Irving Wladawsky-Berger

Beyond GDP - Measuring Value in a Service-oriented, Information-based, Digital Economy

Gross domestic product (GDP) is the basic measure of a country’s overall economic output based on the market value of all the goods and services the country produces.  Most measures of economic performance used by government officials to inform their policies and decisions are based on GDP figures.  But, many concerns have been raised about the adequacy of GDP-based measurements given the major structural changes that economies around the world have been going through over the past few decades.

GDP is essentially a measure of production.  While suitable when economies were dominated by the production of physical goods, GDP does not adequately capture the growing share of services and the production of increasingly complex solutions that characterize advanced economies.  Nor does it reflect important economic activity beyond production, such as income, consumption and living standards. 

A few years ago, a Commission on the Measurement of Economic Performance and Social Progress led by Nobel-prize winning economists Joseph Stiglitz and Amartya Sen was convened to look at the limits of GDP as an indicator of economic performance and social progress.

“What we measure affects what we do; and if our measurements are flawed, decisions may be distorted . . .,” it noted in its report issued in September of 2009.  “So too, we often draw inferences about what are good policies by looking at what policies have promoted economic growth; but if our metrics of performance are flawed, so too may be the inferences that we draw.” 

The Commission recommended complementing classical measures of GDP and economic production with additional measurements that captured people’s well being, as well as factoring in measurements of sustainability to help reflect the evolution of the economy into the future. 

The Evolution toward a Global Digital Money Ecosystem

I recently read an excellent article, 2012: The Year in Payments - A Look Back At The News And The Noise In Payments by Karen Webster, CEO of Market Platform Dynamics and founder of PYMNTS.com.  In the article, Webster reviews some of the major developments in digital payments over the last year, and gives her opinion of what is likely to happen in 2013 and beyond.  Beyond her detailed reviews and predictions, the article is a very well written overview of the evolution toward a digital money economy, including the major advances already underway as well as the huge challenges that still lie ahead. 

For several years now I’ve been convinced that the development of a global digital money ecosystem is among the most exciting and important societal challenges in the coming decades.  It’s right up there, in my opinion, with other technology-based transformational innovations, including electricity, the telephone, radio and TV, and the Internet and World Wide Web.

Where are we in digital payments?  Webster believes that 2012 will be viewed in the payments history books as a very good year.  “Payments innovation fueled by the IP-enablement of devices used by consumers and merchants to interact drove payments innovation into high gear.  Players large and small flooded the market with new applications, new business models, and new approaches to transforming the shopping experience.”

Social Business in the Age of the Customer

Social Media is one of the hallmarks of our digital age, enabling individuals and communities to create and share user-generated content.  Starting about a decade ago with the rise of Web 2.0, we have seen the explosive growth of social media technologies, - e.g., blogs, wikis and podcasts, - as well as platforms like Twitter, Facebook and YouTube with hundreds of millions of users.  Social media is giving individuals unprecedented influence over business and governments, - causing Netflix to reverse its business strategy in October of 2011, and helping to topple governments in the Arab Spring. 

But, despite the widespread success of public social networks, many companies have been slow to embrace social media as an integral part of their workplace.  This is a problem, particularly for younger employees who are extensively using social media technologies in their personal lives, but cannot properly do so at work.

The Social CIO, a recently published study by Forrester Research, concludes that the number of businesses that are truly executing social initiatives remains surprisingly small.  Companies are making investments in social platforms and technologies, but, in general, their efforts remain haphazard and disjointed.  They may succeed within individual silos of the business, but they are not fully realizing the potential power of becoming a social business, - which Forrester defines as: “removing the barriers between people (employees, customers, partners) and information while making it easier for people to work together using that information to solve business problems.”  The report observes that:

“While the speed at which ideas traverse public social networks is phenomenal, surprisingly few organizations have managed to fully exploit the power of open knowledge sharing inside and outside their company walls.  Many businesses have set up social technologies in their organizations, yet few have truly made the technical, cultural, and process changes necessary to reap the full opportunities and benefits of these tools or the vast amounts of data they capture.  This puts business and government leaders at risk of being overcome by the tidal wave of rapid change and innovation spearheaded by knowledge-empowered customers, partners, and competitors.”

Transmedia Storytelling and Collaborative Innovation

Communications and related activities have played a major role in my work over the past twenty years.  The key reason is that over this period, I have been involved in a number of emerging business opportunities such as the Internet and e-business, Linux, cloud computing and digital money.  Marketing and communications are essential when introducing a disruptive innovation in the marketplace, given the need to explain what the new initiative is all about to key constituencies including clients, analysts and reporters.

Over the years, I have learned that in order to capture the attention of your intended audience and differentiate your offerings from those of competitors, you have to develop a compelling brand for your new products or services.  This is particularly important when you are introducing a new and potentially disruptive offering in the marketplace.  

Establishing such a brand requires much more than advertising.  It is akin to engaging in a conversation with your intended audience, where you talk about what's in your mind, your aspirations, your questions, your doubts, what you know and what you don't know.  In short, you are creating and telling a story about your brand.  And, the more powerful, important and complex the messages you are trying to convey, the more important it is that you do so by telling a compelling, emotionally resonant story.

I believe that developing and communicating the storyline behind a disruptive innovation requires the close involvement of those who best understand and care about the new initiative and offerings.  Marketing experts and design agencies are invaluable in this work, but by themselves they cannot properly communicate the in-depth understanding and passion of those most responsible for the innovations.

So, I was very excited when several months ago I learned about transmedia storytelling, a concept originally developed in the entertainment industry to tell a common story across multiple media platforms by moving characters and storylines across books, films, video games, comic books, TV series, and so on.  The rise of social media and other digital channels makes the concept particularly powerful as a way of engaging the target audience with more depth and over a much longer period of time than would be possible within a single medium.

STEM Literacy is for Everyone

MIT professor Richard Larson recently wrote an excellent opinion column - STEM is for Everyone.  In the column, he succinctly made the case for widespread STEM (Science, Technology, Engineering and Math) literacy, and explained why it is as important to our 21st century information economy as basic reading-writing literacy has been to the industrial economy of the past two centuries.  According to Larson, STEM literacy is a way of thinking and doing:   

“A person has STEM literacy if she can understand the world around her in a logical way guided by the principals of scientific thought.  A STEM-literate person can think for herself.  She asks critical questions.  She can form hypotheses and seek data to confirm or deny them.  She sees the beauty and complexity in nature and seeks to understand.  She sees the modern world that mankind has created and hopes to use her STEM-related skills and knowledge to improve it.” 

Larson is Professor of Engineering Systems and Civil and Environmental Engineering at MIT.  He is a pioneer in applying STEM capabilities to a wide variety of problems in services industries, from urban systems to online learning.  He is the founder and director of LINC - Learning International Network Consortium, a collaboration involving educators from around the world who share best practices on how to best organize higher education distance learning projects in developing countries.  Among LINC’s key projects is Blossoms  - Blended Learning Open Source Science or Math Studies, which is developing a large free repository of video modules created by gifted volunteers from around the world to assist school teachers with math and science courses.

Market-facing Innovation Labs

The corporate research lab has radically changed over the past several decades.  Corporate labs reached their peak in the 1960s and 1970s.  As technologies and markets changed, most such labs declined in importance over the next twenty years.  But, they are being reincarnated in our 21st century information economy as market-facing innovation labs, with significantly different and broader scopes than those of the original industrial economy research labs.

Most of these labs were established by large, successful industrial companies in the years after World War II.  Their job was to push the frontiers of knowledge by conducting both basic and applied research, which would hopefully, over time, lead to new commercial technologies and products.

In the postwar years, ATT’s Bell Labs was one of the top research labs in the world, having developed a number of revolutionary technologies, such as the transistor, the laser, information theory, UNIX and C.  Xerox PARC created a number of the key technologies that helped make personal computers so successful, including the Graphical User Interface (GUI), the WYSIWYG text editor and Ethernet.  IBM’s Research labs developed the Dynamic Random Access Memory (DRAM), magnetic disk storage, the Reduced Instruction Set Computer (RISC) architecture, relational databases and fractals as well as helping to establish computer science as a viable academic discipline. 

I joined the computer science department at IBM’s Thomas J Watson Research Center when I finished my university studies in 1970, and worked there for fifteen years.  In those days, R&D were two very distinct activities, the R conducted by scientists in research labs, and the D conducted by engineers in product development labs.  Marketing, was another distinct activity in a product’s life cycle.  These various handoffs resulted in large time gaps between research, product development, and marketing, but since both technology and markets advanced at a relatively slow pace, there was little pressure to reduce the transition times across the gaps.

A very good 2007 Economist article, The Rise and Fall of Corporate R&D - Out of the Dusty Labs observed that this strong separation between R&D&M was common across all industries.  John Seely Brown, former director of Xerox PARC, succinctly captured the prevailing attitude of research labs in those days with this quote in The Economist article:  “When I started out running PARC, I thought 99% of the work was creating the innovation, and then throwing it over the transom for dumb marketers to figure out how to market it.”

Revolutionary, Ordinary Innovation

I recently read an intriguing article in the NY Times: In the Ordinary, Silicon Valley is Finding the Next Big Thing, by columnist and Ohio State professor Steven Davidoff.  The article focused on the recently announced deal between Starbucks and Square, the San Francisco-based mobile payments startup.  Under the deal, customers will be able to pay for their purchases at any of Starbuck’s 7,000 US coffee houses using Square’s mobile phone app by simply telling their name to the cashier, who will just verify the customer’s picture appearing next to their name in the iPad-based digital cash register. 

While the Square technology is very cool indeed, Davidoff’s key point is the ordinary nature of the innovation in question.

“The deal not only has the potential to change the way people pay for coffee and everything else, it also shows how small innovation applied to everyday tasks may be the next new thing for venture capital. Call it the rise of the ordinary innovators. . . And while it may be revolutionary, Square is really just an example of what Silicon Valley is increasingly about: process and networking [i.e. VC ecosystems] at its finest. . . 

“Square shows how these venture capital networks can be used to transform the ordinary.  Its idea was not particularly new, but Square designed a simple but usable device, patented some of the underlying technology, leveraged other technology like the iPad and added some marketing.  With the Starbucks partnership, Square is also showing the opportunity for old-line companies to capitalize on their large customer bases.”

The Continuing Evolution of the Internet

A few weeks ago I had an interesting discussion with Bob Kahn.  Along with Vint Cerf, Bob is recognized as one the key fathers of the Internet, for which they both received the 1997 National Medal of Technology and a number of other top prizes.  The occasion was a board meeting of the Corporation for National Research Initiatives (CNRI), a not-for-profit organization that promotes research in the public interest which Bob founded in 1986 and continues to lead.  Earlier this year, I joined CNRI’s Board of Directors.  

 We were talking about the continuing evolution of the Internet, something Bob is uniquely qualified to discuss.  Beyond his role as co-inventor of its key protocols, Bob has played a leading role in shepherding the Internet from its modest beginnings over forty years ago to its well recognized position as the engine of the digital revolution. 

What do we mean by the Internet?  The most concrete answer is that the Internet is the global system of interconnected computer networks based on the TCP/IP protocols co-developed by Cerf and Kahn.  But, beyond the central role that TCP/IP has played, I believe that the success of the Internet is predicated on a few key architectural principles: open, simple and distributed.

En Route to the Cashless Society

Over the last few months there have been a spate of articles on the evolution to a cashless society as the use of mobile devices continues to grow around the world.  The Death of Cash, Time for Cash to Cash Out?, Visions of a Cashless Society, and Why Cash is Losing its Currency? are some of the titles.  The articles are generally focused on two key aspects of mobile digital money: innovative technologies and apps, which are primarily being introduced in the more advanced economies; and the financial inclusiveness of the poorer segments of society in developing economies.  Let me briefly explore an article in each of these two categories. 

The Death of Cash, published by Miguel Helft in Fortune, is a good article of the first category.  He writes about his experiences buying a cappuccino at a coffee house in New York City.  He payed for it by simply telling the cashier “Charge it to Miguel,” and was done.  That’s because the coffee house uses Square Register, an iPad-based digital cash register application, and Helft has Pay with Square, a digital wallet app in his smartphone. 

Both products were announced last year by the San Francisco-based startup Square.  Square Register is an iPad app that enables merchants to accept payments, generate digital receipts and manage their menu items and prices.  Pay with Square is the companion smartphone app that let’s customers open a tab at any business that uses Register, and pay for their purchases by simply giving their name. 

The smartphone app is linked to a credit card and your personal photo.  The iPad Register app detects when you are in the store with Pay with Square open in your smartphone and displays your name and photo.  After ringing up your purchases, the cashier makes sure your photo matches your face and then taps on it to charge the purchases to your linked credit card.

Just before posting this blog, it was announced that Square’s mobile payment offerings will be available at Starbucks’ 7,000 US stores.  Somewhat similar capabilities are being pursued by a number of other vendors, including PayPal, Verifone and Google.

Strategy and Execution in an Increasingly Complex World

I recently read a good, short article in strategy+business (s&b), the management magazine published by the global consulting firm Booz & Company.  Its title asks the question: “Strategy or Execution: Which Is More Important?,” to which it adds the tagline:  “Many business leaders think they’d rather have great execution than superior strategies, but you can’t have the first without the second” 

According to the article, many business leaders think that “strategy doesn’t matter as long as you are producing results. . . Often, this is because they associate strategy with analysis and execution with getting things done, and they attribute more value to doing than to analyzing.” 

But, the article goes on to succinctly defines strategy as “. . . the series of choices you make on where to play and how to win to maximize long-term value.  Execution is producing results in the context of those choices. Therefore, you cannot have good execution without having good strategy.” 

This interplay between strategy and execution has evolved over time.  Twenty-thirty years ago, the business world was arguably less complex, slower moving and more predictable.  Strategic planning involved looking out several years into the future, - generally three to five years, longer for technologies and products requiring extensive R&D.  The lines of business had the operational responsibility for executing the agreed upon strategy, including the production of goods and services, dealing with customers and business partners, and achieving quarterly and yearly financial targets.  Operations and strategy were distinct parts of the business, one focusing on running the business in the present, the other one looking out into the future. 

But, in today’s fast changing and unpredictable business environments, these time cycles are increasingly overlapping.  It is difficult to do strategic planning beyond a one to three year timeframe.  Unpredictable, unanticipated events require strategic corrections in even shorter timeframes.  Both strategy and operations need to continuously adjust to fast changing market conditions.  Our strategic planning now has to incorporate flexible execution.  Successful companies - especially market leaders being chased by small and large competitors - must achieve a delicate balance between carefully managing their existing operations, and formulating the appropriate strategies that will propel them into the future.

Digital Common Law

On May 30 and 31 I attended a meeting in Washington, the Rights and Bytes: Law and Big Data Workshop. The workshop explored progress in developing effective, legally sound, software-based solutions for the management of digital identities and for the protection and sharing of sensitive data.  It was  sponsored by ID³, a recently organized multidisciplinary non-profit institution with close ties to MIT’s Media Lab.  ID³’s principal focus is to develop architectural frameworks and open source software solutions that embody the necessary policy principles for managing critical personal information so that it can be tested, verified, improved and scaled. 

For the past few hundred years, governments around the world have developed laws, policies and practices to help us better get along with each other as we conduct the many transactions and interactions that are part of our everyday lives.  But, as as Internet and digital technologies are increasingly integrated into just about all aspects of our lives, the laws, policies  and institutions we developed for the physical world are way too impractical for our fast moving, fast changing digital world.  We must somehow bring with us and adapt our policies and regulations from the physical to the digital world.

Is this even feasible?  Yes, argues John Clippinger, ID³’s Executive Director and CEO, and policy strategist and writer David Bollier in an excellent working paper Digital Common Law: Brief on Trust Frameworks and Self-Governance which they wrote for the workshop.

The Untethered, Hyperconnected Enterprise

A few weeks ago I attended the MIT Sloan CIO Symposium.  The theme of this year’s Symposium was Piloting the Untethered Enterprise:  “In today's world of mobile, big data and the cloud, how does a CIO successfully pilot his organization towards its goals?” 

After listening to a number of talks and panels throughout the day, I came away with a few key impressions.  Pretty much everyone agrees that we are in transition from the tethered, connected world of PCs, browsers and classic data centers to the untethered, hyperconnected world of smart mobile devices and cloud computing.  The emergence of the untethered enterprise will have major implications for IT, for business and for society in general.  But lots of questions remain as to what those implications might be.  This is to be expected in the early stages of such a major transition. 

Two back-to-back panels explored what it takes to successfully transition to the untethered enterprise, one consisting of academics, and one of CIOs.  Not surprisingly, each of these panels viewed the opportunities and challenges through somewhat different lenses.

An Emerging Platform for Digital, Inclusive Innovation

The Internet era was born in the mid 1990s.  On August 9, 1995, Netscape’s IPO caught the world by storm.  It marked the passage of the Internet from a network primarily used by universities, research labs and geeks in general, to a platform with a vastly expanded reach and connectivity.  Anyone with a personal computer and Web browser, was now able to access all kinds of content, communicate with people all over the world, and conduct a variety of transactions over the Internet.  

The Internet became an incredible platform for innovation, enabling startups, large institutions, and everyone in between to quickly develop and bring to market many new digital products and services.   Its reach and connectivity led to the creation of all kinds of innovative, digital applications.  It enabled individual and institutions to do all the things they did much, much better.  It transformed all kinds of every day activities, including the way we work, shop, learn, bank, listen to music, watch films and deal with government.

But, getting online and being able to access the Web and the many applications built around it required a personal computer and an Internet account.  And, e-commerce transactions required a credit card or bank account.  So, while the Internet was truly empowering for those with the means to use it, it led to serious concerns about the growing digital divide both within countries and across the world. 

The reach and connectivity we were all so excited about in this initial phase of the Internet era was in reality not so inclusive.   As our economy was becoming increasingly digital, major new inequalities were now arising because so many around the world could neither afford a PC or an Internet account and had no bank relationship or credit card.  It was disconcerting to have a digital revolution and new information-based economy that left out the majority of the world’s population.

Cloud and “Game Changing” Business Innovation

Earlier this year, IBM’s Institute for Business Value published a very good report - The Power of Cloud: Driving Business Model Innovation.  Along with the Economist Intelligence Unit, the IBM study surveyed 572 business and technology executives around the world  to learn how organizations use cloud today and how they plan to use it in the future.  “Recent technology and social connectivity trends have created a perfect storm of opportunity for companies to embrace the power of cloud to optimize, innovate and disrupt business models,” is the study’s overriding conclusion.      

“Although cloud is widely recognized as a technology game changer, its potential for driving business innovation remains virtually untapped.  Indeed, cloud has the power to fundamentally shift competitive landscapes by providing a new platform for creating and delivering business value.  To take advantage of cloud’s potential to transform internal operations, customer relationships and industry value chains, organizations need to determine how best to employ cloud-enabled business models that promote sustainable competitive advantage.”

The survey finds that cloud is still in the early stages of deployment, but its use is expected to grow over the next few years.  Almost three quarter of the surveyed executive said that they have cloud initiatives underway, but only 13 percent said that they already have substantial cloud implementations.  In three years, over forty percent expect to have such substantial implementations, while 90 percent will be involved with cloud initiatives in one way or another.

Complex Sociotechnical Systems: the Case for a New Field of Study

Digital technologies are enabling us to develop systems with huge numbers of interconnected components and sophisticated software that infuses them with seemingly unlimited capabilities.  They are penetrating just about every nook and cranny of the economy and of society in general.  And, they are profoundly changing the way all organizations operate, as well as our working and personal lives. 

We are increasingly able to pull all these capabilities together and develop sociotechnical systems, which combine the powerful, inexpensive and ubiquitous digital technologies with the people and organizations they are transforming.  But, we have much to learn on how to best design and operate these systems.  They generally exhibit a level of complexity that is often beyond our ability to understand and control.  Not only do they have to deal with the complexities associated with large scale hardware and software infrastructures, but with the even more complex issues involved in human and organizational behaviors. 

A few weeks ago, MIT professor Joseph Sussman addressed these issues in a lecture - Complex Sociotechnical Systems: The Case for a New Field of Study.  Sussman is Professor of Civil and Environmental Engineering and Engineering Systems and interim director of the MIT Engineering Systems Division. 

Complex sociotechnical systems are high-impact, difficult-to-understand, technology-intensive systems that have major societal, political and economic implications.  While this definition can rightfully apply to many of the systems we have been developing in the last few decades, their importance is on the rise now for two major reasons. 

We are increasingly using systems thinking to address some of our most critical contemporary problems including climate change, energy and the environment, cities and metropolitan areas, jobs and productivity, the global economy, financial systems and national security.  At the same time, we now have the technologies, tools, engineering methodologies and scientific principles to be able to better design and manage such systems.

Design Principles for Complex, Unpredictable, People Oriented Systems

An IBM Global CEO Study conducted in 2010 concluded that complexity was the primary challenge emerging out of its conversations with 1,500 CEOs and senior government officials.  “CEOs told us they operate in a world that is substantially more volatile, uncertain and complex.  Many shared the view that incremental changes are no longer sufficient in a world that is operating in fundamentally different ways.”  

These same CEOs cited creativity as the most important leadership quality they look for over the next five years.  “CEOs now realize that creativity trumps other leadership characteristics.  Creative leaders are comfortable with ambiguity and experimentation.  To connect with and inspire a new generation, they lead and interact in entirely new ways.”

A similar view was expressed by Roger Martin, the dean of the University of Toronto’s Rotman School of Management in an excellent January, 2010 article in the NY Times - Multicultural Business Theory.  At B-School?.  For over a decade, Professor Martin has been advocating “what was then a radical idea in business education: that students needed to learn how to think critically and creatively every bit as much as they needed to learn finance or accounting.  More specifically, they needed to learn how to approach problems from many perspectives and to combine various approaches to find innovative solutions.”

Over the past several years, we have seen a rising emphasis on design, creativity and holistic thinking in business to help us deal with an increasingly volatile, unpredictable complex world.  This is reflected not just in studies and articles, but in the growing number of design consulting firms like IDEO, as well as of design centers in universities, such as MIT's Media Lab and the d.school in Stanford.

Business and business schools are supposed to be all about applying hard, that is, quantitative, analytical approaches to management.  What then do we mean by bringing seemingly soft topics like design and creativity to business and why is it so important in today’s world?

The Complex Transition to the Age of the Cloud

In June of 2008 I participated in a conference on cloud computing.  After a full day of talks and discussions, the sense of the meeting was that cloud computing has the promise to bring a real paradigm shift to the IT world, although, as the conference organizer succinctly put it in his closing remarks: “There is a clear consensus that there is no real consensus on what cloud computing is.”  In other words, something big and profound seems to be going on, although we are not totally sure what it is yet. 

Where are we now, almost four years later?  Just about everyone agrees that cloud computing is one of the major trends in IT, with important implications not only to IT but to business and society in general.  Many books and articles have been written on the subject.  A number of companies have cloud-based offerings in the marketplace, with more to come.  But, while many of us feel that cloud is even bigger and more profound than we thought back in 2008, lots of questions remain on its intrinsic nature and its value to the business. 

In November of 2011, Andrew McAfee published an article in the Harvard Business Review: What Every CEO Needs to Know about the Cloud.  McAfee is Principal Research Scientist and Associate Director of the MIT Center for Digital Business, where I am a Fellow.  

He writes that cloud computing is “ . . . a sea change - a deep and permanent shift in how computing power is generated and consumed.  It’s as inevitable and irreversible as the shift from steam to electric power in manufacturing, which was gaining momentum in America about a century ago.”

Reflections on the Evolving Role of the CIO

Much has been written about the future role of the Chief Information Officer in the last few years.  Many opinions have been put forward.  All pretty much agree that fundamental changes, already underway, will take place over the next few years in how the IT function is organized and managed.  Some feel that the CIO role is likely to significantly diminish, with its various responsibilities distributed across the business or subsumed within the CFO organization.  Others are of the opinion that CIOs will play an even more influential role.  Given the growing importance of information technologies to all aspects of the business, the CIO role will likely be viewed as being as critical to the business as the CFO.  

I am very much in the latter camp.  I strongly believe that CIOs are in the eye of the IT storms that continue to rage all around us.  While their impact on business is hard to predict and unlikely to be the same for all institutions, few will dispute that over the past couple of decades IT has been significantly transforming just every company, industry, economy and society around the world, as well as our own personal lives.

Information, Money and Related Subjects

“Money, it is conventional to argue, is a medium of exchange, which has the advantage of eliminating inefficiencies of barter; a unit of account which facilitates valuation and calculation; and a store of value which allows economic transactions to be conducted over long periods as well as geographical distances,” writes Harvard historian Niall Ferguson in The Ascent of Money: a Financial History of the World. 

For a long time, money was embodied in precious metals like gold and silver.  The earliest known gold coins were produced in Lydia, in what is now Western Turkey about 2500 years ago.  But, with the introduction of banknotes in seventh-century China, money started to decouple from physical objects with intrinsic value.

“Today . . . we remain more or less content with paper money - not to mention coins that are literally made from junk,” writes Professor Ferguson.  “ . . . we are happy with money we cannot even see.  Today’s electronic money can be moved from our employer, to our bank account, to our favorite retail outlets without ever physically materializing.  It is this virtual money that now dominates what economists call the money supply . . .The intangible character of most money is perhaps the best evidence of its true nature.”

Given this intangible character of money, it is not surprising that major advances in information technologies have in turn led to major advances in the way we deal with money and payments.  In the 1960s, 1970s, and 1980s, mainframes, minicomputers, data networks, transaction processing and data bases enabled financial innovations like ATMs and credit cards.  Then in the 1990s, the wide adoption of the Internet and World Wide Web led not only to online banking, but paved the way for online shopping and e-commerce in general.

Smart mobile devices, broadband wireless networks, cloud-based services and big data are now ushering the next major phase in the evolution of money and payments.  Money is continuing its centuries old transformation from being embodied in objects with intrinsic value, like gold and silver, to being nothing more than information in the digital wallets of our mobile devices as well as in our digital accounts someplace out there in the cloud. 

Since just about everyone in the world, rich and poor alike, now has access to mobile devices, this major chapter in the history of money brings with it a universal inclusiveness that has been missing in the previous links between information technologies and money.  Mobile digital money is coming, - over time, - to every individual in every corner of the world.

The Emergence of a Digital Money Ecosystem

At the beginning of this year I wrote that the transition to universal mobile digital money is likely to be among the most exciting, important and challenging projects the world will undertake in the coming decades.  Everything I have learned through the year indicates that, while still in the very early stages, the transition is well underway and gathering momentum. 

This transition involves a lot more than the transformation of money - cash, checks, credit and debit cards, and so on, - from physical to digital objects that we will carry in our smart mobile devices.  It encompasses the whole money ecosystem, including the global payment infrastructures, the management of personal identities and personal financial data, the global financial flows among institutions and between institutions and individuals, the government regulatory regimes, and so on.  

In other words, just about every aspect of the world’s economy is involved.  Over time, mobile devices will truly become our personal windows into an increasingly global, digital economy.  This will take decades to fully play out, - historical transitions take their time.  But, it is most definitely underway, with an increasing number of market pilots and research studies already taking place around the world.  

As part of my work with Citi, I have been spending a lot of time thinking about the implications of this historical transition to a digital money ecosystem.  The more I learn about it, the more I am convinced that this is truly a major paradigm shift that will change the very way we think about money.

Open, Collaborative Trust Frameworks

A couple of weeks ago I attended a workshop on Inventing the Future of Finance cosponsored by ID³ and the MIT Media Lab.  ID³, - the Institute for Institutional Innovation by Data Driven Design, - is a new multidisciplinary non-profit institution formed to develop architectural frameworks, open source software and educational content for the protection, sharing and monetization of sensitive data. 

It was founded by MIT Media Lab Professor Alex “Sandy” Pentland, and by John Clippinger, who is currently a Research Scientists at the Media Lab, and until recently was a Senior Fellow at Harvard’s Berkman Center for Internet and Society.  Clippinger is Executive Director and CEO of ID³, while Pentland serves as its Chief Scientist.  I just joined its Board of Directors.

One of the key missions of ID³ is the creation of trust frameworks, which it defines as:  “A combination of software mechanisms, contracts, and rules for defining, governing and enforcing the sharing and protection of information according to a common and independently verifiable standard of performance.  Whenever possible, such governance mechanisms and contracts should be self-executing and self-correcting.”

Open Services Innovation

Earlier this year, UC Berkeley professor Henry Chesbrough published a new book, Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era.  This is his third book on open innovation in the last eight years, having published Open Innovation: The New Imperative for Creating and Profiting from Technology in 2003, and Open Business Models: How to Thrive in the New Innovation Landscape in 2006.

Professor Chesbrough is in the faculty of Berkeley’s Hass Business School and executive director of the Garwood Center for Corporate Innovation and of the Program in Open Innovation.  I met him over a decade ago when I first got involved with Linux and open, collaborative innovation.  He is a top expert on the value of open innovation to business.

When I recently found out that he had published a book on services, I was eager to learn how he framed the subject.  For over ten years now, I have been thinking about the application of technology and innovation to services.  Over the years, I have given quite a few seminars on the subject, including a graduate course in MIT in the Fall of 2010.  I have also written a number of entries on services in this blog.

Jobs in the Age of Watson

On October 31, I participated in a symposium sponsored by MIT’s Center for Digital Business on The Race Against the Machine: The Future of Technology and Employment.  The symposium was associated with an event that took place later that same day on the Harvard campus, the IBM Watson Challenge.  The Watson Challenge was an exhibition Jeopardy! match between Watson, IBM’s question-answering system, three students from the Harvard Business School and three students from MIT’s Sloan School of Management.  Watson won the exhibition match, with the Harvard team finishing a close second.

At the MIT symposium, I was part of a panel on How will technology affect productivity and employment? The panel was moderated by MIT management professor Erik Brynjolfsson, who is also the director of the Center for Digital Business.  The other panel members were MIT economists David Autor and Frank Levy.  We discussed the impact of technology on jobs, in particular, the impact of advanced systems like Watson which are pushing the boundaries between human and machine capabilities

Services, Production and Clouds

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.

The IT-based Transformation of Services

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.

Innovation in Higher Education

A glance at the latest US employment figures from the Bureau of Labor Statistics reveals sharp differences in unemployment rates by educational attainment: college degree or higher: 4.3%; associate degree or some college: 8.2%; high school graduates, no college: 9.6%; and no high school diploma: 14.3%.  Moreover, while the overall unemployment rate remains over 9 percent, a recent McKinsey report found that employers are having trouble filling specific positions because they could not find applicants with the right skills.  The report projects that if economic conditions improve, there will be a shortage of 1.5 million workers with college degrees by 2020, but a surplus of almost 6 million of workers with no high school degree.  It also projects a continuing shortage of workers with technical and health care skills not necessarily requiring a college degree.

Just about every such study points to a similar trend: for the foreseeable future, the US economy will need better educated workers with specific skill requirements.  Workers without a post-secondary education face a contracting set of job opportunities.  Those with higher educational attainments will be in the best position to obtain good jobs with good pay. 

Thus, we need to significantly increase the number of students receiving post-secondary education.  However, our colleges and universities, the very institutions to which the country should turn to help us address these increased educational demands, are facing problems of their own. Tuition costs have risen much faster than the rate of inflation and keep going up, thus making it harder for them to serve the students most in need of their services.  Many educational institutions are facing financial difficulties.  The financial crisis has been aggravating the situation, at both public and private institutions.  Government education budgets are under huge pressure at all levels, - local, state and national.

Incremental steps will not make much of a dent on the problem. We need to look at higher education through the lens of disruptive innovation, argues a report published last February, - Disrupting College: How Disruptive Innovation Can Deliver Quality and Affordability to Postsecondary Education.  The report is written by Clayton Christensen, Michael Horn, Louis Caldera and Louis Soares.

The Science of Complex Systems

When I look back over my long, relatively eclectic career, complex systems have been a common theme in all the activities I’ve been involved in.  It started in the 1960s, when I was an undergraduate and graduate student at the University of Chicago majoring in physics, - the study of complex natural systems.  The research for my thesis was focused on the highly complex world of atoms and molecules.  

After finishing my studies, I joined IBM Research in 1970 and switched to computer sciences.  My main research interests were centered on large computer systems, including mainframes, supercomputers and distributed systems.  In the 1990s, my work was focused on the kinds of complex systems and applications made possible by the advent of the Internet, World Wide Web and e-business. 

Then, around ten years ago, I became very interested in the applications of technology to market-facing, people oriented complex systems, especially systems involving services.  Over the past few years, I have also become increasingly interested in economic systems. 

In addition, I started to notice that a number of the concepts and principles I learned many years ago as a physics student seem to apply to these new kind of complex organizational systems I was now interested in.  Let me explain.

The Modernization of the State

I spent the first week of June in Chile, my fourth visit in the last five years.  I was there at the invitation of Fernando Flores, President of the National Innovation Council for Competitiveness, to assist in the Modernization of the State initiative, one of the major projects in the administration of Chile’s President Sebastian Piñera. 
 
The Modernization of the State initiative is being led by Rafael Ariztia under the General Ministry of the Presidency.  It has four major objectives:

• Improve in the overall services that the government provides to all its users
• More effective and efficient government institutions
• Improve the effectiveness of government employees
• Facilitate the decentralization of the country

I first met Fernando Flores during a trip to Chile in August of 2006 to attend an international conference.  He was a Senator then, a position he held from March of 2002 until he was appointed by President Piñera to his present position in March of 2010.  We discovered that we had a lot of common interests and have since become friends.  I continued to meet with him during subsequent visits to Chile.  He knew about my strong interests in cloud computing, and last year I invited him to a briefing on the subject in IBM’s headquarters in Armonk, New York.

Flores has been very involved in the Modernization of the State initiative, both because of his position as president of the Innovation Council as well as his personal expertise in technology and management.  He holds a Ph D from UC Berkeley, has worked extensively in the fields of organizational leadership and human cognition, and written a number of books, including Understanding Computers and Cognition: a New Foundation for Design and Building Trust: in Business, Politics, Relationships and Life.

Flores feels that cloud computing has a major role to play in helping to achieve the objectives of the Modernization initiative.  We talked about his ideas earlier this year, which I thought were right on the mark.  He later invited me to assist in these efforts by coming to Chile for meetings with Rafael Ariztia and the key groups woking on the initiative, as well as to give a seminar explaining cloud computing and its potential to Chilean government officials.

IBM's Centennial

IBM is turning 100 years old on June 16.  The company is commemorating its 100th anniversary with a year-long set of activities around the world.  It is using the opportunity to reach out to many of its constituents in business, government and academia and engage with them in a variety of celebratory events, such as seminars and conferences.  In addition, IBM Chairman Sam Palmisano is inviting all members of its extended family - employees, partners, retirees, families and friends - to pledge at least eight hours of community service during 2011.

If you look at the fast changing IT industry, it is hard enough to find companies that have survived thirty years, let alone one hundred.  It is even harder to find a company that has survived this long, is in great competitive shape and continues to be among the leaders in its industry.  So, as The Economist observed in 1100100 [100 in binary] and Counting in its June 9, 2011 issue:      

“The firm’s centenary is an occasion to reflect on many things digital, but one question stands out: why is IBM still alive and thriving after so long, in an industry characterised perhaps more than any other by innovation and change?  This is not just of interest to business historians.  As IBM enters its second century in good health, far younger IT giants, such as Cisco Systems, Intel, Microsoft and Nokia, are grappling with market shifts that threaten to make them much less relevant.”

Money Doesn't Necessarily Buy Competitive Advantage

Just about every company will tell you that innovation is one of its highest priorities.  How can you tell if the company truly means it, or if it's mostly wishful thinking or marketing hype?  We can see if the company is putting its money where its mouth is by measuring how much it spends on innovation relative to other companies in its industry.  But, this is much easier said than done.  There is no consensus as to which budget line items to include in measuring innovation spending.  So, as often happens, people will try to use a well defined, concrete line item as a proxy for estimating the measurement they are really after.

Research and development is often used as such a proxy for innovation.  Many assume that since both R&D and innovation are supposed to translate into competitive advantage, looking at how much companies spend on R&D equates to how serious they are about innovation.  But, as Michael Schrage, a Research Fellow in MIT’s Center for Digital Business wrote in an FT article in November of 2005:

“Any policymaker, chief executive or innovation champion who relies on R&D intensity and R&D budgets as a meaningful or usable metric to assess global competitiveness virtually guarantees shoddy analysis and distorted decisions.  Few things reveal less about a company's ability to innovate cost-effectively than its R&D budget.  Just ask General Motors.  No company in the world has spent more on R&D over the past 25 years.  Yet, somehow, GM's market share has declined.”

“The simple fact,” he later added, “is that R&D spending - whether in euros, dollars or as a percentage of sales - is an input, not a measure of efficiency, effectiveness or productivity.  Ingenuity, invention and innovation are rarely functions of budgetary investment.”

The Management of Disruptive Innovations

The management of disruptive innovations is very different when looking at relatively simple or self-contained technologies, products or services versus highly complex platforms and infrastructures.  A lot of the hype you often hear when new innovations come about is the result of people not properly understanding the different dynamics that apply to simple versus highly complex innovations.  Unrealistic predictions are then made about the near term impact and rate of adoption of the new innovation, because the innovation in question is quite complex in nature, but the predictions assumes that it is on the simpler end of the spectrum. 

Let me illustrate what I mean by giving a few examples of different kinds of disruptive innovation across the spectrum from relatively simple to highly complex.

Reflections on the Transition to an Information Society

In the 1920s, Russian economist Nikolai Kondratiev observed that capitalist economies go through long term cycles of booms and depressions every 50 years or so.  These economic cycles became known as Kondratiev Waves.  More recently, Carlota Perez expanded on Kondratiev’s work, describing the central role of technological revolutions, disruptive innovations, and financial and production capital in these economic cycles.

Perez identified five such technology-based revolutions and economic cycles since the onset of the Industrial Revolution in 1771, the first one being the age of machines, factories and canals.  This was followed by the age of steam and coal, iron and railways starting in 1829; steel, electricity and heavy engineering in 1875; the age of oil, the automobile, and mass production in 1908; and our present age of digital technologies, information and telecommunications which Perez pegs as starting in 1971.

In each of these cycles, unrealistic expectations in the new disruptive technologies led to over-investments in new companies.  This eventually turned into unsustainable speculation, causing a financial bubble, which eventually crashed and resulted in a period of economic stagnation. 

In the past four cycles, once the impact of the financial bubble and economic stagnation worked themselves out, a golden age of innovation and production followed, where new paradigms based on the new technologies significantly transformed the economy and just about every single industry, as well as re-shaping the institutions of society, and the nature of work, government and even people’s personal lives.

But now,  given our jobless recovery and continuing slow growing economy in the US, we are pondering whether we are once more at the onset of a new golden age of innovation, or at the beginning of something different which will become known as The Great Stagnation.  While I am hopeful that technology, innovation and globalization will eventually lead to all kinds of new jobs, a much improved economy and a higher standard of living, none of us really knows which of these two scenarios will prevail in the future.

A Great Stagnation or a New Golden Age of Innovation?

Here is the way things are supposed to work.  Every 50 years or so, the world goes through a major technology-based economic revolution, - also known as Kondratiev Waves.  A new disruptive technology emerges out of the lab into the marketplace, becomes increasingly successful, gets embraced by entrepreneurs who start new businesses based on these new technologies, and begins to gain market share at the expense of the previous, slow moving market leaders.  These new ventures continue to attract more and more financial capital from investors, which in turn helps improve the quality and lowers the cost of the new disruptive technology and leads to many new innovative applications.     

But inevitably, the investments in new companies and applications turns into unsustainable speculation, leading to a financial bubble which eventually crashes. 

Then, after the crash, comes a 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.  The previous decades of creative destruction now become a golden age of creative construction.

The 2011 Tapia Conference Celebrating Diversity in Computing

Last week I participated in the 2011 Richard Tapia Celebration of Diversity in Computing Conference which took place in San Francisco, where I had the honor to give the Ken Kennedy Distinguished Lecture.

The Tapia Celebration of Diversity in Computing conference is quite unique.  It is aptly named, being the most diverse conference in computing anywhere.  This year, 53% of the participants were female, 47% male.  About 40% were African American, 26% Hispanic, 20% White (non-Hispanic) and 8% Asian.  One third were undergraduate students, one third were graduate students and the rest were professionals from industry and academia. 

They came from a wide-range of places, including historically-black colleges and hispanic serving institutions as well as places like Berkeley, Georgia Tech, Rice, UCLA, and so on.  One of its key objectives is to reassure the students that computing is the right career path for them, help them overcome any potential feelings of isolation by being in an environment with many others just like them, - regardless of their ethnicity or gender, - and increase their dedication to complete their degrees.

The Future of the State

The March 19 issue of The Economist included a special report on The Future of the State.  In an excellent series of articles, the special report explains why the continuing growth of government is no longer sustainable, especially in the more advanced economies with aging populations like the US and Western Europe.  It highlights what some governments are doing to address the problem, especially Singapore and Britain.  Finally, the report offers a set of recommendations that governments might follow if they want to get a handle on the extremely complex and challenging problem of reforming the state.

“How to slim the state will become the great political issue of our times,” is the byline of its introductory article, Taming Leviathan.  “The state has kept on grabbing an ever larger share of the economy in the rich world for a century, and the state’s regulatory sweep has increased as well.”  The report includes a chart showing that the average government spending as a percentage of GDP in thirteen rich world countries went from 10.4% in 1870, to 28.8% in 1960, and 47.7% in 2009.     

“ . . . the forces driving this growth are powerful,” it writes, “but so are the reasons why it needs to be halted . . . there are pragmatic grounds now for politicians of all sorts to make the state more productive.  With ageing populations to care for, many rich-world governments are on course for bankruptcy - unless they raise taxes to levels that would wreck their economies.”

Why has government grown so much in these rich nations over the past century?  “Because, despite all that rhetoric from the tea-partiers, big government is not just the fault of self-interested bureaucrats and leftist politicians.  Conservative voters, even if they don’t like taxes, have kept on demanding that the state does more.  Just as the left has built hospitals, announced endless programmes to help the poor and indulged the teachers’ unions, the right has built prisons, announced wars on drugs and terror, and indulged generals, farmers and policemen.”

The Community Library in Our Emerging Knowledge Economy

In early March, I participated in a presentation and discussion on The Community Library in the 21st Century along with Maxine Bleiweis, the director of the Westport Public Library. 

Libraries have been an integral part of civilization from our earliest history, including ancient Mesopotamia, Egypt, Greece and Rome.  Greek and Roman scholars came to their libraries to discuss issues and learn from each other.

Free, open public libraries were first established in communities across the UK and the US in the second half of the 19th century.  Along with the rise of public schools during the same period, they were an important part of the transition from the agricultural to the emerging industrial economy which required a more literate, better educated work force.  

From the 1880s through the 1920s, almost 1700 public libraries were built in the US, through the philanthropic efforts of industrialist Andrew Carnegie.  His Carnegie Library Grants promoted community libraries for self-education, which was particularly important during a time when the US was absorbing large numbers of immigrants from around the world.

From e-business to Social Business

At the beginning of February I participated in a Social Business Industries Symposium sponsored by IBM in Orlando.  Social business is an initiative that IBM launched last November, along with new products and services that combine social networking with advanced analytics capabilities to help organizations build trusted relationships and make better and faster decisions.

What is a social business?  In the past few years, the term has been used to mean “a non-loss, non-dividend company designed to address a social objective,” - a new kind of capitalism to serve humanities most pressing needs, pioneered by Nobel Peace Prize winner Muhammed Yunus and others.
  
But with the rise of social media, another major use of social business has emerged.  IBM’s basic definition is short and simple:  A Social Business embraces networks of people to create business value.

The Evolution of the World's Digital Payments Infrastructure II

In part I of this entry, I discussed  the need to significantly transform the world's digital payments infrastructure to support the emerging evolution toward univeral mobile digital money.  This transformation is a very complex an undertaking that will require significant research and innovation, and will likely play out over many years.  Let me summarize some of the key challenges and opportunities.  

Payment Hubs and Clouds

There is near universal agreement on the need for new payment hubs.  As McKinsey's Payment Hubs: Redefining the Industry’s Infrastructure observes:  “Banks are struggling to cope with transaction platforms that no longer serve their needs.  A legacy of silo IT architecture combined with the need for data integration is leading these institutions to investigate payments hubs as a solution.  There seems to be little consensus, however, as to what a payments hub is (even among those who are building them) and where it sits in the overall payments system.”

The study identifies three major kinds of consolidation or aggregation payment hubs.

The Evolution of the World's Digital Payments Infrastructure I

The huge success of the Internet and World Wide Web was made possible by the continuous advances in digital technologies over the past few decades.  The technology advances were absolutely necessary, - but not sufficient.  The underlying IT architecture supporting the new Web-based applications had to radically evolve as well in order to take advantage of the advances in technology.  And the organizational architecture of the private and public sector institutions that were embracing these new Web-based applications had to similarly change, in order to translate these technology advances into productivity and quality improvements.

Web applications typically run on a three tier IT architecture.  In tier one, users link to the Internet with their PCs, smartphones and other devices, and access the Web with their browsers and related software.  These tier one clients connect to the tier two http-based web servers, which process the browser requests, access tier three back-end systems as required, collect all the needed information and send it back to the clients.  Tier three comprises the different applications and information in back end systems, including mission critical transaction processing and data bases.

This three tier architecture has contributed greatly to the success of e-business solutions, by making it possible to quickly combine the standards, universal reach and connectivity of the Web-based systems in tiers one and two, with legacy and new applications, data bases and other back end resources in tier three.

As we now contemplate the evolution toward universal mobile digital money and smart digital wallets, I believe that we are facing major changes not unlike those that accompanied the advent of the Web and e-business, which will require similar technology, architecture and organizational innovations.  The need for privacy and security concerning money, credit cards and personal IDs requires a highly sophisticated IT infrastructure to support this transition.  Today’s payment systems and the organizations that operate them will need to significantly evolve in order to handle the combination of huge transactional volumes, very low costs and high degree of security, as well as compliance with the variety of financial regulations in countries around the world.

The Evolution of Money

In 2010, the BBC and the British Museum collaborated in a project called A History of the World.  The heart of the project was a BBC Radio program which focused on one hundred objects from the collection of the British Museum, around which you can tell the history of humanity over the past two million years.  That history is presented in a series of fifteen minute podcast about each of the objects, written and narrated by British Museum Director Neil MacGregor and broadcast over the BBC throughout the year.

The objects and podcasts are organized into a number of themes.  Money is one of the themes.  It is represented by four objects:

• one of the world’s first gold coins produced over 2500 years ago in Lydia, western Turkey, whose last king was Croesus, of rich as Croesus fame;
• a 1375 banknote from the Ming Dynasty, one of the world’s first paper banknotes;
• a silver coin minted in Bolivia in the late 16th Century; these were known as pieces of eight and used as the world's first global currency throughout the Spanish Empire;
• and a plastic credit card exemplifying the changing role of money in the modern world.

Money, as one of the podcasts observes, has been one of the great constants in human affairs, right up there with sex and war.  Money was not necessary when people lived in small communities where they knew and trusted their neighbors and could therefore exchange labor, food or goods in kind.  But the need for inventing money arose once civilization started to expand and people were dealing with strangers they may never see again and could not trust, as was the case in Lydia and neighboring communities a few thousand years ago.  Money has played a major role in the world ever since, giving rise to commerce and economies, enabling the organization of companies and public institutions, and helping communities become more productive and raise their standard of living.

Smarter Cities Santiago

On November 23 I participated in IBM’s Smarter Cities Forum in Santiago, Chile.  The event brought together over 100 government, business and academic leaders from all parts of Chile, as well as many others from North America and Europe.  The Forum was hosted by IBM’s Chairman and CEO Sam Palmisano.

Why Santiago?  In his opening remarks, Sam answered this question: 

“Santiago is representative of the new urban future, both its opportunities and its challenges, that faces our planet.  In the early part of the twentieth century, Santiago had 500,000 inhabitants.  Today it has more than 5 million - or more than one-third of the nation’s total population.  This population growth has also translated into making Santiago the financial and commercial center of the country.  The metropolitan region generates 45 percent of GDP and nearly 50 percent of total household income in Chile.”

This is my third visit to the city in the last four years.  I can personally attest that Santiago is a great city, a medium sized truly global city, and  one of Latin America’s most modern metropolitan areas.  It has an extensive public transportation and highway system, an impressive high-rise architecture, great hotels and restaurants, excellent universities and a large skills base.

Along with the rest of Chile, the city enjoys a dynamic market-oriented economy, a democratic government, a positive investment environment and a high level of global trade.  It is not difficult to understand why Sam would pick Santiago as the first city in Latin America in which to personally host a Smarter Cities event.

The MIT Systems Thinking Conference

I recently participated in MIT’s 2010 Systems Thinking Conference for Contemporary Challenges.  This annual conference is sponsored by Systems Design and Management (SDM) - an interdisciplinary program between MIT’s School of Engineering and Sloan School of Management.  The SDM program aims to provide mid-career professionals with a systems perspective that will help them address and solve large-scale, global, complex challenges.  Most of the students in the classes I have taught at MIT are enrolled in SDM.

The Systems Thinking Conference is intended to showcase innovative ways of addressing complex challenges, in particular, how to integrate technology, management and social sciences to successfully solve very tough problems.  The agenda included sessions on sustainability and urban systems, health care and services.  The talks covered a wide range of subjects, from the global development of Boeing’s 787 to the home of the future.  I was co-organizer of the session on service systems, gave a talk on Technology and Innovation in the Service Economy and moderated a panel with the other speakers in the session.

John Sterman - professor in MIT’s Sloan School of Management and director of the Systems Dynamics Group - gave a very interesting talk: A Banquet of Consequences: Systems Thinking and Modeling for Climate Policy.  The title of his talk is based on a quote by Scottish writer Robert Louis Stevenson: Everybody, soon or late, sits down to a banquet of consequences.

Can New York Remain the World's Media Capital?

Over the past two years, SUNY’s Levin Institute hosted a series of panel discussions to explore the state of innovation in New York City.  Innovate New York - Envisioning an Inventive City was jointly sponsored by the Levin Institute, the New York Academy of Sciences and the Sloan Foundation.  Its basic premise was:

“New York is a global city, a diverse blend of culture, vitality, and extraordinary talent.  But the wealth of science and technology talent and innovation is less apparent, at least in the form of a thriving technology economy.”  The Innovate New York series aimed to discuss “where New York stands relative to its competitors, and to identify approaches that could capitalize on New York's strengths, shore up its weaknesses, and plant it firmly on the map as a capital of innovation.”  Panel discussions were held in a variety of areas, including finance, media, services, life sciences, arts, and culture.

I personally participated in a couple of the panel discussions, and in my role as Senior Fellow at the Levin Institute, was involved in helping to organize the series. 

The Sloan Foundation has agreed to renew its sponsorship of Innovate New York, this time focused on one industry, - media and communications, - which will enable us to explore the topic in considerable more depth.

Reinventing Relationships

On September 16, I will join the IBM Lotus team in an event in New York City - Reinventing Relationships.  The event will explore how the Web, collaboration and social software "will transform - actually reinvent - how organizations relate to their customers, partners, employees and citizens through more compelling experiences.”

Once upon a time, new technologies were first deployed in large institutions - enterprises, universities and research labs, the military and civilian government agencies, - from which they eventually trickled down to the rest of the economy as their prices and complexity dropped.  Forty years ago, for example, the computer industry consisted primarily of expensive mainframes and supercomputers that only larger institutions could afford to buy and operate.

But, this trickle-down approach to technology diffusion dramatically reversed itself with the advent of inexpensive technologies, especially digital technologies.  As a result of the incredible advances in digital components and personal computing over the past thirty years, many new innovations are first emerging in consumer markets and among communities of experimental users, from which they eventually trickle-up into the worlds of business and government applications.  Besides personal computing, we have seen such consumer and user-driven innovations in cellular and smartphones, game players, Linux, and perhaps most prominently, with all kinds of innovations around the Internet and World Wide Web.

Reflections on Innovation, Productivity and Job Creation

A couple of weeks ago I attended a workshop on Information Technology and Economics sponsored by the National Bureau of Economic Research (NBER).  The two-day workshop consisted mostly of presentations and discussions by renowned economists of their latest work.  I was invited to participate in the workshop as part of an industry panel on “IT and Economics on the Internet”.

I have become quite interested in economic issues in my post-retirement life of the past few years, as I have had more time to think about and learn new disciplines.  This interest is a natural outgrowth of my work on highly complex systems, especially the kinds of people-oriented complex systems with which economists generally deal.

So, I was very happy to be surrounded by economists for two days, and in particular to have a chance to talk with experts in the field about some of the problems I have been thinking about, especially during the nice dinner we had in the evening of the first day of the workshop.

For example, over the past year I have given a number of seminars on Technology and Innovation in the Service Economy.  I am getting ready to teach a graduate course on the subject at MIT this Fall, where we will explore technology’s impact on industries ranging from finance to healthcare.  I have also been thinking a lot about the impact of these innovations on the productivity of the service sector of the economy in general, and in particular, on the kinds of jobs that we can expect to be created over the next decades to replace those jobs that might decline or disappear as a result of such productivity improvements.

Mainframes and Clouds

On July 22, I attended IBM’s announcement of its new generation of mainframes, the zEnterprise System in New York City.  As you would expect with any product announcement, this new mainframe is significantly better and faster than its predecessors.  The new z196 platform has better and faster processors, more processors per box and offers significantly greater energy efficiency.

But, what I found most compelling about the announcement, is its role in the continuing re-invention and evolution of the mainframe, which was first announced as S/360 in 1964.  With this announcement, IBM is positioning the mainframe as an architecture for integrating and managing heterogeneous systems in the data center, not just platforms based on the z processor architecture, the descendant of the original S/360.

IBM’s engineers have deconstructed the mainframe architecture into two major parts:  the processor architecture, including its instruction set, which is mostly implemented in the hardware of the machine; and the management architecture, including virtualization, which is mostly implemented in firmware and software although it is often supported with some hardware assists.  The major new part of this announcement is that the mainframe management architecture is now being supported not just on systems based on the z processor architecture, but also on systems with totally different processor architectures. 

IBM is now extending the benefits of its mainframe management architecture, including high efficiency, scalability, security and reliability, to other platforms in the data center, starting with Intel-based Linux systems and Power-based Unix systems.  This means that you can now integrate heterogeneous systems in the data center and manage them using the mainframe management architecture, which most everyone agrees is the most advanced in the industry.  This is important because the ability to operate highly efficient, reliable, safe data centers with different platforms and workloads is an absolutely critical requirement in the age of cloud computing. 

Smarter Public Health

The increased importance and fast rising costs of healthcare in the US and many other countries are causing a much greater interest in the subject of public health - “the science and art of preventing disease, prolonging life and promoting health through the organized efforts and informed choices of society, organizations, public and private, communities and individuals.”  

We are all very familiar with the fierce political debates surrounding US healthcare reform, which culminated with the historical Health Care Act of 2010 signed into law by President Obama on March 30.  But healthcare is not only a major political challenge, but one of the grandest overall challenges facing the world in the 21st century.  

The problems are enormous at multiple levels.  Healthcare involves lots of people and institutions - patients, insurers, device manufactures, pharmaceuticals, advocacy groups, biotech, research institutions, IT companies, governments of all sorts, state licensing, state insurance commissioners, and on and on and on.  And this is before you get to the provider side, which involves doctors, nurses, hospitals, pharmacies, non-traditional providers, medical schools, and others.

The National Broadband Plan, Jobs and Economic Development

On March 16, the Federal Communications Commission (FCC) released to the public and delivered to Congress the National Broadband Plan: Connecting America, “. . . an ambitious agenda for connecting all corners of the nation while transforming the economy and society with the communications network of the future - robust, affordable Internet.”

In a recent Washington Post OpEd, FCC Chairman Julius Genachowski explained the driving forces behind the National Broadband Plan:

“Universally deployed broadband networks can be America's engine for enduring job creation, economic growth and tremendous improvements and savings in education, health care and energy conservation.”

“This vision of world-leading 21st-century broadband networks and their benefits will not occur spontaneously.  While the United States invented the Internet, when it comes to broadband we have fallen behind as other nations have raced ahead.  Some studies show us to be as low as 15th in the world in broadband adoption; others have us higher, but none puts us even close to where we need to be.”

The “Professionalization” of Service-based Industries

I spent several days in mid-February at Imperial College in London.  I was a speaker and panel member at an event sponsored by Design London, the multi-disciplinary innovation initiative between the Royal College of Art and the Imperial College engineering and business schools.  The event - The STEM of Service Experience, - focused on the role of Science, Technology, Engineering and Math (STEM) on innovation in services. 

The following day I conducted a seminar on Technology and Innovation in the Service Economy with doctorate candidates in the Business School.  We had very stimulating discussions on the impact of STEM on service-based organizations, in particular, how increased access to information and sophisticated analysis and modeling tools can help managers make better business decisions, especially those concerning highly complex problems. 

One of the students raised the question of whether, as service-based industries have better information and tools at their disposal, we should expect their management to become more professional in the way they make decisions, much as has been the case with engineering as it matured as a discipline over the decades.

It was a very intriguing question that has stayed in my mind since.  What does it mean for a company and its management to be more professional?  How is professionalism related to the scientific and technology underpinnings of the company, as well as to its use of information, analysis and modeling tools?

Technology, Leadership and Innovation in the Service Economy

At the end of January I gave a half-day seminar at MIT on Technology, Leadership and Innovation in the Service Economy.  I offered the seminar as part of MIT’s Independent Activities Period (IAP), a four week informal learning interlude between the fall and spring semesters that offers a variety of experimental short courses and seminars.

For a while now, I have been thinking about how technology and innovation can best be applied to services.  It is a subject I come back to repeatedly in this blog.  My interest started several years ago, when we launched a number of efforts in IBM to help create a research and academic discipline around services.  We coined the term Service Science, Management and Engineering (SSME) to highlight the interdisciplinary nature of this emerging discipline.  We usually refer to it as just Service Science.

A number of universities have already organized different kinds of Service Science programs, such as Services Management and Consulting at NC State University and Information and Service Design at UC Berkeley.  Several additional schools around the world are in the process of launching such programs.

My interest in technology-based services innovation was heightened last summer when I read an excellent report, Hidden Wealth: the contribution of science to service innovation, based upon a study sponsored by the UK Royal Society.  I found Hidden Wealth to be one of the most comprehensive studies anywhere on the promise of technology and innovation to services, and its potential impact to 21st century economies.