On September 27 I participated in a workshop at IBM’s Almaden Research Lab on The Co-Evolution of Future Technologies, Skills, Jobs, and Quality-of-Life. The key objective of the workshop was to explore how new technologies are changing the economics of work activities, and to understand the frameworks, theories and models that might help us better deal with these economics changes.
In a series of talks and panel discussions, the workshop first reviewed the historical patterns of technology innovations and economic cycles, and then looked at the future of work economics in three key areas: technologies and societal infrastructure; skills and jobs; and careers and quality-of-life measures. I gave a presentation on Job Creation, Education and Entrepreneurship in the Emerging Knowledge Economy.
John Zysman, professor of political science at UC Berkeley and co-director of the Berkeley Roundtable on the International Economy, gave an excellent talk on Production, Clouds, and the Transformation of the Global Economy. He presented a particularly interesting point of view on the ongoing IT-based transformation of services, which he calls an algorithmic revolution. His discussion of services is largely based on his 2006 paper, The 4th Service Transformation: The Algorithmic Revolution, which was later followed by a more comprehensive 2010 paper, Services with Everything: The ICT-Enabled Digital Transformation of Services co-written with Stuart Feldman, Jonathan Murray, Niels Christian Nielsen and Kenji E. Kushida.
About ten years ago IBM started a major effort in Service Science working closely with universities around the world. Its main objective has been to help develop Service Science into a true academic discipline, as was the case with Computer Science several decades ago. I have been personally involved in this effort since its inception, and have given a number of seminars on Technology and Innovation in the Service Economy, including a graduate course in MIT in the Fall of 2010.
According to Zysman, while there is wide agreement on the technology-based transformation of services, the character of the transformation is obscured by our vague definition of services, as well as by the focus on the digital technologies facilitating the transformation. In Services with Everything, Zysman et al write:
“The core of our story of the services transformation is not about the growth in quantity or value of the activities labeled services, the conventional emphasis of much of the writing about services. Nor is it about the revolution in digital technology. Rather, it is about how the application of rule-based information technology tools to service activities transforms the services component of the economy, altering how activities are conducted and value is created.”
“When activities are formalized and codified, they become computable. Processes with clearly defined rules for their execution can be unbundled, recombined, and automated. The codification of service activities allows the rapid replication, analysis, re-configuration, customization, and creation of new services. We call this the Algorithmic Revolution.”
I believe that framing the transformation of services in terms of service activities is a very important and subtle point. We have generally viewed services in contrast to what they are not: products, manufacturing or the industrial sector of the economy, rather than what they are. Zysman tells us that this is not the right way to frame the problem, because the boundaries between products and services, manufacturing and services, and the industrial versus the service sectors of the economy are all breaking down. Our focus should be on service activities, that is, what are the major activities performed by people in the organization, and how these activities are being transformed using digital technologies.
Traditionally, we have looked at organizations, companies and economies in terms of production, that is, the value of the offerings they produce. We can measure how much it costs to produce these offerings and measure productivity by how much those costs decrease over time. We know that people, - their skills, talents and ideas, - are the major factors driving innovation in a business, but by focusing primarily on production, our main link between people and productivity has been to look at how many fewer people it takes to produce the offerings. By these measures, we have made huge advances in productivity in the agricultural and industrial sectors of the economy, but not in the service sector, which now employs the vast majority of people, especially in advances economies like the US.
What do these people do and how do they add value to the business and the overall economy? That has been much harder to measure, because in general, services have been viewed as a kind of overhead on production. Zysman is suggesting that by focusing on the service activities that people perform, we will get a much better handle not just on how they add value to the organization, but in how their activities can be made more productive through the use of information technologies.
Looking at business from the point of view of service activities applies to all sectors of the economy. Any business can thus be viewed in terms of their various activities or tasks, including processes, business models and organizational structure. The key question then is innovation. How can you leverage information technologies to make the organization significantly more productive? How can you differentiate your market offerings to avoid the commodity trap where you have to compete based solely on price against similar such offerings from competitors? How can you offer higher quality offerings and overall customer service at affordable costs?
“With the Algorithmic Revolution, tasks underlying services can be transformed into formalizable, codifiable, computable processes with clearly defined rules for their execution. The inexorable rise in computational power means that an ever greater range of activities are amenable to expression as computable algorithms, a growing array of activities are reorganized and automated. Indeed, core activities in services from finance through nursing - can be captured and expressed as digital information.”
“. . . Firms are increasingly turning to services to add value. In-house business functions are available as services, firms are ever more comprised of bundles of services purchased on markets, and manufactured products are increasingly embedded and recast as services offerings. Traditional sectoral boundaries are breaking down as information and services offering bring previously unrelated firms into direct competition.”
In his talk, Zysman discussed a spectrum of service activities. At one end are those activities that can be fully automated using IT systems and networks, such as those offered by ATMs and other financial networks, customer self-service web sites, search, and social networks. At the other end are irreducible service activities that can only be provided by humans either because they require social skills and judgement that only human can offer, e.g., judges, psychologists, consultants; or for simple reasons of cost and practicality, e.g., hairdressers, gardeners, chefs.
In between these two extremes are a wide variety of hybrid services, which combine humans and IT-based tools, such as in accounting, health care, and many different kinds of design activities. Computer Aided Design (CAD) systems, for example, enable engineers to design significantly more complex objects that they otherwise would have been able to. A variety of tools, from electronic medical records to advanced diagnostic systems, promise to significantly improve the quality and productivity of health care practitioners.
The majority of services activities in the economy are still irreducible, that is, they are performed by humans with little or no technology assistance. But, given the growing power and sophistication of IT, an increasing number of services will become automated or hybrid over time.
While the potential for fully automated service activities will continue to expand as digital technologies continue their relentless advances, Zysman believes that hybrid systems have the most potential for innovation and deep economic transformation. Such hybrid man-machine systems enable us to address highly complex problems that neither humans by themselves or fully automated machines are able to tackle. For such complex service activities, human judgement will be significantly augmented by increasingly sophisticated IT tools.
He also believes that the algorithmic revolution in services will profoundly change how firms compete:
“Services are increasingly the way that firms pursue value-added activities to avoid ever-faster commoditization of products, that is to avoid competition based solely on price when market offerings are relatively similar. However, the unbundling of services activities themselves accelerates this commodification, since competitors have the same efficiency-enhancing business process and infrastructure services available to them. Firms increasingly become bundles of services purchased on markets, and at the same time some of those in-house business functions that are maintained are then offered as services. A consequence is that the distinction between products and services blurs, as manufactured products are increasingly embedded within and recast as services offerings. Clearly, traditional sectoral boundaries break down, as information and services offerings bring previously unrelated firms into direct competition.”
In the end, Zysman told us, services are all about the use and deployment of information. The transformation of services is being driven by the continuing advances in digital technologies, as well as by the market pressure that every business is now feeling as they compete in an increasingly global, digital world. The consequences, - for every single aspect of business as well as for the overall economy, - promise to be profound.