Last week I wrote about the workshop I recently attended in IBM’s Almaden Research Lab on The Co-Evolution of Future Technologies, Skills, Jobs, and Quality-of-Life. In particular, I discussed the talk on the IT-based transformation of services given by John Zysman, professor of political science at UC Berkeley and co-director of the Berkeley Roundtable on the International Economy.
Professor Zysman key premise is that the service transformation we are going through is truly an Algorithmic Revolution, that is, the ability to formalize and codify the activities underlying services, express them as computable algorithms and capture them in software. Given the major advances in the power and costs of information technologies, many more such service activities are now amenable to be transformed into algorithms and embodied in software. This is profoundly changing the nature of business and just about all other institutions in society, as they increasingly turn to IT-based services to add value to their offerings.
Over the past several years I have given a number of seminars on technology and innovation in services. It has been a tough subject to teach. Services, along with their creation and consumption, have been difficult to define. So, like many others, I have discussed services and their attributes in contrast to what they are not - physical products that are generally manufactured in factories. But, while such a definition of services and the service sector of the economy may have worked well in the past, it does not work so well now.
One of the major consequences of the IT-based transformation of services is the blurring of the lines between manufactured products and products delivered as services, as well as between the industrial and service sectors of the economy. The distinction between products and services blurs, as physical products are increasingly embedded into service-based solutions, where the clients pay for the services they receive, not the products embodied in the solutions. The traditional boundaries between the industrial and service sectors of the economy have been breaking down.
“Firms’ hardware offerings are increasingly enhanced in value by ICT-enabled services offerings. Apple‘s iPod is more than an attractively designed mp3 player. Its integration with the iTunes software was critical to its commercial success, and Apple‘s online music store revolutionized the way music is sold.”
“Komatsu, a Japanese construction machinery firm, sells products with embedded sensors; these sensors send detailed information not only about the deterioration of parts, but also fuel usage and other information, to the company‘s headquarters. As a result, Komatsu can notify its customers in developing countries if fuel is being siphoned, and it can even remotely halt the operation of machines if lease payments are overdue.”
“Similarly, John Deere offers agricultural equipment that embeds an array of services. Location-referenced soil samples can be collected, analyzed, sent wirelessly to a remote database, which both helps - map the fertilizer applied and adjusts the fertilizer mixtures in real time.”
The authors cite IBM as an example of a company that has transformed itself “from a product company in which services support provided competitive advantage, to a services company embodying products in its offerings.” In 2010, IBM derived 57% of its revenues from services, 23% from software and 20% from hardware, a huge business model change for a business that not all that long ago was primarily known as a computer hardware company.
“While still deriving significant profits from its hardware offerings, IBM's central focus has been on its service offerings, which include management consulting, running firms' ICT operations, and providing a wide range of functionality for firms with its software. IBM's most recent “Solutions for a smarter planet” campaign, with a wide range of target customers ranging from banking, buildings, education, and energy to food, healthcare, government, oil, retail, traffic, water, and more, demonstrates just how far they have gone in focusing on services.”
As these examples illustrate, the historical distinction between product and services is now blurring. So is the distinction between manufacturing and services: “a window washer in a GM plant was classified as a manufacturing worker if employed by GM, but became a service worker if employed by subcontractor, even if the person and the task remained unchanged.”
“As the Algorithmic Revolution extends the range of computable activities, and as developments in software, processing power, and ICT networks enable increasing portions of corporate activity to be outsourced, the breakdown of this distinction is accelerating. In the current era, manufacturing itself is offered as a service, with examples ranging from Taiwanese “fabless” semiconductor manufacturing firms to a company such as Flextronics, which manufactures electronic products under contract to brand-name suppliers (Original Equipment Manufacturing – OEM).”
The Industrial Revolution can be viewed as the introduction of steam power, machine tools and related technologies to all sorts of activities that could previously only be accomplished with human labor. Over the subsequent two and a half centuries, dramatic advances have been achieved through the applications of science, technology and engineering both in the sophistication of the physical products we are now able to develop as well as in the productivity and quality of manufacturing.
Through most of this time, services were a totally different story. “Services were once seen as a sinkhole of the economy, immune to significant technological or organizationally driven productivity increases. . . [They were viewed] as a drag on aggregate economic growth as their role grew in the economy.”
“Services were originally a ‘residual’ in national accounting after manufacturing and agriculture. Since ‘services’ was a catch-all category not thought to be central to the processes of innovation and productivity, little attention was given to how to measure them or the productivity increases. And they are inherently difficult to measure in any case; measures of services price, quantity, and quality are problematic.”
But, the digital revolution, and in particular, the algorithmic revolution Zysman talks about changed all that. Just as once we applied science, technology and engineering to replace and/or augment human physical activities, we are now able to apply science, technology and engineering to similarly automate and/or augment many human information-based activities. The blurring of the lines between physical products and services is thus best framed as a spectrum of activities that previously could only be carried out by humans, but that now can be automated and/or augmented with machines and tools in order to increase the overall productivity of the economy.
There is wide agreement that starting in the mid 1990s, the US has been experiencing an IT-based productivity surge. In the first few decades since the advent of computers, companies used IT primarily to automate existing processes, especially the more highly repetitive and standardized tasks that were amenable to computer applications. But, it wasn’t until the 1990s that companies started to realize that using technology to automate existing processes wasn’t enough to achieve the desired productivity increases. That's when organizations started to rethink their operations, redesign their flow of work and eliminate processes that did not add value to the fundamental objectives of the business.
Zysman argues that IT-based service activities should be viewed as a form of production, as is the case with the manufacturing of physical products. “ICT based services have to be built and produced, or at least the ICT systems have to be designed, developed, built, and implemented. The tools, including software, have to be built, and the online services themselves have to be constructed. Consequently they are very much open to innovation and productivity increases.”
He views cloud computing as being primarily a story of production. For users, cloud computing can be viewed as an enhanced dynamic utility, making intensive computing much more accessible and thus diffusing the potential for innovation. For providers, cloud computing significantly improves their ability to deliver very high volume of services at significantly lower costs and higher quality. For both users and providers, cloud computing truly represents the industrialization of information-based service activities.
In the end, the overall story of the past few hundred years is one of human progress, whether we are talking about advances in agricultural, industrial or service activities. As our knowledge continues to advance, new kinds of activities become amenable to science, technology, engineering and innovation. Let us all hope that this story of human progress continues well into the future.