimates the real situation as these estimates were made before the recent recession. By 2035, I expect Ontario to be devoting something in excess of 60% of its program spending to health care – and that’s typical of jurisdictions throughout the U.S. and Canada. This will create all kinds of fiscal and financial problems, as well as acrimonious debate at state and provincial governments across North America – and, indeed, throughout the developed world. These costs may even bankrupt all major governments in the developed world, because these programs are essentially pay-as-you-go, and demographic support for the biggest generation in history is simply not there. If governments are to avoid bankruptcy, then people in the developed world are not going to get the health care we want and expect.

Finally, there are the children of the baby boomers, called the “echo boomers” or “echoes”, born roughly between 1977 and 1997 (currently between 12 and 32). In 10 years time, they will range between finishing their formal schooling and approaching their 40s. The echoes are the Next Big Thing for any organization that hires and employs people, for they are not only the next generation of clients and customers, they are also the next generation of health care professionals. The problem is that there aren’t as many echoes as there are boomers, with the result that we are going to experience an increasing shortage of health care professionals for the next 10 years. It will improve slightly after that, but then get substantially worse beyond 20 years, especially in Canada, unless Canada and the U.S. import and certify substantially more foreign doctors, or unless technology provides new solutions.

So where are all the customized drugs?

Next let’s look at the very real promise, and the phony pursuit of personalized drugs. The pharmaceutical industry is talking a good game when it comes to personalized drugs, but I don’t think they mean it. If you look at the current state of such drugs, the industry tends to point to two drugs in particular: Herceptin and Gleevec.

Herceptin (from Genentech) is the exception that proves the rule. It is much talked about, but with few exceptions, its example hasn’t been much followed by pharma companies. In my opinion, the reason why Herceptin is an exception is that the screening test that accompanies it eliminates roughly 65% of potential patients, producing a much smaller potential market. Since big pharma companies are largely run by marketing people and bean counters, they hate the idea of cutting down on potential markets. They would much rather find another blockbuster, even if it means discarding a perfectly effective drug that doesn’t have a large-scale market. And yet, since the overall percentage response rate in the overall potential population for Herceptin is less than 10%, Herceptin would probably not have been approved without a genetic screen. With the screen, a failed drug was rescued, serves as a niche drug, and still produces $1 billion in revenues per year. Yet, despite Herceptin’s success, as far as I know, Genetech doesn’t seem to have made any effort to improve the focus of the diagnostic test; it’s seen as “good enough,” even though they could increase the efficacy of the drug by narrowing the focus further.

By comparison, Gleevec (from Novartis) seems like the industry’s ideal – but there’s a catch. Gleevec targets a particular protein in chronic myeloid leukemia (CML), and produces a 75-80% response rate, which is head & shoulders above competitive drugs. This is the industry’s ideal, but it was targeted on that protein because it was already known there was a relationship between that protein and CML, which is the reverse of most drug research.

Pharmaceutical companies dragging their feet

There are probably other “personalized drugs” in development, but nowhere near the number you would expect from Herceptin’s success as a $1 billion a year niche product. I believe this is because the pharma industry is dragging its feet. And I further believe this is a mistake: pharmaceutical companies should be eager to pursue this approach, as it will make them more money than ever before. The problem is that it requires a different business model with which they aren’t familiar. All they know is that the marketing model they have followed for decades is based on big blockbuster drugs that sell billions of dollars of drugs to millions of people. They don’t see how selling millions of dollars to thousands of people can replace that – yet it can, as I’ll come to in a moment.

Moreover, in both cases, Herceptin and Gleevec involve a single protein, a single test, or a single genetic marker, yet most genetic indicators will be more complex than that. Mostly there will be multiple indications, and a multivariate approach will be called for, which has been a problem in drug research so far.

According to Tufts University, in 2006 it cost $1.2 billion to develop a new drug and bring it to market. Most of that is the opportunity cost of selecting one compound for development compared to other possibilities, and investing the 15 years necessary to bring it fruition. And a hefty chunk of the cost associated with drug development comes in drugs that get as far as Phase II or III clinical trials, and then fail because they either are not effective enough, or they have unacceptable side-effects.

But if you can identify the populations for whom such drugs either have low efficacy or unacceptable side effects, you can still market such drugs profitably, albeit to much smaller segments of the target market. So, which is better? To get nothing from a drug, and flush all of the associated costs? Or to target it to a smaller population, derive lower revenues, but at higher profit margins? To date, the major pharmaceutical companies have generally decided they’d rather flush such drugs than take them to market. If your revenues are $20 billion, and Wall Street expects 20% growth, you have to come up with an additional $4 billion in revenues every year. With that as your target, a drug that might produce $100 million in annual sales is not worth pursuing. Yet, according to one research group with whom I’ve worked, “A failed drug is an expensive lost opportunity.”

Improving the beauty contest in drugs

A major pharma company may have 300 compounds it is considering at any one time, and must pick and choose which ones it will develop. This becomes a matter of internal politics, and a bit of a beauty contest. If, instead, the pharma companies developed companion diagnostics based on genetic indicators right from the start, they would have a much better way of predicting the potential market for each drug, and hence its ultimate profitability. The direct marketing industry knows this well. Broadcast advertising – TV and newspaper ads – sells on the basis of cost-per-thousand. Direct marketing, like direct mail, sells on the basis of cost-per-sale. And successful Google Adwords marketers and the like measure success on the basis of cost-per-dollar-of-profit. Companion diagnostics are a way of coming closer to being able to predict cost-per-dollar-of-profit, and that should be the yardstick pharmaceutical companies use going forward. Moreover, it’s a yardstick that would lead them to substantially bigger profits and lower costs.

Which brings me to new research tools. Although statisticians deny it vehemently and for obvious reasons), statistical analysis is no longer sufficient in a world where relevant data are growing by orders of magnitude, and multivariate analysis is required. The old tools just aren’t up to the task, yet companies cling to them because, as Abraham Maslow once remarked, “When all you have is a hammer, you tend to see all your problems as nails.” Yet, new tools are emerging in strange and unusual places, such as mathematical models of fuel combustion in jet engines, and software techniques for designing radio antennae, none of which have any credibility with pharma companies – but which can solve these kinds of massive data problems. By using such tools, and embracing rather than avoiding pharmacogenomics, I believe pharmaceutical companies can reduce drug development costs, perhaps by an order of magnitude, produce more successful drugs, albeit for smaller potential markets, and sell them for higher profit margins because of their higher efficacy. Let’s look at one potential new tool set to see if this is realistic.

Genetic programming – a new tool set

I’m going to describe one specific tool that’s already emerging into the marketplace, and about which I – accidentally – know quite a bit, called genetic programming, or “GP.” Genetic programming is a machine-learning technique where the system evolves by reinforcing success. It uses the idea of natural selection to discover solutions. The solutions that work best are combined to discover even better hybrids, much as cross-breeding horses can create offspring that are faster and more robust than their parents. GP is not an artificial intelligence system, and there is no attempt to mimic human reasoning. GP’s advantages are that it:

• Solves the problem of too much data.
• Integrates large & diverse data sets.
• Facilitates the unbiased discovery of key factors, especially where the key factors are unknown.
• Ignores factors that turn out to be irrelevant or unimportant; and
• Creates human readable models that can serve as indicators for future research.

Moreover, GP is a non-linear method, which means it can be dramatically faster than conventional analysis techniques, especially for multivariate analysis involving large amounts of data. Indeed, large amounts of data tend to produce more robust results.

I’m about to describe a company called Genetics*Squared, but in the interests of disclosure, I must also say that I know the principals, I have worked with this company, and I own shares in it. This is also how I know so much about it. However, since Genetics*Squared (or “G*2”) is privately held, there are no shares available to outsiders anyway, so the disclaimer is academic.

G*2 is a “dry” biotech company that uses GP to analyze clinical trial data in order to produce prognostics and diagnostics predicting who will respond to a given therapy or pharmaceutical. G*2 is about to seek FDA approval for a prognostic test for colorectal cancer to determine which patients, following surgery for colorectal cancer (CRC), are at risk for a relapse and should seek additional treatment. Preliminary indications are that the test they developed has 85% sensitivity, and 90% specificity. These results compare with the National Comprehensive Cancer Network (NCCN) guidelines of 73% and 38%. This means G*2’s test is very good at identifying the people who are – and are not – at risk for recurring colorectal cancer. The test does not suggest the form that treatment should take; that’s up to the patient and her doctor to explore and decide.

A logical next step from there might be to use genetic programming to run clinical trials with those patients who are at-risk for a relapse in CRC to see which ones would respond to an off-patent, generic chemotherapy drug, such as 5-FU (Fluorouracil), a chemotherapy drug that’s been around since the 1950s. For those identified at high risk for CRC recurrence, and for whom 5-FU is found to be effective, as identified by such a diagnostic, the efficacy and cost of 5-FU would have the potential to completely undermine the market for any new drug for whom there was no screening test.

For instance, suppose G*2‘s test were to eliminate 66% of a potential market for a new chemotherapy drug for CRC, and suppose further that one-third of those at risk for relapse could use generic 5-FU instead of the newly developed drug. This means that instead of a potential market of 100% of those people who have had surgery for colorectal cancer, the pharmaceutical company would have a potential market of only 22% of such patients. (Please note that I’m making these numbers up purely for illustration purposes.) Hence, using more sophisticated screening, and a low-cost, generic drug might not only be more effective, but could spoil the potential market for a new drug that does not identify the appropriate niche for its use. It is this low-cost competition that will ultimately drive the pharma industry toward pharmacogenomics, not regulation: the threat that smaller companies could destroy the market for blockbuster drugs. Moreover, how many failed drugs could be resurrected with an appropriate genetic screening? And how much would that save in R&D costs? It will ultimately be money that will make pharmacogenomics appealing.

On beyond genetics

Beyond genetics, IT will also force a reshaping of health care. Moore’s Law, coined by Gordon Moore of Intel fame, states that computers will double in speed, and halve in price every 18 months. (Actually, Moore’s Law refers to the number of transistors on a chip, but this is the effect of it.) Yet Moore’s Law, even though it represents exponential growth, is too conservative. Not only is the pace of change accelerating, but the rate of acceleration is increasing. This implies that a computer for a given price will be roughly 1000 times faster in 10 years’ time than it is today. This is going to produce changes over the next 10 years that are at least twice as dramatic as the changes of the last 10 years. And technology is going to have direct and important changes in medical practice.

Let’s start with the basic building block of the global computer network that tracks and identifies new diseases and epidemics that I described earlier. The precursor to the computer companion, which forms that basic building block, is already in widespread existence today: the smartphone, such as the BlackBerry or iPhone. For instance, I understand that there is an application for the iPhone that communicates with a heartbeat monitor to monitor your health heartbeat-by-heartbeat, much as I described it earlier. Only this isn’t science fiction; this is today’s reality. As smartphones become more powerful, more globally connected, and work with devices that monitor and analyze different aspects of your health, I expect they will gradually morph into all-purpose assistants, including health monitors.

When coupled with the intricate knowledge of our individual genomes, and the dramatic increases in our understanding of what the various markers in our genomes mean, these computer companions will become incredibly powerful and useful agents on our behalf. And analysis of individual genomes is not that far off. The first reading of a human genome was the focus of the Human Genome Project, and it cost billions of dollars. Today, the cost of reading a genome is approaching $1,000, and within five years, or ten at the outside, it will approach $100 per person. And once read, your genome will provide a continuing source of new insights into why your health is the way it is, plus why your body is the way it is, as we learn more about how to interpret the genetic markers buried in each genome.

The greatest medical tool humanity has ever had

When coupled with global analysis of lifestyle factors, food, exposure to particular viruses, bacteria, and chemicals in our personal environments, we will begin to build a broad understanding of what helps – and hurts – us, both as individuals, and as a species. This will be, I believe, the greatest medical tool humanity has ever had.

But it won’t end there. There will be lots of developments in lots of areas. These range from dramatically improved x-rays, CAT scans, and imaging of all kinds, to computer-oriented solutions to difficult problems, to the rise of robots, both for surgery and for attending to pateints.

Let’s start with an example in imaging. Dr. Otto Zhou of the University of North Carolina is working with Siemens to bring out a much clearer and more precise x-ray technology based on electron-field emission[i].

This allows for an array of receivers so that a CAT scan, for example, can be taken all at once instead of progressively, so that the images will be dramatically sharper and more detailed. It also allows for imaging at the same time as treatment, so that health care professionals can watch precise images as the same time as they zap a cancer tumor, for instance.

Up until now, robots have been seen as science fiction phantoms, good for Hollywood, and not much else. All of the robots to date are seen either as being bolted to the floor in car factories, or as cute little toys that don’t do much. But did you know that Toyota is pouring billions of yen into producing household robots, and plans to start marketing them in their home market, in Japan, this year?

Over the next 10 years, we are going to see the gradual emergence of much more flexible and powerful robots. BigDog & HRP-4C are both examples of today’s robots. They are awkward and clumsy. Rather like human toddlers, they are taking their first steps, and those first steps are ungainly and tentative. Yet, like human toddlers, they will improve rapidly, and this will be powered both by dramatically faster computers, and increasingly sophisticated tools and techniques to use them.

According to Raymond Kurzweil, an inventor and technologist, by 2016, a $1000 computer will have more computing power (not “intelligence”) than a human brain. By 2036, he projects that a $1000 computer will have more computing power than the entire human race. And increasingly sophisticated software will harness this power into seeming-intelligence that will first rival, and then exceed our own. And in health care, this rapidly accelerating intelligence will produce a rapidly increasing flow of new discoveries and treatments.

It’s not all good; trouble ahead

Finally, let me address one of the problems ahead, just to demonstrate that I’m not a pollyanna, and that I do appreciate that the road to dramatically improved healthcare will be rough. The biggest problem ahead is summarized in two words: money and politics.

We know that money spent in preventing disease is generally more effective than curing it. Hence, promoting the use of condoms for safe sex is more effective than trying to deal with an AIDS epidemic, but politics and social attitudes often get in the way. Moreover, we know that some choices make no logical sense. We know that we spend, on average, about half of all the money we will ever spend on health care in the last six months of our lives. So sensibly, we should know when to say enough is enough. But paranoia about litigation, coupled with an attitude of preserving life at any cost, seems to prevent us from even discussing such issues, particularly when it’s your mother, your wife, or your son that’s involved.

Yet, I don’t think I need to convince anyone here that our health care systems in both America and Canada are leading towards bankruptcy. The U.S. Federal Reserve and the Government Accounting Office essentially agree on the extent of the projected unfunded liabilities of the U.S. federal government. The Fed estimates it at $99.9 trillion, while the GAO estimates it at $101 trillion – and almost 2/3 of these estimates relate to health care costs.

And while the Canada Pension Plan is in much better shape than Social Security in the U.S., Canada is in no in better shape in terms of its promises on health care. The IMF published a report, which has been refashioned as a book by Peter Heller and published by the IMF, called “Who Will Pay?” In this book, Heller quotes the IMF as indicating that as of 2002, the U.S. had explicit net debt of about 45% of GDP, and Canada had explicit net debt of about the same (Canada’s has moved down since then, while America’s has shot up). However, when you add the implicit debt due to future promises, in 2002, America’s explicit plus implicit debt amounted to about 265% of GDP, and Canada’s amounted to about 415%. What is beyond dispute is that both governments – indeed, all governments of all developed countries – are going to be under enormous financial pressure because of the aging of their populations. What we don’t know – and what I would strongly suggest you should prepare for – is how governments and voters will cope with being unable to give boomers the health care they demand. To attempt to do so is to court being voted out in favor of some demagogue who promises the impossible.

And there’s another aspect to the future: the war against infectious disease has not yet been won. We are already experiencing a silent pandemic about which virtually nothing is said: the spreading of antibiotic-resistant superbugs. And even here, policy choices are clouded by what should be extraneous issues, such as creating deliberate breeding grounds for superbugs by feeding antibiotics to livestock, a practice advocated and protected by the farm lobby. As well, neither governments nor pharmaceutical companies want to finance the development of new antibiotics. Governments don’t want to do it, because it looks, to a bean counter, like an extra expense. Pharmas don’t want to do it because there’s no guarantee of a large enough market. Moreover, we have no true cures for viruses at all, except vaccination ahead of time, and there is not much money going into research in this field, either. Yet, in the war against infectious diseases, I can promise you that we have not won the war, only an opening skirmish. We have pitched battles yet to come, whether in the emergence of a viable airborne ebola virus, or some completely unknown bacteria infection.

For example, consider the H1N1 flu pandemic. It had the potential to be as bad as the Spanish flu of 1918-20, although we also have a better idea how to contain it. But now imagine the emergence of a hyperbug – a strain of bacteria resistant to all known antibiotics – emerging in the midst of the flu pandemic. This is not unlikely; overcrowded hospitals and over-tired health care workers create a likely breeding ground for just such a hyperbug. The day will come when we can analyze and respond to such threats in a matter of days, but we’re not there yet, and millions of people will die until we get there.

Two questions everyone wants answered, but no one wants to ask

At the core of the health care debate, there are two questions that no one wants to ask, but that everyone wants answered. First: How can I get someone else to pay for my health care? And second: Do we want a more effective & more expensive health care system, or a less effective & less expensive health care system? And the problem is that voters (and hence politicians) want a more effective, less expensive system, which is not one of the choices. Worse yet, we are not even discussing these issues. Instead, we are shouting at each other about useless matters that won’t solve the problem.

Change will come slowly at first. Social systems have tremendous inertia. Drug approvals are slow. Payers are slow to accept new, more expensive, more effective drugs. Doctors are so swamped that they are reluctant to take the time to learn new fields, like genetics, that impinge on their own, so that practice in the field can often take years or even decades to catch up with research in the lab. And the general public, and the politicians they lead, don’t take the time to understand the debate, with the result that they fall prey to demagogues who cloud the issues for their own reasons. In Canada, it’s a phony “public vs. private” debate. In America, it’s the misleading “socialized health care is worse than dying” debate. Both debates are largely irrelevant to the central issue of financing health care. Worse, they divert attention and vital resources from the real issue.

Changes will start slowly. But the pressure from an aging population, an Internet-informed voting public, and the startling developments from science will start to move the log jam, slowly at first, and then faster and faster. If you are not prepared when the pace picks up, you will quickly be left behind. I wish you good luck, and God speed. Thank you.

This is a collation of a number of presentations I’ve made in the last few months to groups involved in health care, pharmaceuticals, and even food processing. It encapsulates a lot of what I believe will happen in health care over the next 25 years. Because it’s over 6,000 words in length, I’ve cut it into two parts. This first part will deal with what health care is likely to look like in 25 years’ time. The final part will deal with how we might get there from here.

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To begin, I need to impart a sense of the dramatic changes that are going to occur in health care over the next quarter-century. Intellectually, we all know that there are going to be a lot of changes, and significant ones to boot. Emotionally, though, I really doubt if any of us believes, in our heart-of-hearts, just how dramatic these changes are going to be.

I think we would all agree the rate of change is accelerating, as it has since the beginning of the Industrial Revolution. I think most people would also agree that the pace of change was substantially faster at the end of the 20^th century than it was at the beginning. I’m going to arbitrarily say that it was at least 6 times faster, and that change will be at least 6 times faster over the next 25 years than at the beginning of the 20th century. I suspect that I’m being conservative in this assumption. By using that as the yardstick, I’m going to draw the analogy that health care has changed as much over the last 150 years, since 1860, as it will over the next 25 years to 2035. With that in mind, let’s look back at health care 150 years ago.

The year 1860 saw the beginning of the American Civil War. Although opium and ether were known, they were rarely used in surgery, and almost never on the battleground, where surgery was performed by giving the patient a stick wrapped in leather for them to bite on while they sawed off his leg (hence the nickname “sawbones”). Sterile dressings were unknown, and wounds were allowed, or even encouraged, to suppurate. There were no antibiotics, no thoracic surgery, no germ theory of disease (that came in 1865 with the findings of Joseph Lister), and no knowledge of bacteria, let alone viruses. Darwin’s Origin of Species had just been published the year before, in 1859, but Gregor Mendel’s work on genetics would not be published until 1865, so there was no understanding of the mechanism of how our bodies worked, even though the theory of evolution required a mechanism not-then explained. Moreover, Mendel’s work was largely ignored for decades, until well into the 20^th Century, and Darwin’s work is still considered controversial today – although hopefully not here.

Neither drugs, nor advertisements for drugs were regulated, and people could, and did, make fantastic claims for quack nostrums, many of which were actively harmful. In short, we look back at that era and think of it as a Dark Ages of medical practice.

Likewise, when the practitioners of 2035 look back at us today, they will shake their heads at our profound ignorance, and the dangerous things we do to patients. Let me use pharmaceuticals as an example. Although things are changing rapidly, the three traditional means of finding new drugs are still in widespread use: accidental discovery, as with penicillin; trial and error, as when pharmaceutical companies screen tens of thousands of compounds before selecting one for development; and studying compounds used by witch doctors and wise women, as with the discovery of digitalis. In 25 years, we will have a profoundly improved understanding of the mechanisms of the body, genetics, disease, and disfunction, and we will approach treatment and cures deliberately, almost as an engineering problem rather than a process of problematic scientific discovery.

Jump ahead to the year 2035

Now let’s jump ahead twenty-five years, to the beginning of 2035 and consider what it might be like, and then come back to the present to see how we might get there from here. Be warned, though, that I’m going to give you one possible scenario of the future, based on the evidence I see today, but I want to emphasize that the future will be different in many important respects. In particular, I would encourage you to consider two specific aspects about the future. First, I would encourage you to consider a future that is much more advanced than I’m proposing. My comments constitute, in effect, an educated guess, but if I’m wrong about the future of health care, it will be because I’m being too conservative, not too aggressive. And second, I find the political situation, both locally, in the United States and Canada, and globally, extraordinarily complex. Therefore I would suggest you should consider a complete series of background scenarios over the varieties of political changes possible over the next two-and-a-half decades. I don’t have time to do this today, so it is, as they say in the finest universities, left as an exercise for the reader

So, let’s assume that it is the beginning of a new year, 2035. What does health care look like? First, there will be a global computer network that gathers information about the health of each individual within the network, which covers almost two-thirds of humanity, to provide early warning signals about possible new diseases and epidemics. State and provincial departments and ministries of health accumulate information about the state of health of every one of their citizens instant-by-instant, strip off personal identifiers, and pass the information on to national computer agents.

These national computer agents, or health-bots, search for patterns that indicate the emergence of diseases, and assesses these patterns to determine if this is a new disease, a mutation of an existing disease, or the seasonal re-emergence of a known disease. As well, the national health-bots merge this information with a global health-bot network, operating out of the Center for Disease Control in Beijing, that looks for similar patterns on an international level. If a disease reaches a measured level of importance, particularly if it is a known virulent disease or a new disease, the health-bots notify the relevant national and international bodies, and provide all known information about the disease, including the relevant genetic markers of people who have caught or transmitted it.

From this information, humans, working with seemingly intelligent computer research assistants, begin inferring the genetic pattern of the disease from the genetic patterns of the individuals who have contracted the disease, while researchers are sent into the field to take direct samples from these infected individuals. These samples are collected within 48 hours of initial notification. From the inferences and the direct data, the gene sequencing of the disease is completed within another 24 hours, and the necessary vaccine or antibiotic countermeasure mapped out. Within a week, 1,000 doses of a test vaccine or antibiotic are available for testing on volunteers, who have already been identified for genetic suitability and contacted.

Within the next two weeks, the potential countermeasure has been administered by the volunteers’ health care practitioners, and their responses have been gauged. Based on the predictive models and how well they mirror the actual responses of the volunteers, the vaccine or drug is approved for general use, along with refined estimates of the total number of doses necessary to stop the potential epidemic. The doses are ordered, and within three additional weeks, the most important potential victims are given the countermeasure, and the potential epidemic is stopped before it truly gets started.

Monitoring health, heartbeat-by-heartbeat

The smallest unit, or building block, of this system is the embedded computer companion that most of the world’s population now uses, coupled with the widespread decoding of individual genomes. It now costs the equivalent of $100 to decode an individual genome, the vast majority of which is administrative cost. These computer companions monitor individual health heartbeat-by-heartbeat, and are able to detect problems early from heart rate, galvanic skin response, fluctuations in body temperature, subconscious minor muscle movements indicating discomfort, and other indicators. If appropriate, a computer companion will signal any significant abnormality to the individual, her health practitioner, and, if warranted, a local ambulance corps, as well as her state or provincial health-bot. Moreover, the global health-bot has tens of millions of patterns of health risks for every conceivable known health threat, including heart attacks and strokes, and makes these patterns available to individual computer companions. As a result, each computer companion has an almost uncanny ability to anticipate health threats and problems as they emerge – and this ability steadily improves as more and more data is collected, analyzed, and collated by the global health-bot network.

This detailed, individual monitoring of instantaneous health has led to a dramatic decrease in significant heart attacks, strokes, and other sudden-onslaught health threats, as well as the identification of early warning signs of health risks. It has also led to a graduated scale of health insurance premiums, based on the lifestyle factors that are matters of personal choice, like fitness and diet. Genetic factors are excluded by law in determining insurance premiums on the premise that no one is responsible for the genes handed to them by their parents.

Meanwhile, non-infectious diseases, like cancer and diabetes, have largely been cured, or are at least managed, and the survivability of all cancers, especially sneaky ones like ovarian and pancreatic cancers, that don’t present symptoms until very late, has risen dramatically. Not only are they detected much earlier, but they can be cured, often in a single treatment that amounts to a resetting or reprogramming of the individual’s genetic code that cancels out the cancer, diabetes, cystic fibrosis, multiple sclerosis, celiac, or other genetically-linked disease.

Treating aging as if it were a disease

At the same time, there is serious research being done on treating aging like a disease. Not all of the problems have been solved yet, but enough has been done that there is a very real prospect that those who are in reasonable health in 2035 will be able to live as long as they choose – or until their money runs out, which isn’t quite the same thing. Organ, joint, and other body parts are routinely replaced from organs grown from the patient’s own stem cells, overcoming the problems of immune-system rejection. An obvious consequence of these developments is a dramatic increase in life expectancy to beyond 100 years. How far beyond, no one really knows, and accidents and suicide have become the two leading causes of death.

All these changes have not only revolutionized health care, but fostered a pitched battle over pension rights, entitlement to government-sponsored health care treatments, and intergenerational conflicts that were unknown in previous decades. In essence, these debates can be boiled down to a simple example: if it becomes possible for someone to live to age 120, for example, after working 40 years from age 25 to age 65, do they have the right to collect a pension without any further contributions to society for 55 years? If life expectancy extends beyond 120, how long are they entitled to be “retired,” i.e., to contribute nothing except money? These are issues that have never had to be confronted before – but they have now reached a rolling boil. The most recent issue is whether it is ethical to restore reproductive rights and abilities to people of any (not “either”) sex who, in earlier days, would have been considered far too old to have children.

The future of the pharmaceutical industry

The pharmaceutical industry is still very much alive, but much changed. Not everything is known or understood about how or why diseases attack some humans, but not others. And while the human genome, and its interaction with the human proteome, is being intensively studied, the recursive nature of the subroutines embedded in the genome have turned out to be far more complex than anyone expected. Big pharmaceutical companies spend most of their research dollars outside their own companies, in networks of small, entrepreneurial companies. Big pharma companies in 2035 are primarily involved in data gathering and assessment, drug development, clinical testing, manufacturing, distribution, and sales – the things at which they excelled at the turn of the 21st century.

Drug purchases and health treatment prices are negotiated between the computers of the supplier, payer, patient, and practitioners, with humans being involved only if there are significant disagreements. Price negotiations are largely based on mathematical models of previous transactions that have been accepted by all involved.

In short, people of 2035 will look at what the practice of medicine in 2010 as unforgivably primitive. And if this sounds far-fetched, let me quote professor John H. Holland, of the University of Michigan, who recently commented that “By the mid-twenty-first century, much of medicine as it was practiced in the latter part of the twentieth century—for example, using surgery, chemotherapy, and radiation to treat cancer—will look as ineffective as the bloodletting of earlier centuries.” Holland is a professor of psychology, electrical engineering, and computer science at the University of Michigan, and a pioneer in complex systems and nonlinear science.

So, let’s just assume, for the moment, that I’m right in my scenario about the future of health care. How would we get to there from here? That’s the subject of my next blog.

© Copyright, Richard Worzel, March 2010.

Let me start by defining risk management as the process of asking the right questions about what might happen in the future, and then preparing the best plans you can to deal with events that might occur. Hence, if there’s a major pandemic, and if you’ve considered that possibility, have a plan prepared to deal with it, and the plan works reasonably well, then you have adequately managed that risk.

And yet, I very much doubt that any contingency plan, no matter how well you prepare it, will deal with everything that happens – you will still be caught by surprise in some regards. This is why you always need to do a “lessons learned” assessment after each crisis. Your task in risk management, though, is to both to be able to cope with problems as they arise, and to be prepared to change your plans when new, unexpected developments occur.

I’m going to approach risk management from a futurist’s viewpoint, not from the body of risk management literature, so my view will be different from the risk management texts that are out there.

And let me start by making three comments about risk management. First, the best kind of risk management is where you forestall problems rather than cure them. Hence, successfully promoting the use of condoms for safe sex is better than being prepared for a widespread outbreak of AIDS. Second, risk management can’t always allow you to stop problems from happening. You can’t stop a plane crash, because that’s out of your control, so the appropriate response then becomes containing the problems, keeping difficulties to a minimum, and producing the best possible corporate outcome in the most cost-effective manner. Hence, while you may not be able to stop a plane crash, you can make sure that you don’t allow too many key corporate leaders to fly in the same plane. And third, not all risks are negative. This last point is often not considered at all, or is considered to be outside the purview of risk managers, but I contend it is critically important to proper risk management.

Suppose, for instance, in-house research allows you to cut carbon emissions, reduce costs, and improve customer satisfaction (which, by the way, is not that far-fetched as it might sounds as it has been the focus of work I’ve done for number of clients). Or consider a significant increase in productivity, due to new technological tools. Does your organization have the awareness and ability to capture the benefits of such improvements, or will you waste the opportunity? I know that, for many groups, this has more to do with the responsibilities of senior management; my point is that not all the changes we face in future are negative, and managing positive outcomes can be just as important as managing negative ones – they just don’t get as much attention. I call this the “lottery effect”; if improperly managed, positive outcomes can be frittered away, as often happens when someone wins a lottery and blows all the money.

Three fundamental types of risk

Next, I believe there are three fundamental kinds of risks to be concerned about: Rapid onset, gradually developing, and unexpected.

Typically with rapid onset risk, you will have considered a catastrophic event, but when it happens, it’s still a shock because of the speed with which it occurs. Examples include SARS, a flu pandemic, a plane crash with senior management on board, or a major product defect that causes harm to customers or clients.

With a gradually developing risk, you can see it coming, but because it happens over a long period, no one day seems that urgent and you can usually justify deferring action. Examples include the rising level of financial stress due to an aging population, and the growing abuse of mortgage financing in the States from 2000 and before. Eventually such gradually developing situations reach a tipping point where they become a crisis. At that point, if you haven’t prepared for it, you can look awfully foolish. After all, after the fact, everyone saw it coming, so why didn’t you? This is precisely what happened with the financial panic of 2008.

Finally, let’s consider the unexpected. The unexpected risk is something that happens that you haven’t foreseen or considered, and to which you must respond. Among the more recent classic examples are the terrorist attacks of 9/11, the south-Asian tsunami of 2003, or a tornado hitting downtown Chicago.

The classic responses to these three kinds of risk also tend to vary, according to the type. The classic response to rapid onset risk is to deploy the contingency plans you’ve prepared, if they exist; otherwise people will treat it as they will an unexpected risk. With a gradually developing risk, the classic response is to ignore it, and hope for the best. With an unexpected risk, the classic response is panic.

You need to think through all three kinds of risk, and have plans to deal with them. Most of the effort devoted to risk management is spent on the first category, rapid onset risk, but you can be devastated by all three. It can be argued that the second category, gradually developing risk, actually falls more into the area of corporate management rather than risk management. That may or may not be appropriate, but however you define it, you still need to manage it. And, of course, managing the unexpected is, by definition, hard to do, but you can try to whittle down the types of things that are unexpected. I’ll return to this later.

Environmental scanning

Next, I’m going to discuss risk management in two parts. First, I’m going to survey the future, which is also called “environmental scanning,” and talk about some of the risks I see ahead of us at this time. Then, I’m going to talk about a particular approach to risk management. I’m also going to give you some tools to take home and use, and discuss how you can use these tools to improve your strategic foresight and develop appropriate contingency plans to cope with all three kinds of risk. So let’s start by talking about what risks are out there that we can see

Let’s start big, first with global health, and then the global economy.

We know we are experiencing a flu pandemic, but what we don’t know is how bad it will be. Although there have been deaths from the H1N1 strain, the number of deaths in the Southern Hemisphere was significantly lower than for the normally expected seasonal flues of recent years. However, this was also the pattern we experienced with the Spanish flu of 1918-20, so let’s review that pandemic. We don’t really know how bad it was, because there weren’t as accurate global statistics as there are today. However, the estimates I’ve read indicate that roughly one-third of the world’s population, or about 500 million people, caught Spanish flu, and between 10 and 20% of that third died from it. This death rate is between about 3 and 6 times normal, and would overwhelm our health care system.

Now transpose these sickness and death rates to your own staffs. Imagine having 12% of your staff sick at any one time, and having 5-10% of your staff die from a pandemic. What would that do to your company’s ability to operate? Probably decimate it, regardless of any contingency plans you’ve made – but the real issue becomes how badly you are affected, and how quickly and well you recover.

Of course, global pandemic plans aim to break the cycle of infection and transmission, so it’s quite possible that isolation and inoculation could keep these numbers down. But in your plans, this is the kind of rapid onset risk you need to be considering. So far, this kind of killer flu pandemic has been a once-a-century risk – but we’re due, and there is, now, a potentially nasty pandemic that we know is happening.

By comparison, there’s another pandemic that is also happening, but as a gradual onset risk, which is why you haven’t heard much about it. The rise of antibiotic-resistant bacteria represents a very real threat to public health, but its rise has been relatively slow and steady, so we’ve tended to ignore it. We know it’s happening, but there isn’t the same kind of outcry about it – it doesn’t get the media or political attention, even though it may ultimately claim more lives than the H1N1 flu.

Now let’s step back and consider a more complex probable risk. Suppose we get hit by a combination of events, such as the emergence of a hyperbug – resistant to all known antibiotics – while we are fighting the flu pandemic. This is not an improbable scenario: if health professionals are overworked and tired, or overwhelmed with patients even after triage, as might well happen in a flu pandemic, then they may get sloppy with protection procedures. Then, add to this the inevitable overcrowding of hospital facilities and there is a real increase in the probability of the emergence of a hyperbug, leading to substantially higher death rates, and a dramatic decrease in the effectiveness of health care facilities and practitioners. Have you thought about or planned for these kinds of combined risks?

The potential for nasty economic surprises

Now let’s turn to the economy. At this stage of the cycle, when the economy is starting to grow again, it’s easy to assume that things will continue to get better. That’s probably the case, but the economy and the global financial systems are still fragile, so we could be shocked by new nasty surprises that still might happen. I’d like to mention three possibilities, although there are others.

The first is that the American banks – and others – are now starting to register significant losses on commercial real estate loans. If things go badly, this could push more banks into insolvency, trigger a new run on banks, reigniting a financial crisis. These aren’t the same big, money-center banks, by and large, but a lack of confidence in some banks could easily spread throughout the system, as we saw last October.

The second is one we’ve all rather conveniently forgotten: toxic debt. It was lack of due diligence on the part of all the financial players in the States – and elsewhere – that led to the creation of all of the toxic, asset-backed securities in the first place, and there are trillions of dollars of this stuff still out there. At some point, someone has to figure out how to value these securities – which may be impossible – or write them off entirely. However they are dealt with, someone is going to have to take big losses – and taxpayers are almost certain to figure prominently in this group.

And the third, and potentially most dangerous, is a wild card: the possible insolvency of the government of the United States. Let me cover this with a quote from the blog I posted on my website in June, 2009, “Is America Too Big to Fail?”:

“… the U.S. federal government, unless it makes a Herculean effort to change direction, will fail. … With the U.S. already the biggest debtor nation in the world, with its biggest [external] creditor, China, already musing publicly about whether the U.S. government is capable of supporting the debt loads projected, and with market players musing about whether the U.S. government will lose its AAA credit rating, who is going to want to step up and buy more U.S. securities than have ever been sold before? Why would any sane investor want to take that kind of risk? … If the American government tries to sell all of this new debt, and doesn’t find enough takers, than the U.S. government won’t have enough money to pay the bills it is so freely running up. Its checks (or cheques) will start to bounce; it will be functionally bankrupt.”

Am I sure that these things will happen? No, and I clearly hope they don’t. But the difference between a crisis and an opportunity is foresight, and foresight implies taking a hard look at reality, whether you like it or not. And just as clearly, you need to have a Plan B ready to deal with these kinds of possible shocks. I would classify a possible default by the government of the United States as a gradual onset risk – and, as such, one that we all tend to ignore.

The aging of the population: another gradually developing risk

Now let’s turn to one aspect of demographics that is clearly defined and falls into the gradual onset category of risk: the aging of the population. Average per-capita health care costs tend to remain reasonably stable from about age 2 until around age 55 – but then they start rising almost exponentially. The baby boom – the biggest generation in history – is entering the high-rent district of health care. They were born between 1947 and 1967, so the leading edge is turning 62 this year. This is inevitably going to push up spending on health care, as will happen not only in America and Canada, but throughout the developed world.

Three things will happen as a result: First, program spending in every other area will have to be cut to allow for greater health care spending – which will make for uncomfortable choices, acrimonious cabinet meetings, and unhappy users of government services. Next, governments and corporate payers will try to cut back on the things that government- and corporate-sponsored health insurance covers (you can already see this happening), with the result that there will be pressure from unhappy voters to spend even more on health insurance. And finally, there is a high probability, in my view, that taxes will rise, and might rise significantly.

This is clearly an example of a gradual onset risk – and yet, it’s one that governments and the private sector alike are ignoring, but which will have significant, even dire, consequences. There is a very real risk that these problems could bankrupt not only American and Canadian national, state, and provincial governments, but the governments of developing (and rapidly aging) countries around the world as well. I’ll bet that very few organizations here have even considered this in their risk management planning

Unexpected risks

Now we come to unexpected risks.

There are positive risks ahead of us that are highly probable, but hard to anticipate. There are going to be immense new opportunities opening up to do things that have never been done before – but they are difficult to forecast precisely because we have no experience with them. For example, I worked on one of the first applications for cellphone licences in the early 1980s. Our group (which did not get a license) did a feasibility study of the potential demand for cellphones, and concluded that it had money-making potential because almost 8% of consumers said they were likely to use a cellphone. This was good enough to establish a business case, but our projections were wrong by almost a factor of 10. Neither we, nor anyone else, expected the extent of the market penetration of cellphones at a time when they cost over $2,000 each, and were so heavy that you had to store them in the trunk of your car. The reality turned out to be much better than we had projected – and could have bankrupted us if we had won the license, but had not had the necessary working capital to fill demand.

Next, have you considered the risk to your business of someone you don’t know applying technology in novel ways? Let me use as an example a prognostic test for cancer, for instance, that is about to be submitted to the Food & Drug Administration for approval. (And pause for disclosure: I’ve worked with this company, and hold shares in it, but it’s not publicly traded, so you couldn’t buy shares in it anyway.) This test has been produced by a young upstart of a company that applies patented, problem-solving computer software to come up with tests and treatments for cancer. The test promises to be significantly more effective than current techniques in telling patients who have had surgery for colorectal cancer whether they should have follow-on therapy or not.

Now suppose you were a pharmaceutical company that had just come up with a new drug to treat Stage III colorectal cancer, only to find that this young upstart could tell half of your market that they don’t need any additional cancer treatment, and a third of the remaining market that they can get results that are as good, or better, with a cheap, out-of-patent drug? Tufts University estimates that in 2006 it cost $1.2 billion to develop and market a new drug, and suddenly you find that market for your drug has just been scooped by a company offering two tests that cost about one-tenth of a course of your new drug. Where were the risk managers in your organization while this was happening?

Governance risks

Which leads, rather naturally, into governance, both corporate and public sector. I would suggest that a number of the things I’ve characterized as risk most organizations tend leave to senior management, particularly gradual onset risks, and positive risks. But what about management itself as a risk?

Looking back at last year’s financial collapse, it’s clear that the interests of the organization and the interests of management don’t always coincide. What happened in the U.S. financial system (and elsewhere) was that senior managers were chasing the prospect of enormous bonuses by pushing their organizations into taking unreasonable risks. This is a classic case of “heads I win, tails you lose”, because all that could happen to the executives would be that they were fired, whereas many corporations lost everything, either by being taken over (Bear Sterns, Merrill Lynch) or going to the wall (Lehman Brothers, AIG).

The problem is only partly recognizing these risks; the other part is how do you deal with someone to whom you report who is putting the corporation at risk? Especially if the Board of Directors is involved as well? I would suggest that you’ve already lost if you encounter a situation where you are trying to change the behavior of senior management that is pursuing personal gain at corporate expense. Instead, this is the kind of risk that, probably, can only be dealt with by anticipating it. In particular, you should seek to have corporate policies in place that identify such behavior, and provide an accepted means of blowing the whistle if it happens. Even then it’s dicey – which only heightens its importance.

Next let’s consider external governance risks. We’ve already talked about two potential government risks: rising taxes because of health care costs; and over-reaction because of privacy violations. I think you should also consider what happens when governments are faced with a world where they have less and less influence at a time when their constituents are feeling more and more anxious. You are likely to get governments that act irrationally, and look for scapegoats and whipping boys. And if your company happens to be handy for that purpose, it may be your turn in the barrel. I would strongly suggest that one of the risks you should consider preparing for is arbitrary government actions. You should watch for it, and have contingency plans in place for dealing with it. And remember; it’s easier to head off such developments than to undo them once they’ve become law. This also argues strongly for working together as a group, both here, and within your own industries, because an industry has more chance of influencing outcomes than a single company.

The balance of this article, dealing with techniques for risk management, will appear next week.

by futurist Richard Worzel, C.F.A.

All developed nations are struggling with health care because of their aging populations. In America, for instance, the Great Debate is on, chock full of noise and nonsense, about providing universal health care. Those opposed say that it is socialized medicine, and therefore a sin, and bad. Those who are for it say health care is a human right, and therefore a virtue, and good. And I can’t (or won’t) resist adding a couple of asides:

First, health care is not a human right. Tommy Jefferson and Co. never murmured a syllable about it, and would, I suspect, have been flabbergasted that someone would even suggest that government should pay for it. Likewise, the canard about socialized medicine is hypocritical nonsense as America has, today, the worst, least effective, most expensive kind of socialized medicine in the world. Medicare and Medicaid cover the two most expensive groups of the population: the old, and the poor, while leaving out the young, the middle class, and the healthy, all of whom would lower the costs per person of health care. And many of those who do not have health care coverage because they fall through the cracks (some 40 million-odd Americans) will go to the local hospital emergency room. Emergency rooms must, by law, treat walk-ins, even when the hospitals know they won’t be paid for such treatment, thereby throwing the burden on those who do pay. Since hospital emergency room care is the most expensive, and least effective, form of continuing health care imaginable, I submit that America has a hybrid system that costs more, and does less than universal health care would cost in its place. (Depending, of course, on how much pork is larded into final legistlation).

On the other side, Canada has universal health care, without a parallel private system – at least in theory – so that people stand in line, and if you die before you get to the front of the line, too bad. (Why this is worse than dying because you can’t pay has never been explained by the American right. Moreover, Canada really does have a parallel, private system: you fly to the America and pay to get treated there. No one wants to acknowledge this officially; it’s Canada’s dirty little health care secret.)

Britain has a hybrid system, with public health care available to all that is frequently dreadful, and occasionally pretty good, but with a parallel private system that anyone can use if they’re willing to pay. Of course, the private system bleeds resources that would otherwise go to make the public system better, so there’s a cost to both the private payers, and to the overall health of the nation. France has an excellent system, where patients co-pay 20% of the cost of treatment, but all patients generally get prompt, top-notch care, including home visits if necessary. The only downside is that this system is threatening to bankrupt the national government of France. And other nations have other systems that work to greater or lesser extents, but no one is interested in cataloging what works and what doesn’t anywhere else, since that would mean putting aside the ideology wars that dominate health care debates. (I’ve only listed the systems of which I have direct knowledge through personal experience with friends and relatives.)

Yet, the world is getting older, and my calculations show, based on such data as I can find, that health care costs in developed countries stay reasonably stable, on average, until around age 55, at which point they start to go up almost exponentially as aging bodies need more and more care. Post–war generations (notably the baby boom in those countries that had one) are now entering their early 60s at the leading edge, which means that the number of people needing ever-rising amounts of health care is going to place enormous strains on the health care systems of all developed nations, regardless of how they decide to pay – or not to pay – for it. Public or private, it doesn’t matter, health care is threatening to break the bank everywhere.

Which leads me to the one question that everyone wants answered, and nobody wants to been seen to ask: How can I get someone else to pay for my health care? Everyone wants the finest possible health care, no matter what it costs, and everyone wants to duck out on the bill. This is particularly true of those who are reaching the Danger Zone of 55 and up – we want to find a way of forcing the rest of the population (which means the young) to pay for the health care we know we will need. Which, by the way, is blatantly unfair and unreasonable of us, especially as we have systematically ducked all responsibility for laying resources aside for that purpose in order to keep our incomes and spending artificially high. Now we want our children and grandchildren to pay for our fun.

So the real, underlying problem of health care in a world of aging people is that everyone wants to shove the costs off on someone else. Since that’s not possible, in aggregate, we get all the creative fairy tales dressed up as politics that are going on, with truly nonsensical arguments used to create enough furor to distract us from the real question.

Avoiding this question is not a win-lose issue; it’s a lose-lose issue, one that will bankrupt our governments and harm us all if we don’t soon start speaking the truth, to ourselves and to each other. As long as we duck this question, we will be dealing in smoke and mirrors, and not grappling with the real issues.

But if we do start truth-telling, then we can start asking other, relevant questions, like: Ignoring ideologies, and based only on empirical evidence, what’s the most cost-effective way to run a health care system? What works best in other jurisdictions, and how can we adopt it here? How do we attract health care workers without spending our entire budget on their services alone? How do we structure an insurance system that spreads the risk within an age group, while not unduly penalizing the young? How do we encourage the development of new drugs without bankrupting payers? What’s a fair share of health care cost per individual, and how should we measure it? Are we going to distort the premiums to benefit politically powerful groups, or use statistics to determine health insurance costs? If the latter, should we give price breaks to those who lead healthy lifestyles and penalize those who are couch potatoes do eat junk food? And how do we deal with the inevitable groups that want to distort the system? For instance, if we decided to penalize those who eat junk food for the (documented) higher costs of their health care, then the entire fast food industry would lobby against the proposal, but quietly, and behind closed doors. So, how do we prevent his from happening?

None of these questions are easy. It would be far easier to duck behind the current smokescreens of public-vs-private care and ideological purity. But if we do that, we will all of us suffer because of it.

I think the time has finally come for honesty, because the consequences of lying to ourselves will be devastating.

© Copyright, IF Research, June 2009.