There is little question that our economy, our society and just about all our institutions are going through major structural changes mostly caused by the digital technology revolution that has been all around us for the past several decades. Such technology-based structural changes are not new. In her 2002 book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, scholar and writer Carlota Perez puts our own turbulent times into a clear, historical perspective.
According to Perez, over the past couple of centuries, we have had a technology revolution every 40 - 60 years, starting with the Industrial Revolution in 1771, which was characterized by the emergence of machines, factories and canals. This was followed by the age of steam and coal, iron and railways which started in 1829; steel and heavy engineering (electrical, chemical, civil and naval) starting in 1875; and the age of the automobile in 1908. Our present information technology and telecommunications age, whose starting point Perez pegs at 1971, is the fifth such major revolution in that span.
To better understand the dynamics of a technology revolution, we should split it into two different periods, each lasting 20 - 30 years. The installation period is the time of creative destruction, when new technologies emerge from the lab into the marketplace, entrepreneurs start many new businesses based on these new technologies, and venture capitalists encourage experimentation with new business models and speculation in new money-making schemes. Inevitably, this all leads to the kind of financial bubble and crash we are all quite familiar with from our recent experiences.
After the crash, comes the deployment period, the time of institutional recomposition. The now well accepted technologies become the norm. New paradigms emerge for guiding innovation and for determining winners and losers in the marketplace. Over time, these new paradigms significantly transform the economy and everything around it, as well as re-shaping social behavior and the institutions of society.
“. . . this time we have had the boom and crash in two episodes. The first was the Internet mania which was truly fuelled by new technology and ended in the NASDAQ collapse of 2000. The other was the set of easy credit bubbles of 2003-08, when investors were pushed by an abundance of quasi-free money into finding anything but technology as an object of speculation (from commodity futures to securitized sub-prime mortgages). The enormity of this financial bubble was facilitated by the process of globalization and the capacity for computer-aided financial "innovation" acquired during the NASDAQ boom. . . ”
You need the fullness of history to understand the magnitude of the changes we are going through. We are likely in the early stages of a major industrial, economic and societal recomposition. It started in the private sector industries most affected by the Internet boom and subsequent dot-com crash. The recomposition is being led by those industries and companies that use technology most intensively, and that have also invested in the organizational capital needed to effectively restructure their companies so they can translate the technology advances into increased productivity, quality and customer service.
In Wired for Innovation: How Information Technology is Reshaping the Economy, authors Erik Brynjolfsson and Adam Saunders write:
“The companies with the highest returns on their technology investments did more than just buy technology; they invested in organizational capital to become digital organizations. Productivity studies at both the firm level and the establishment (or plant) level during the period 1995-2008 reveal that the firms that saw high returns on their technology investments were the same firms that adopted certain productivity-enhancing business practices. The literature points to incentive systems, training and decentralized decision making as some of the practices most complementary to technology.”
Not surprisingly, the IT and telecommunications industries are among the furthest along in their restructuring. Companies in these industries have had to continuously adapt to fast changing technologies and markets over the past fifteen years to make sure they survive the impact of their own innovations. These industries led the Internet boom of the late 1990s, and had to both adjust to the many new innovations being created during those times, as well as to the aftermath of the dot-com crash in the early 2000s. Over the last decade, the rate and pace of innovation has continued at blinding speed, with new technologies and products continuously transforming the IT and telco infrastructures, including smart mobile phones, tablets and sensors, cloud computing services, social media platforms, information analytics and broadband wireless networking.
Just about every industry is going through its own restructuring. Industrial companies, retailers, distributors and other industries with significant physical assets have been leveraging IT to reengineer their business processes and become more productive. Information and content-centric industries, like music, media and entertainment are also reengineering their processes, but are going through particularly rough times, as the transition to digital content and Internet-based distribution is severely impacting their business models.
Financial service companies have long been among the leading edge users of IT, but they are undergoing another major round of transitions as they adjust to the regulatory changes in the aftermath of the global financial crisis, as well as to the ongoing evolution to digital money and payments. And, even relatively slow changing industries like electric utilities are poised to restructure as they embrace smart grids and sustainable energy management.
To a greater or lesser extent, just about all private sector industries have been going through an intense period of transformation. We are now seeing major institutional recomposition reaching beyond the private sector to government and industries like health care and education that receive much of their support from government and taxes. Tough as private sector recomposition has been, these coming changes to the public sector and related industries promise to be even tougher.
When companies are no longer competitive, they go out of business and their clients take their business elsewhere. But, the invisible hand, creative destruction and other powerful free market forces that impose rigorous disciplines on business have not applied to government. There is a huge difference between failed companies and failed communities, cities or countries. Clients can easily find other companies to do business with in place of the ones no longer around. This is not the case with citizens.
How is public sector recomposition likely to play out in the US? It’s really hard to tell. There is no one pattern emerging yet in the struggles just about all our public institutions are going through, including states, cities, counties and federal agencies.
The biggest opportunities lie in governments embracing many of the technologies and organizational practices that have transformed the private sector over the past twenty years. A report released in October of 2010 by the Technology CEO Council, One Trillion Reasons: How Commercial Best Practices to Maximize Productivity Can Save Taxpayer Money and Enhance Government Services proposed a number of specific recommendations based on real-world expertise, information technologies and organizational practices that are already being successfully applied in the private sector.
To quote from the report: “Our government has an opportunity to dramatically reduce spending and cut the deficit, while also improving its level of service to citizens. By harnessing major technological shifts and adopting best business practices, we can not only make our government far more productive, but also foster greater innovation in areas ranging from healthcare to education and energy – innovation that will generate economic growth and job creation.”
“We have seen this repeatedly over the past several decades in our own industry, and in the impact of new technology models across our economy and society. Again and again, new capabilities have simultaneously reduced costs and sparked innovation.”
These kinds of recommendations to significantly improve the efficiency of government institutions are fairly straightforward and well known to anyone involved in the management of large operations. While one can debate the priorities and the potential savings inherent in each recommendation, they are not controversial or ideological. Rather, they are based on applying the best complex systems thinking and organizational management practices to government institutions.
I am well aware of the difficulties of implementing these changes. Organizational transformations are very difficult to implement in business even when the necessary changes are clearly visible. We have seen quite a number of companies go out of business because of the inability of their management to make the necessary changes, even though they understood what had to be done.
In government, these changes are even more difficult, which is why public institutions have for so long ignored inefficiencies that would have long put a private company out of business. But, eventually you hit a point where something must be done, and it feels like we are close to that point.
Many have argued that the answer is to significantly reduce the role of government at all levels, reduce taxes, and provide significantly fewer services to everyone. But, short of a very small number of committed libertarians, few truly embrace this option. When you probe a little deeper, what they really mean is that you should cut services for everyone else, but not for them and their friends, families and communities.
As we saw during the heated debates prior to the passing of last year’s Health Care Reform bill, many of the most vociferous critics of health care reform where also shouting things like keep your government hands off my Medicare. The reality is that most people, even those who call themselves political conservatives, want the government to continue to provide them services, albeit more efficiently, with fewer regulations and lower taxes.
I truly don’t know how institutional recomposition in the public sector will play out. The changes will likely be accompanied by considerable turmoil and pain. I hope that, as often happens in business, different states, regions and cities will find innovative approaches that work for them which can then be embraced by others. But, in the end, perhaps the biggest driver for change is that the present system is not working and something must we done.