Irving Wladawsky-Berger

The Rise of the Chief Digital Officer

At its recent Symposium/ITxpo 2012 in Orlando, Gartner predicted that by 2015, about a quarter of all organizations will have created a new seat at the senior executive table - the Chief Digital Officer.  Gartner’s prediction is based on the major transformation underway as companies are digitizing both their sources of revenue as well as their services. 

“Organizations are digitizing segments of business, such as moving marketing spend from analog to digital, or digitizing the research and development budget.  Secondly, organizations are digitizing how they service their clients, in order to drive higher client retention.  Thirdly, they are turning digitization into new revenue streams.  Gartner analysts said this is resulting in every budget becoming an IT budget.  To address these changes, organizations will create the role of a Chief Digital Officer as part of the business unit leadership.” 

I had not heard much about the Chief Digital Officer until I read about Gartner’s prediction.  But, the more I’ve thought about it, the more I like the concept.  Chief Digital Officer succinctly captures the future direction of the CIO role. 

“Chief information officer (CIO), or information technology (IT) director, is a job title commonly given to the most senior executive in an enterprise responsible for the information technology and computer systems that support enterprise goals,” is how Wikipedia defines CIO.”  While accurate, this definition feels somewhat dated.

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.

The USAID-Citi Mobile Money Alliance

Last month, the US Agency for International Development (USAID) and Citi announced a partnership aimed at accelerating mobile money adoption in developing countries.  The partnership will initially focus its work in Colombia, Haiti, Indonesia, Kenya, and the Philippines.  Its efforts will later be extended to Peru, Tanzania, Uganda and Zambia. 

“Of the five billion mobile phone users worldwide, nearly two billion lack access to banking services, instead relying on cash transactions that expose them to potential theft, fraud or loss, and high-cost lending and remittance providers that leave them vulnerable to endless debt and high fees,” said the joint press release, and later added: 

“USAID and Citi share a common belief that expanding the adoption of mobile financial solutions is a critical economic development strategy with the potential to drive growth and increase financial access and security for the developing world’s poor population.  The effort seeks to strengthen alternatives to a cash-based system that is inefficient, costly, and prone to corruption.” 

The digital technology revolution that has been transforming just about every aspect of life around us - from the way we interact with each other to the way we conduct business, - is now poised to usher the concept of mobile digital money to every corner of the world.

Rethinking Personal Data

In 2010, the World Economic Forum (WEF), launched a project on Rethinking Personal Data.  The project brought together experts from business, government, academia and end user privacy and rights groups to examine the challenges and opportunities involved in properly managing the explosive growth of personal data in the digital world.  In January of 2011 they published their first report, - Personal Data: the Emergence of a New Asset Class.  

The report’s overall point of view is that personal data is a new asset class touching all aspects of society.  It is potentially as valuable a resource in the 21st century as heavily traded physical goods like oil have been in the past hundred years.  The report recommends the development of a principled, collaborative and balanced personal data ecosystem that is capable of evolving and improving over time.

This past May, the WEF released a second report, Rethinking Personal Data: Strengthening Trust.  I found it to be an excellent overview on the subject.  It observes that throughout history, economic value creation has been linked to the ability to move and trade physical goods.  Similarly, “data needs to move to create value.  Data sitting alone on a server is like money hidden under a mattress. It is safe and secure, but largely stagnant and underutilized.”

But, personal data lacks the trading rules and policy frameworks that exist for widely traded physical assets.  As a result, there is little trust among the key stakeholders, - individuals, governments and the private sector, - which could undermine its long-term potential.

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.

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.

Capitalists and Capitalism

A recent NY Times OpEd by Nicholas Kristof observes that:  “Just as Communists managed to destroy Communism, capitalists are discrediting capitalism.” 

“A Pew Research Center poll in December found that only 50 percent of Americans reacted positively to the term capitalism, while 40 percent reacted negatively.  Among Americans ages 18 to 29, more had a negative view of capitalism than a positive view, the survey found.  Those young Americans actually viewed socialism more positively than capitalism.  In other words, America’s grasping capitalists are turning young Americans into socialists.”

Kristof’s OpEd references a very interesting survey by Edelman, a global public relations firm which has been publishing an annual Trust Barometer for over ten years.  Their 2011 Trust Barometer notes that “Trust Plunges in the United States While Resilient across the Globe.” 

“Trust in business saw a two-point global increase, surging in Brazil, rising in Germany, and holding steady in China and India.  The United States was the outlier, as trust dropped across all institutions - business, government, NGOs, and media.  U.S. trust in business fell by eight points to 46 percent - placing the world’s largest economic power within five points of last-place Russia - and decreased in government by six points to 40 percent, putting the U.S. among the bottom four countries with the least trust in government.  In the Trust composite score, an average of a country’s trust in all four institutions, the U.S. also fell to fourth from the bottom, while three years ago, it was in the top four.”

Over the last few weeks we have heard the term vulture capitalism used in national public debates, not by members of the Occupy Wall Street movement, but by arch-conservative politicians.  Are we seeing the emergence of a New Populism where the people, - whether the Tea Party on the right or Occupy Wall Street on the left, - are rising up against the elites, - the rich and powerful who have gotten the US into such a mess?

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.”

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.

An Exciting New Challenge

At the beginning of March, I started to work with Citigroup as strategic advisor for innovation and technology.  This is a part-time position, which I will take on while continuing my current activities with IBM, MIT and Imperial College. 

When I retired from my full time position at IBM last May, my intent was to continue working pretty much full time, but instead of doing so at one company - as I had done for 37 years - I wanted to now do so by working closely with a few different institutions.  In particular, I wanted to split my formerly one-company job roughly three ways:  one third with IBM; one third with MIT and other universities; and one third doing something entirely different.  In addition, I wanted to continue my participation in various boards and committees.

The first two thirds of this equation has worked out very nicely since I started my post-retirement life in June, perhaps because they were essentially a continuation of activities I was already involved in.  The final piece of the puzzle took more time, but I believe it is now in place with my new relationship with Citigroup.

There are multiple reasons why working with Citigroup is appealing.  At the top is innovation, and in particular, how technologies are transforming whole businesses and industries.   This was, after all, the subject of my recent graduate seminar at MIT, which I will be offering again this coming Fall.

It is one thing to talk about how disruptive technologies are transforming an industry - it is another to be part of that industry, see it happen from the inside, and get personally involved in helping to formulate the proper strategies to take advantage of the disruptive transformations taking place all around us.  So, when the recently appointed CEO Vikram Pandit offered me the opportunity to come work at Citigroup - it did not take me long to accept.