Irving Wladawsky-Berger

AI - the Creation of a Human-Centric Engineering Discipline

AI is rapidly becoming one of the most important technologies of our era.  Every day we can read about the latest AI advances from startups and large companies, including applications that not long ago were viewed as the exclusive domain of humans.  Over the past few years, the necessary ingredients have finally come together to propel AI beyond the research labs into the marketplace: powerful, inexpensive computer technologies; huge amounts of data; and advanced algorithms.

Machine learning  and related algorithms like deep learning, have played a major role in AI’s recent achievements.  Machine learning gives computers the ability to learn by ingesting and analyzing large amounts of data instead of being explicitly programmed.  It’s enabled the construction of AI algorithms that can be trained with lots and lots of sample inputs, which are subsequently applied to difficult AI problems like language translation, natural language processing, and playing championship-level Go.

Over the past several decades, AI has been besieged by rounds of hype which over-promised, under-delivered, and nearly killed the field.  Once more, a recent Gartner article positioned machine and deep learning at the top of their hype cycle, - when all the excitement, publicity and promising potential often leads to a peak of inflated expectations, risking falling into the trough of disillusionment if the technology fails to deliver.  Now that AI is finally reaching a tipping point of market acceptance, it’s particularly important to be cautious and not repeat past mistakes.

In Artificial Intelligence - The Revolution Hasn’t Happened Yet, UC Berkeley professor Michael I. Jordan aims to inject such a note of caution.  “AI has now become the mantra of our current era…  The idea that our era is somehow seeing the emergence of an intelligence in silicon that rivals our own entertains all of us  -  enthralling us and frightening us in equal measure.  And, unfortunately, it distracts us…  Whether or not we come to understand intelligence any time soon, we do have a major challenge on our hands in bringing together computers and humans in ways that enhance human life.”

The Identity Challenge: On the Internet, Nobody Knows You're a Dog

I recently read Better Identity in America, a report by the Better Identity Coalition, an organization launched earlier this year to focus on promoting the development and adoption of solutions for identity verification and authentication.  The report outlines a policy agenda for improving the privacy and security of digital systems and help combat identity fraud.

How bad is the problem?  Data breaches, large-scale fraud, and identity theft are becoming more common.  In 2017, there were 16.7 million victims of identity fraud in the US, causing a loss of $16.8 billion; there was a 44.7% increase in US data breaches between 2016 and 2017 and a 30% rise in online shopping fraud; 179 million personal information records were exposed to data breaches, 69% of which were identity theft incidents.

The report notes that “the ability to offer high-value transactions and services online is being tested more than ever, due in large part to the challenges of proving identity online. The lack of an easy, secure, reliable way for entities to verify identities or attributes of people they are dealing with online creates friction in commerce, leads to increased fraud and theft, degrades privacy, and hinders the availability of many services online.”

As the report reminds us, the extent of this challenge was famously captured back in 1993 by Peter Steiner’s New Yorker cartoon with the caption On the Internet, nobody knows you’re a dog.  25 year later, the cartoon still perfectly describes the identity challenge.  If anything, the challenge is even more serious in 2018, given that the volume and variety of online transaction services are greater than ever before.

An Agile, Incremental Approach to Business Process Automation

I’ve long believed that customer self-service was key to the success of e-business, - the IBM Internet strategy I was closely involved with in the mid-late 1990s.  It was quite revolutionary how easy it was to now do for yourself so many ordinary activities that previously required a phone call during office hours or a trip to a store or office.

Moreover, such e-business applications were relatively easy to develop.  By integrating their existing transaction and data base applications with a web front-end, - a strategy we succinctly described as Web + IT, - any business could now be in touch with its customers, employees, suppliers and partners at any time of the day or night, no matter where they were.  Companies were able to engage in their core activities in a more productive way by web-enabling their back-end systems, that is, linking their web front-ends to the presentation services of their back-end applications.

I was reminded of IBM’s e-business strategy when recently reading about Robotic Process Automation (RPA), a technology for automating business processes based on emulating the manual actions of a human at a keyboard.  RPA aims to improve the operational efficiency of office and service workers by automating tedious, repetitive, tasks, such as those associated with widely used horizontal processes in HR, Finance & Accounting and IT services.

RPA enables process automation at a fraction of the cost and time of classic software development.  Rather than automating a process by redesigning the overall back-end application, RPA interfaces with the back-end system by performing the same actions that a human does via the application’s user interface.  RPAs thus creates kind of software robots, or bots for short, that work alongside the humans.

The Emergence of a Blockchain-Based Token Economy

Blockchain Revolution, published in May of 2016 by Don Tapscott and Alex Tapscott, was one of the first books that explained the promise of blockchain technologies to the general public.  Its central argument is that for nearly four decades, the Internet has been great for reducing the costs of searching, collaborating, and exchanging information.  But, it has serious limitations for business and economic activity.  “Doing business on the Internet requires a leap of faith,” the book noted.  The Internet was designed to move information, but it’s lacked the necessary trust, security and privacy safeguards to move assets of value.  With blockchain, we’re now seeing the emergence of such an Internet of value.  “Now for the first time ever we have a native digital medium for value, through which we can manage, store, and transfer any asset.”

An updated edition of Blockchain Revolution was published this past June.  A lot has happened with blockchain in the intervening two years.  The updated edition explains some of these recent developments in a new preface, including cryptoassets, permissioned networks, identity and supply chains.  I’ll focus my comments on the emergence of a blockchain-based token economy, driven by the explosive growth in the value and variety of cryptoassets.

When the original book was published, the entire cryptoasset market had a value of $9 billion, - mostly dominated by the value of Bitcoin at $7 billions, while Ether, the Ethereum cryptocurreny, had reached around $1 billion.  The new edition estimates that as of March, 2018, the cryptoasset market was around $400 billion in size, a value subject to rapid fluctuations.  In addition, a wide variety of cryptoassets have been developed over the past two years. 

What Machine Learning Can and Cannot Do

Artificial intelligence is rapidly becoming one of the most important technologies of our era.  Every day we can read about the latest AI advances from startups and large companies.  Over the past few years, the necessary ingredients have come together to take AI across the threshold: powerful, inexpensive computer technologies; huge amounts of data; and advanced algorithms, especially machine learning.  Machine learning has enabled AI to get around one of its biggest obstacles, - the so-called Polanyi’s paradox.

Explicit knowledge is formal, codified, and can be readily explained to people and captured in a computer program.  But, tacit knowledge, a concept first introduced in the 1950s by scientist and philosopher Michael Polanyi, is the kind of knowledge we’re often not aware we have, and is therefore difficult to transfer to another person, let alone capture in a computer program.

“We can know more than we can tell,” said Polanyi in what’s become known as Polanyi’s paradox.  This common sense phrase succinctly captures the fact that we tacitly know a lot about the way the world works, yet aren’t able to explicitly describe this knowledge.  Tacit knowledge is best transmitted through personal interactions and practical experiences.  Everyday examples include speaking a language, riding a bike, and easily recognizing many different people, animals and objects.

Machine learning, and related advances like deep learning, have enabled computers to acquire tacit knowledge by being trained with lots and lots of sample inputs, thus learning by analyzing large amounts of data instead of being explicitly programmed.  Machine learning methods are now being applied to vision, speech recognition, language translation, and other capabilities that not long ago seemed impossible but are now approaching or surpassing human levels of performance in a number of domains.

The Transformative Power of Analytics - The Houston Astros: a Case Study

In 2013, the Houston Astros finished the season with a 51-111 record, - the worst record in the history of the franchise, having also lost over 100 games in the previous two years.  In 2017, the Astros won 101 games, finished first in the American League West Division, and went on to win their first ever World Series.  How did the Astros go from worst team record to first World Series victory in only four years?

The answer, in a nutshell, is analytics.  In December, 2011 the Astros hired Jeff Luhnow from the St Louis Cardinals as their General Manager.  As VP of scouting and player development in St Louis, Luhnow built a strong analytics department and enjoyed great success as one of the top talent producers in baseball, helping the Cardinals win the 2011 World Series as well as reach the playoffs from 2012 to 2015.  Luhnow then brought his analytics and management skills to Houston and proceeded to transform the team into a top contender in a short few years.

Today, just every major sports team makes extensive use of sports analytics, but none more so than Major League Baseball (MLB) teams.  Baseball has long been a game of statistics, collecting and analyzing vast amounts of data going back to the founding of the MLB in the years following the Civil War. 

Top MLB players are constantly compared not just to other contemporaneous players, but to other top players across the long history of the game, - a history that was very nicely depicted in Baseball, Ken Burns excellent documentary miniseries. Babe Ruth, Willie Mays, Mickey Mantle, Hank Aaron and countless other players are never forgotten in the world of baseball statistics.  For those of us who are fans, - as I am, not surprisingly given my Cuban roots, - baseball’s rich history is a major part of our enjoyment of the game. 

Are Innovation and R&D Yielding Decreasing Returns?

Given the pace of technological change, we tend to think of our age as the most innovative ever.  But over the past several years, a number of economists have argued that increasing R&D efforts are yielding decreasing returns.

Has the ideas machine broken down?, asked The Economist  in a January, 2012 article that examined the growing concerns that we may be in a long-term period of slow innovation despite our rapidly advancing technologies.  “With the pace of technological change making heads spin, we tend to think of our age as the most innovative ever,” said The Economist.  “We have smartphones and supercomputers, big data and nanotechnologies, gene therapy and stem-cell transplants. Governments, universities and firms together spend around $1.4 trillion a year on R&D, more than ever before.”  But, perhaps these don’t quite compare with modern sanitation, electricity, cars, planes, the telephone, and antibiotics.  These innovations, first developed in the late 19th and early 20th century, have long been transforming the lives of billions.

In a September, 2012 paper, Northwestern University economist Robert Gordon questioned the generally accepted assumption that economic growth is a continuous process that will persist forever.  He wrote that the slow growth we’ve been experiencing in the US and other advanced economies isn’t cyclical, but rather evidence that long-term economic growth may be grinding to a halt.

The rapid growth and rising per-capita incomes we experienced at the height of the Industrial Revolution, - between 1870 and 1970, - may have been a unique episode in human history.  Since the 1970s, US productivity and income growth have dipped sharply except for an Internet-driven productivity boost between1996 and 2004.  Innovation may be hitting a wall of diminishing returns.  There was little growth before 1800, and there might conceivable be little growth in the future.

A similar pessimistic view was expressed by George Mason University economist Tyler Cowen in his 2011 book The Great Stagnation.  According to Cowen, over the past two centuries the US economy has enjoyed lots of low-hanging fruit, including a vast, resource rich land, waves of immigrant labor, access to education and the technological advances of the Industrial Revolution.  But, Cowen believes that we are at a technological plateau, and wonders whether long term growth is still possible because the supply of low-hanging economic fruit is nearly exhausted.

Education, Work and US Leadership in the 21st Century

A few weeks ago, the Council on Foreign Relations (CFR) released The Work Ahead - Machines, Skills, and U.S. Leadership in the Twenty-First Century, a report by a CFR-sponsored Task Force to assess the future of work and its implications for the US economy and national security.  The Task Force was led by Penny Pritzker, - former Secretary of Commerce and founder and chair of PSP Partners, and by John Engler, - former Governor of Michigan and interim President of Michigan State University.

Their comprehensive report, - over 150 pages and 276 citations, - explored in great depth the changing nature of work as global competition and advanced technologies like AI, robotics, and smart IoT devices transform jobs and careers.  It states right up front that “The most important challenge facing the United States - given the seismic forces of innovation, automation, and globalization that are changing the nature of work - is to create better pathways for all Americans to adapt and thrive.  The country’s future as a stable, strong nation willing and able to devote the necessary resources and attention to meeting international challenges depends on rebuilding the links among work, opportunity, and economic security.”

For much of the 20th century, technology and globalization helped lead America to its leadership position in the world stage.  Underpinning this US leadership was the American Dream, - the promise that anyone can get ahead and achieve success and prosperity through talent and hard work.  But this promise has been eroding for decades.  For many of its citizens, the American Dream has been steadily disappearing.

Technology advances have led to massive innovations and efficiencies, enabling companies to get the same work done with significantly fewer people.  At the same time, many US-headquartered companies are truly global, doing business all over the world.  Beyond outsourcing jobs to countries with lower labor costs they’ve been investing and adding jobs where the demand is highest, - which has often been in faster growing emerging markets.

The US thus faces two major challenges: “creating new work opportunities, better career paths, and higher incomes for its people, while developing a workforce that will ensure U.S. competitive success in a global economy that will continue to be reshaped by technology and trade.” 

The 2018 Inclusive Internet Index

Earlier this year, the Economist Intelligence Unit (EIU) published the Inclusive Internet Index 2018.  Now in its second year, the Index analyzes and compares the current state of the Internet across 86 countries, ranging from advanced to developing economies and covering 91% of the world’s population.  Its key objective is to help policymakers understand the key factors necessary for the wide, inclusive use of the Internet in their respective countries.

Countries are evaluated based on 54 indicators organized around four major categories:

• Availability,  which captures the quality of breadth of the infrastructure available for Internet access, including network availability, access points for landline and mobile connections, and the basic electricity infrastructure needed to support Internet connectivity in urban and rural areas.
• Affordability, which measures the cost of Internet access relative to income, the competitive environment for wireless and broadband operators and the measures taken to decrease costs and promote access.
• Relevance, which looks at the availability of Internet content in the local language(s) and the value of being connected to get access to relevant services like news, entertainment, health advice and business and financial information.
• Readiness, which examines the capacity to take advantage of accessing the Internet, including level of literacy, educational attainment, cultural acceptance, privacy and security, and trust in the sources of online information.

Each country is assigned a score for each of the four categories, as well as an overall index score. 

The Impact of AI on R&D and Innovation

For the past couple of centuries, general-purpose technologies (GPTs) have been the key drivers of productivity and economic growth, - thanks to their rapid improvements in price and performance, pervasive applications, and ability to spur complementary innovations across a wide variety of industries.  The steam engine, electricity and the internal combustion engine are prominent examples of GPTs in the 18th and 19th century.  More recently, semiconductors, computers and the Internet have led to the digital revolution of the past several decades.

Beyond innovations in existing sectors, the rapidly improving price/performance of GPTs have led over time to the creation of whole new applications and industries.  For example, the steady declines in the price of electricity-generated power and the improvement in the efficiency of electric motors led to the radical transformation of manufacturing in the early part of the 20th century with the advent of the assembly line.  It also led to the creation of the consumer appliance industry, e.g., refrigerators, dishwashers, washing machines.  Similarly, as the semiconductor industry took off, it led to the historical transition from the industrial economy of the past two centuries to our ongoing digital economy.

How about artificial intelligence?  Beyond its use by leading edge technology companies, we’re still in the early stages of AI deployment.  It’s only been in the last few years that major advances in machine learning have taken AI from the lab to early adopters in the marketplace.  While considerable innovations and investments are required for its wider deployment, AI is likely to become one of the most important GPTs in the 21st century. 

Harnessing the Collective Intelligence of Humans and Machines

For over a decade, MIT professor Thomas Malone has been conducting pioneering research on the collective intelligence of groups.  Malone is the founding director of the MIT Center for Collective Intelligence, and has authored and co-authored a number of seminal articles on the subject.  A few weeks ago, Malone published Superminds: The Surprising Power of People and Computers Thinking Together, - a book that nicely explains the concept of collective intelligence and how our increasingly capable machines are now complementing the intelligence of groups of people.  The book illustrates these concepts with a wide variety of examples and case studies.

He defines a supermind as “a group of individuals acting in ways that seem intelligent.”  A supermind has measurable properties just as individual do.  It can have a life of its own beyond those of its individuals constituents.  And, as Malone points out, throughout history, groups of people working together as superminds have been responsible for the vast majority of human achievements. 

From Horseless Carriages to Driverless Vehicles

Autonomous vehicles (AVs) may well be the quintessential symbol of our AI/robotics age.  Cars are a major part of our daily lives.  A self-driven car is a concept that requires little explanation, something we can all quickly grasp.  It wasn’t that long ago that the notion on an AV driving us around while we read or sleep would have felt like the stuff of science fiction.  Having experimental AVs coursing through public roads in Silicon Valley, Pittsburgh and Phoenix is concrete evidence that our smart machines are achieving human-like intelligence, raising a number of important questions:  how long before AVs are all around us?; how will they impact our lives?; what unintended consequences might we have to deal with?; and what should be done to ensure that they arrive as safely and smoothly as possible?

These are among the questions addressed in the March 1 issue of The Economist, which includes a comprehensive special report on autonomous vehicles with seven articles on the subject.  The special report starts out with the assumption that whatever technological hurdles lie in their way will be eventually overcome.  But there are wider economic, social and public policy issues to be explored, starting with: what can we learn from the transition to horseless carriages in the 20th century that can now be applied to the transition to driverless cars?

Human-Machine Work Teams

Will there be enough work in the future?  What’s the likely impact of our continuing technology advances on jobs?  How will they impact productivity?  These are all-important questions to reflect on as our increasingly smart technologies are now being applied to activities that not long ago were viewed as the exclusive domain of humans.

While no one really knows the answer to these questions, most studies of the subject have concluded that relatively few occupations, 10% or less, will be entirely automated and disappear over the next 10 - 15 years.  Instead, a growing percentage of occupations will significantly change as technologies automate the more routines tasks within those occupations.  People will still be involved, but their jobs will be transformed by the advanced tools they now have to master.  Moreover, a growing technology-based economy will likely create all kinds of new occupations, which will more than offset declines in occupations displaced by automation, - as has been the case over the past couple of centuries.

One would also expect that technology advances will increase the productivity of the workers involved in these new or transformed occupations.  But, if we look at the past 10-15 for guidance, we’ll find that productivity growth has significantly declined over this timeframe, notwithstanding huge technology advances like smartphones, cloud computing, big data and artificial intelligence.  Economist have proposed competing explanations for the declining productivity growth, but have so far failed to reach consensus.  Understanding this productivity puzzle may well hold the key to future productivity improvements and long-term economic growth.

Improving the Odds of Success for Corporate Transformations

Looking back upon my long career, one of the major factors shaping my views of strategy and innovation are the powerful transformational forces that I saw buffeting the IT industry over much of that time.  It’s frankly sobering how many once powerful IT companies are no longer around or are shadows of their former selves.  The carnage might be more pronounced in the fast-changing IT industry, but no industry has been immune.  It’s all part of what Joseph Schumpeter called creative destruction over 75 years ago, - “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”

For a startup a transformative innovation is all upside, an opportunity to take-on established companies with new products that offer significantly better capabilities and/or lower costs.  Startups hope that their compelling new offerings will help them establish a foothold in the marketplace and, over time, become leaders in their industry.

But change is often difficult for established companies.  Over the years, they’ve amassed a number of valuable assets and extensive organizations.  Already consumed with managing their existing operations, - e.g., products and services; supply chain and channel partners; sales and marketing; revenues, profits and cash; -  they may see a transformative innovation as more of a threat or distraction than an opportunity. 

The Promise and Current State of Blockchain

I recently participated in a blockchain panel at a conference of senior supply chain executives from a variety of companies.  I welcomed the opportunity to learn how these real-world executives feel about blockchain, as well as how to best communicate the promise and current state of this emerging and potentially transformative technology.  Let me share a few of my observations.

Before our panel started, the executives were asked how they viewed blockchain.  In general, they felt that there was too much hype surrounding blockchain, were skeptical about its value to supply chain systems, but expressed a wait-and-see attitude.  They were then asked how many were conducting blockchain prototypes in their companies.  The majority raised their hands. 

I thought that their views and subsequent questions and comments during the panel succinctly captures the current state of blockchain in the business world: skeptical, turned off by the hype, but hedging their bets by getting on the learning curve with prototypes and experimentation.

The moderator first asked each panelist to address the audience’s skepticism about blockchain.  What, in our opinion, is the key value of blockchain?  I said that I look at the value of blockchain through two complementary lenses: enhancing the security of the Internet, and reducing the inefficiencies and overheads in applications, like supply chains, involving multiple institutions.

The Growing Importance of Resilience in an Increasinsgly Turbulent World

In March of 2017, Northeastern University launched a new interdisciplinary initiative, the Global Resilience Institute (GRI).  GRI is a university-wide research and educational effort to advance the resilience of individuals, communities, economies and societies around the world by strengthening their capacity to adapt to an increasingly turbulent world.  Its key mission is to develop and deploy practical tools, applications and skills to help effectively respond to human-made and naturally-occurring disruptions and disasters.

GRI’s Founding Director is Northeastern professor Stephen Flynn.  In his Director’s Welcome web page, Flynn writes that “Building resilience within and across multiple levels, from individual to societal, requires a comprehensive effort that matches the complexity of the increasingly interdependent systems and networks we all rely on… Our aim is to serve as both a channel and a catalyst for experts in industry, academia, and government to collaborate on solving the world’s most pressing resilience challenges.  These include both slowly emerging disruptions as well as shocks and sudden disasters.”

Most everyone agrees that dealing with our increasingly turbulent, complex world us requires significant enhancements to the resilience of our societies and systems.  But, five critical barriers stand in the way:

• Widespread risk illiteracy and a limited understanding of the new dependencies and interdependencies that pervade our more connected lives;
• Inadequate designs for embedding resilience into systems, networks, and infrastructure at multiple levels;
• Pervasive economic disincentives for investing in proven resilience measures;
• Inadequate governance frameworks and policy guidance to foster resilience; and
• A lack of adequate training and education to support the development and implementation of comprehensive capabilities for advancing resilience.

A Framework for the Safe Management of Digital Identities and Data

Identity plays a major role in everyday life.  Think about going to an office, getting on a plane, logging to a website or making an online purchase.  Identity is the key that determines the particular transactions in which we can rightfully participate as well as the information we’re entitled to access.   But, we generally don’t pay much attention to the management of our identity credentials unless something goes seriously wrong.

For much of history, our identity systems have been based on face-to-face interactions and on physical documents and processes.  But, the transition to a digital economy requires radically different identity systems.  In a world that’s increasingly governed by digital transactions and data, our existing methods for managing security and privacy are proving inadequate.  Data breaches, large-scale fraud, and identity theft are becoming more common.  In addition, a significant portion of the world’s population lacks the credentials needed to participate in the digital economy.  Our existing methods for managing digital identities are far from adequate.

As explained in A Blueprint for Digital Identity, - a 2016 report by the World Economic Forum, - identity is essentially a collection of information or attributes associated with a specific individual.  These attributes fall into three main categories:  inherent - attributes intrinsic to an individual, - e.g., age, height, date of birth, fingerprints, color of eyes, retinal scans;  assigned - attributes attached to but not intrinsic to the individual - e.g., e-mail address, telephone numbers, social security, drivers license, passport number; and accumulated - attributes gathered or developed over time - e.g., health records, job history, home addresses, schools attended.

While mostly associated with individuals, identities can also be assigned to legal entities like corporations, partnerships and trusts; to physical entities like cars, buildings, smartphones and IoT devices; and to digital entities like patents, software programs and data sets.

Data attributes are generally siloed within different private and public sector institutions, each using its data for its own purposes.  But to reach a higher level of privacy and security, we need to establish trusted data ecosystems, which requires the exchange and sharing of data across a variety of institutions.  The more data sources a trusted ecosystem has access to, the higher the probability of detecting fraud and identity theft while reducing false positives.  In addition, an ecosystem with a variety of data sources can help foster economic inclusiveness by certifying the identities and credit worthiness of poor people with no banking affiliation.

However, safeguarding the data used to validate identities creates security and privacy issues of its own.  It’s unsafe to gather all the needed attributes within one institution or central data location, making it a target for data breaches.  But, it’s also highly unfeasible, as few institutions will let their critical data out of their premises.

Customer Experience - the Key Competitive Differentiator in the Digital Age

About five years ago, McKinsey conducted an online survey of over 850 CEOs and other senior executives to find out how their companies were faring in their implementation of digital technologies and strategies.  The data showed that executives were generally optimistic, but they still had much to do to achieve their digital business objectives.  Organizational alignment and leadership were the critical factors in the success or failure of their digital strategies.

More specifically, the survey asked them about their progress in embracing five major digital trends: big data and advanced analytics, digital engagement of customers, digital engagement of employees and external partners, automation, and digital innovation.  While all five trends were important, executives said that digital customer engagements was their most important competitive differentiator and where they were expecting the largest financial returns.

This is not surprising, even more now than at the time of the survey.  A company can differentiate itself from competitors in one of two key ways: by providing a superior customers experience or by offering the lowest prices.  For companies that prefer the former, digital channels are, far and away, the most cost-effective way of reaching out to their clients.  The explosive growth of mobile devices means that you can be engaged with your customers whether they are at home, at work, in your store or anywhere else.

But, digital customers can be fickle and hard to satisfy.  It’s quite difficult to keep up with their fast changing behaviors and expectations.  New products and services are hitting the market faster than ever, brand loyalty keeps decreasing, and the increased competition continues to shift power from institutions to individuals.

Human + Machine: The Impact of AI on Business Transformation

Last week I wrote about the impact of blockchain technologies on business transformation.  I now want to turn my attention to the more immediate impact of AI on business, based on Human + Machine: Reimagining Work in the Age of AI, a recently published book by Accenture executives Paul Daugherty and Jim Wilson.

The book reminds us that technology has long been transforming business.  Electricity and standardized processes ushered the first wave of business transformations about 100 years ago.  Manufacturing was decomposed into a set of processes and reassembled into the assembly line, leading to the age of mass production.

Several decades later, IT and process automation brought us the second wave of business transformation.  Mainframes and data processing software enabled the automation of back-office processes in the 1960s and 1970s.  Front-office automation followed in the 1980s with the advent of PCs and client-server systems.  A decade later, advances in networking and ERP software led to  business process reengineering and management. 

“Now, the third wave involves adaptive processes,” write Daugherty and Wilson.  “This third era, which builds on the previous two, will be more dramatic than the earlier revolutions enabled by assembly lines and digital computers, and will usher in entirely new, innovative ways of doing business… This adaptive capability is being driven by real-time data rather than by an a priori sequence of steps.   The paradox is that although these processes are not standardized or routine, they can repeatedly deliver better outcomes.”

Blockchain and Business Process Transformation

One can look at the transformational impact of IT on companies and industries through a variety of lenses, - e.g., products and services, revenue and profit, sales and support, market strategy.  One of the most important such lenses is the impact of IT on business processes, that is, on how work is actually done across the various functions of an organization. 

Examining the impact of IT over the past several decades through a process point of view, one can identify three distinct phases: first came process automation in the early years of IT, followed around the 1990s by enterprise-wide process reengineering and management.  The third phase, is now starting, focused on the processes and transactions that determine how institutions interact with each other around the world.  Let me discuss each of these phases. 

The MIT Intelligence Quest

How does human intelligence work, in biological as well as in engineering terms? And how can we use such an understanding of human intelligence to build wiser and more useful machines?  On February 1, MIT launched the Intelligence Quest (MIT IQ), - an initiative aimed at addressing these big questions by advancing the science and engineering of both human and machine intelligence.  MIT IQ aims “to discover the foundations of human intelligence and drive the development of technological tools that can positively influence virtually every aspect of society.”

MIT has been deeply involved in artificial intelligence since the field’s inception in the 1950s.  MIT professors  John McCarthy and Marvin Minsky were among the founders and most prominent leaders of the new discipline.  AI was one of the most exciting areas in computer sciences in the 1960s and 1970s.  Many of the AI leaders in those days were convinced that a machine as intelligent as a human being would be developed within a couple of decades.  They were trying to do so by somehow programming the machines to exhibit intelligent behavior, even though to this day we have little idea what intelligence is about, let alone how to translate intelligence into a set of instructions to be executed by a machine.  Eventually, all these early AI approaches met with disappointment and were abandoned in the 1980s.  After years of unfulfilled promises, a so called AI winter of reduced interest and funding set in that nearly killed the field.

AI was reborn in the 1990s when it adopted a more applied, engineering-oriented paradigm.  The new AI paradigm enabled computers to acquire intelligent capabilities by ingesting and analyzing large amounts of data using powerful computers and sophisticated algorithms.  Instead of trying to explicitly program intelligence, this new approach was based on feeding lots and lots of data to the machine, and then letting the algorithms discover patterns and extract insights from all that data.

Such a data-driven, machine learning approach produced something akin to intelligence or knowledge.  Moreover, unlike the explicit programming-based approaches, the statistical-based ones scaled very nicely.  The more data you had, the more powerful the supercomputers, the more sophisticated the algorithms, the better the results.  Machine learning and related advances like deep learning, have played a major role in AI’s recent achievements. 

Blockchain Killer-Apps

A killer app is an IT application whose value is simple to explain, its use is fairly intuitive, and the application turns out to be so useful that it helps propel the success of a product or service.  Spreadsheets and word processing were major factors in the 1980s adoption of personal computers, for example.  A decade later, e-mail, and the World Wide Web played crucial roles in the mainstream success of the Internet.  While there are a number of strong candidates for smartphone killer-apps, navigation and music are among the most widely used.

Blockchain has been in the news lately, but beyond knowing that it has something to do with payments and digital currencies, most people don’t know what blockchain is or why they should care.  A major part of the reason is that we still don’t have the kind of easy-to-explain blockchain killer-apps that propelled the Internet forward.

Blockchain has yet to cross the chasm from technology enthusiasts and visionaries to the wider marketplace that’s more interested in business value and applications.  There’s considerable research on blockchain technologies, platforms and applications as well as market experimentation in a number of industries - roughly where the Internet was in the mid-late 1980s: full of promise but still confined to a niche audience.

In addition, outside of digital currencies, -a somewhat exotic topic of interest to a relatively small audience, - blockchain applications are primarily aimed at institutions.  And, given that blockchain is all about the creation, exchange and management of valuable assets, its applications are significantly more complex to understand and explain than Internet applications.

The management of information is quite different from the management of transactions.  The latter, especially for transactions dealing with valuable or sensitive assets, requires deep contractual negotiations among companies and jurisdictional negotiations among governments.  Moreover, since blockchain is inherently multi-institutional in nature, its applications involve close collaboration among companies, governments and other entities.

A Framework for Building AI Capabilities

After decades of promise and hype, artificial intelligence has finally reached a tipping point of market acceptance.  AI is seemingly everywhere.  Every day we can read about the latest AI advances and applications from startups and  large companies.  AI was the star of the 2018 Consumer Electronic Show earlier this year in Las Vegas.

But, despite its market acceptance, a recent McKinsey report found that AI adoption is still at an early, experimental stage, especially outside the tech sector.  Based on a survey of over 3,000 AI-aware C-level executives across 10 countries and 14 sectors, the report found that 20 percent of respondents had adopted AI at scale in a core part of their business, 40 percent were partial adopters or experimenters, while another 40 percent were still waiting to take their first steps.

The report adds that the gap between the early AI adopters and everyone else is growing.  While many companies have yet to be convinced of AI’s benefits, leading edge firms are charging ahead.  Companies need to start experimenting with AI and get on the learning curve, or they risk falling further behind. 

AI will likely become the most important technology of our era as it’s improved upon over time, but we’re still in the early stages of deployment.  It’s only been in the last few years that complementary innovations, especially machine learning have taken AI from the lab to early marketplace adopters.  And, history shows that even after technologies start crossing over into mainstream markets, it takes considerable time, - often decades, - for the new technologies and business models to be widely embraced by companies and industries across the economy.

Blockchain and the Promise of an Open, Decentralized Internet

The January 21 issue of the NY Times Magazine included a very good article, Beyond the Bitcoin Bubble, by science writer Steven Johnson.  His article aims to explain what blockchain, cryptocurrencies and related technologies are all about as well as their potential impact on the economy and society.  These are not only complex but esoteric subjects, as nicely illustrated in this funny video.  While blockchain and Bitcoin have been frequently in the news lately, beyond knowing that they have something to do with money, most people don’t really know what they are or why they should care.

This is not surprising.  In their early years, it’s hard for most people to appreciate the potential of a transformative technology.  There’s generally a considerable time-lag between the time we start reading articles about their exciting potential and their adoption by companies and industries across the marketplace.  This is particularly the case for general purpose technologies, like electricity, the Internet and blockchain, which are the most potentially transformative due to their widespread use.   Their deployment time-lags are longer because attaining their full benefits requires a number of complementary co-inventions and investments, including additional technologies, applications, processes, business models, and regulatory policies.

Will There Be Enough Work in the Future?

Will there be enough work in the future?  Opinions are fairly divided between those who believe that technology advances will reduce human jobs, and those who believe that technology advances will produce as many jobs as they displace.  It’s easier to predict the jobs that will be automated away by technology, but much more difficult to predict the new jobs that these same technologies will create.  In the end, we don’t really know.

In December of 2017, the McKinsey Global Institute published Jobs Lost, Jobs Gained: Workforce Transition in a Time of Automation, a report that directly addresses this question.  The McKinsey study examined in great detail the work that’s likely to be displaced by automation through 2030, as well as the jobs that are likely to be created over the same period.  It analyzed data from 46 countries comprising almost 90 percent of global GDP, focusing particularly on six countries: China, Germany, India, Japan, Mexico and the US.  For each of this six countries, the study modeled the potential for employment changes in more than 800 occupations based on different scenarios for the pace of automation adoption and for future labor demand.

The report’s overall conclusion is that a growing technology-based economy will create a significant number of new occupations, - as has been the case in the past, - which will more than offset declines in occupations displaced by automation.  However, “while there may be enough work to maintain full employment to 2030 under most scenarios, the transitions will be very challenging - matching or even exceeding the scale of shifts out of agriculture and manufacturing we have seen in the past.”

The Challenges of Executing a Transformational Strategy

The 2018 MIT CIO Symposium will take place on May 23.  This year’s Symposium will be focused on the challenges of executing a digital transformation strategy.   It’s no longer enough to have formulated a digital strategy for the business.  As a number of recent reports have indicated, leading edge companies are pulling ahead of everyone else by pushing the boundaries of digitization.  And, having a strong digital foundation gives those companies a leg up in embracing data analytics, AI, blockchain, and other advanced technologies, further widening their advantage.  “The time for merely thinking digital has passed; the future belongs to the doers,” notes the Symposium’s website.

Why do so many organizations struggle to implement their well formulated strategies, especially transformational strategies like the transition to digital, that encompass new technologies, business models and management practices?  This is a question I’ve long been thinking about, having lived through IBM’s near-death experience in the early1990s.

Is it that in spite of all their efforts in strategy formulation, their management was unable to anticipate the new technology and market changes and were caught by surprise?  Or it is that, as if actors in a kind of Greek tragedy, they saw the changes coming and understood what had to be done, but were somehow unable to execute their strategies?

MIT’s Donald Sull has been exploring these questions for over 20 years.  As this 2015 HBR article notes, we know a lot more about strategy than about translating strategy into results.  “Books and articles on strategy outnumber those on execution by an order of magnitude…  A recent survey of more than 400 global CEOs found that executional excellence was the number one challenge facing corporate leaders in Asia, Europe, and the United States, heading a list of some 80 issues, including innovation, geopolitical instability, and top-line growth.  We also know that execution is difficult.  Studies have found that two-thirds to three-quarters of large organizations struggle to implement their strategies.” 

The Impact of Automation on Everyday Life

This past October, the Pew Research Center released Automation in Everyday Life, a report on what Americans think about advanced technologies like artificial intelligence and robotics, and the impact they expect them to have on their everyday lives.  The report is based on a national survey of 4,135 randomly selected American adults.  To help gauge their opinion on such complex topics, the survey questions were framed around four specific scenarios related to these advanced technologies: driverless cars, workplace automation, robot caregivers, and computer algorithms that evaluate and hire job applicants.

“Americans anticipate significant impacts from various automation technologies in the course of their lifetime,” noted the report.  “Although they expect certain positive outcomes from these developments, their attitudes more frequently reflect worry and concern over the implications of these technologies for society as a whole.”

Let me discuss some of the report’s key findings.

Cloud Computing and the Supply Chain of Services

In 2008 I gave a talk at a conference on The Promise and Reality of Cloud Computing.  In his closing remarks, the conference organizer noted that most everyone had agreed that something big and profound was going on, but they weren’t quite sure what it was they were excited about.  “There is a clear consensus that there is no real consensus on what cloud computing is,” he said.

At the time, most people associated cloud with utility computing and IT-as-a-Service.  Technology writer Nicholas Carr was also a speaker at the conference.  In his talk, based on his then recently published book The Big Switch, Carr nicely framed the historical shift to cloud computing, comparing the evolution of IT to that of power plants.  In the early days, companies usually generated their own power with steam engines and dynamos.  But with the rise of highly sophisticated, professionally run electric utilities, companies stopped generating their own power and plugged into the newly built electric grid. 

IT was then undergoing a similar transformation, as cloud service providers were starting to offer IT-as-a-Service with near unlimited scalability at very attractive prices, based on a flexible pay-as-you-go delivery model.  Early cloud adopters were mostly focused on improving the economics of IT, giving them the ability to launch new offerings or expand their current ones without major investments in additional IT infrastructure while paying for whatever cloud resources they actually used.

Cloud continued to evolve and advance over the ensuing years.  As an article noted about a 2013 cloud conference: “There wasn’t a single speaker who started off a session by saying, ‘Let's define cloud computing.’  That gets tiresome when seen in session after session, year after year, so its absence is gratefully received. This is a clear indication that the industry has moved beyond elementary knowledge-gathering and onto the practicalities associated with cloud implementation and rollout.”  Still, debates continued on the true definition of cloud computing.  Do private and hybrid clouds qualify or only public ones? 

AI and the Productivity Paradox

AI is being successfully applied to tasks that not long ago were viewed as the exclusive domain of humans, matching or surpassing human level performance in more and more domains.  But, at the same time, productivity growth has significantly declined over the past decade, and income has continued to stagnate for the majority of Americans.  This puzzling contradiction is addressed in Artificial Intelligences and the Modern Productivity Paradox, a working paper recently published  by the National Bureau of Economic Research (NBER).

The paper’s authors, - MIT professor Erik Brynjolfsson, MIT PhD candidate Daniel Rock, and University of Chicago professor Chad Syverson, - note that “aggregate labor productivity growth in the U.S. averaged only 1.3% per year from 2005 to 2016, less than half of the 2.8% annual growth rate sustained from 1995 to 2004…  What’s more, real median income has stagnated since the late 1990s and non-economic measures of well-being, like life expectancy, have fallen for some groups.”

This productivity puzzle isn’t confined to AI.  “Few topics in economics today in most large economies generate as much debate as the productivity puzzle,” said McKinsey in a March, 2017 report.  “In  the United States, productivity growth has declined sharply since 2004 yet digital technology has been widely apparent during this period…  The answer to this puzzle holds the key to future prosperity because now more than ever our economy depends on productivity improvements for long-term economic growth.  Economists have proposed competing explanations for declining productivity growth and so far have failed to reach a consensus.” 

Blockchain and the Music Industry: Turning Pennies into Dollars

Just about every industry has been significantly transformed in the past few decades.  But few have been as disrupted as the music industry.  Everything seems to be changing at once, from the way content is produced and delivered, to the sources of revenue and profits.  Digital technologies, - the Internet, smartphones, cloud computing, … - have literally turned dollars into pennies.  Now, blockchain and related technologies may once more play a major role in the music industry, - this time helping to turn those pennies back into dollars.

We’re truly surrounded by music as never before, - in a wide variety of styles; in physical and digital formats; over the Internet, satellite, and broadcasts; in mobile devices and home music systems.  But, the shift from physical to digital, and then from downloads to streaming have wreaked havoc on the business of music.  US retail revenues of recorded music were close to $14 billion in 1998 before starting their decline.  According to the Recording Industry Association of America (RIAA), revenues fell from roughly $12 billion in 2006 to around $7 billion in 2010.  They stayed flat at $7 billion though 2015, starting to increase in 2016 mostly due to a growth in paid streaming music subscriptions.  Revenues are expected to be around $8 billion in 2017.

Turning dollars into pennies succinctly captures the music industry’s precipitous revenue declines.  As this article noted, “During the heyday of the 80s, the music industry was rolling in so much money it could afford to leave some on the table… which it often did…  There were so many dollars coming in, they didn’t bother paying attention to the pennies.  Well, as we all know those days are gone.  And after a decade of losses from its traditional revenue stream (sales), we’ve seen the music industry forced to look for revenue in new places and in different ways.  In the absence of dollars, the pennies now matter.”

As a result, the music industry now finds itself trying to figure out how to keep track of all those pennies in the hope of turning them back into dollars.  In the first half of 2017, streaming services accounted for 62% of the total market, with digital downloads and physical sales accounting for 19% and 16% respectively, said the RIAA.  But streaming pays royalties in fractions of pennies, so legislation, new business models and technological innovations are needed to make sure that all the necessary data are efficiently collected so the various artists involved in a song are paid.

The Rise of Winner-Take-All Urbanism

Earlier this year, Richard Florida published Why America’s Richest Cities Keep Getting Richer in The Atlantic.  Florida is a leading urban studies author and researcher, professor at the University of Toronto and Director of Cities at its Martin Prosperity Institute.

“The most important and innovative industries and the most talented, most ambitious, and wealthiest people are converging as never before in a relative handful of leading superstar cities that are knowledge and tech hubs,” wrote Florida.  “This small group of elite places forge ever forward, while most others struggle, stagnate, or fall behind.  This process is one I like to call winner-take-all urbanism.”

Winner-take-all urbanism is another manifestation of the winner-take-all economics of the past few decades, in which a relatively small number of players reap a very large share of the rewards, upending whole industries with their outsized returns.

AI and The Future of Work

Last month I attended AI and the Future of Work, a conference hosted by MIT’s Computer Science and Artificial Intelligence Laboratory (CSAIL) and its Initiative on the Digital Economy (IDE).  The two-day agenda included over 20 keynotes and panels on AI-related topics, and around 60 speakers and panelists from academia and business.

New technologies have been replacing workers and transforming economies over the past two centuries.  But, over time, these same technologies led to the creation of whole new industries and new jobs.  While the technologies of the industrial economy helped to make up for our physical limitations, the technologies of the digital economy are now enhancing our cognitive capabilities.  They’re being increasingly applied to activities that not long ago were viewed as the exclusive domain of humans.  Will the AI revolution play out like past technology revolutions, - short term disruptions followed by long-term benefits, - or will this time be different?

Conference participants generally agreed that AI will have a major impact on jobs and the very nature of work.  But, for the most part, they viewed AI as mostly augmenting rather than replacing human capabilities, automating the more routine parts of a job and increasing the productivity and quality of workers, so they can focus on those aspect of the job that most require human attention.  Overall, a small percentage of jobs will be fully automated, while many more will be significantly transformed.

Conference participants also generally agreed that the more advanced AI-based transformations will not happen rapidly, but are likely decades away.  Much progress has been recently made in the ability to extract features from all the data we now have access to, as well as in machine learning algorithms that give computers the ability to learn by ingesting large amounts of data instead of being explicitly programmed.  While such statistical pattern recognition approaches can be applied to many tasks, they’re no substitute for model formation, the main approach used by humans, - from toddlers to physicists, - to understand how the world works.  We’re a long way from the development of AIs that truly learn and reason like people. 

The Emergence of Industry 4.0

Over the past few years, Industry 4.0, - aka the 4th Industrial Revolution, - has been the subject of several articles, studies, and surveys, as well as a book published earlier this year by Klaus Schwab, founder and executive chairman of the World Economic Forum (WEF).  They all attempt to describe and put a name to the disruptive changes taking place all around us within the context of the past 250 years.

“Industrial revolutions are momentous events,” said A Strategist Guide to Industry 4.0, - a 2016 article in strategy+business.  “By most reckonings, there have been only three.”  The First Industrial Revolution, - starting in the last third of the 18th century, - introduced new tools and manufacturing processes based on steam and water power, ushering the transition from hand-made goods to mechanized, machine-based production.  The Second starting a century later, brought us steel, cars, chemicals, petroleum, electricity, the telephone and radio while creating the age of mass production.  The Third, - following World War II - saw the advent of computers, digital technologies, the IT industry, and the automation of process in just about all industries.

There’s general agreement that the 4th Industrial Revolution is primarily driven by a fusion of once separate technologies that when joined together are integrating the physical and digital worlds.  But, there’s a spectrum of opinions as to the scope of its impact, some arguing that Industry 4.0 applies primarily to manufacturing technologies and industries, while others argue that it’s profoundly transforming our economies and societies.

A Historical Perspective on the Digital Economy

A few months ago, the magazine strategy+business (s+b) published a roundtable discussion between s+b editor-in-chief Art Kleiner, economic historian Carlota Perez, and PwC UK partner Leo Johnson.  The discussion was centered on Perez’s theory of technology revolutions and economic cycles.  In her 2002 influential book, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages and in several other publications, Perez framed the digital economy of the past few decades from a historical perspective.  If we examine the long term historical big picture, patterns emerge which can help guide our understanding and planning for the future. 

According to Perez, since the onset of the Industrial Revolution we’ve had 5 major technology-driven economic cycles, each one lasting roughly 50-60 years.  First was the age of machines, factories and canals starting in 1771.  This was followed by the age of steam, railways, iron and coal, starting in 1829; steel, electricity and heavy engineering in 1875; oil, automobiles, and mass production in 1908; and our present ICT-based digital age starting in 1971.

Each economic cycle is composed of two very different periods, each lasting roughly 20 - 30 years.  The installation period is the time of creative destruction, when new technologies emerge from the labs into the marketplace, entrepreneurs start many new businesses based on the new technologies, VCs encourage business model experimentation, and the new ventures attract considerable investments and financial speculation.  Inevitably this all leads to a financial bubble, which eventually bursts in spectacular fashion leading to a time of crisis.

After the crash, comes the deployment period, which Perez views as a time of economic transformation and institutional recomposition.  The now well accepted technologies and business paradigms become the norm; infrastructures and industries start getting better defined and more stable; and production capital drives long-term growth and expansion by spreading and multiplying the successful business models.

Human-AI Decision Systems

I recently read The Human Strategy, a very interesting article on Human-AI decision systems by MIT Media Lab professor Sandy Pentland.  Pentland is the faculty director of MIT Connection Science, - with which I’m associated as a Fellow, - as well as director of the Human Dynamics Lab.  In 2014 he published Social Physics: How Social Networks Can Make Us Smarter.

“Perhaps the most critical function of any organization or society is its decision systems,” wrote Pentland.  “In modern societies, decision systems provide a leader the ability to make informed and timely decisions, supported by a complex enterprise of distributed information and communication systems that provide situational awareness.  Traditionally, decision systems have been confined to individual physical domains, such as logistics, physical plant, and human resources, and more recently virtual domains such as cyber, by both policy and technology, resulting in challenges with the integration of information across disparate domains.”

But, despite the increasingly complex decisions that organizations are called upon to make, decision-making remains human-intensive and anecdotal.  Few organizations have applied social network analysis to help them scale the size and expertise of the decision-making group.  Nor have they integrated the large amounts of data, analytical tools and powerful AI systems now at our disposal into their decision making systems. 

Where is Technology Taking the Economy

I recently read Where is Technology Taking the Economy?, an article in McKinsey Quarterly by W. Brian Arthur, - External Professor at the Santa Fe Institute , Visiting Researcher at PARC, and former faculty member at Stanford University.

According to Arthur, the digital revolution has morphed through three distinct eras over the past several decades.  The first era, in the 1970s and 1980s, brought us Moore’s law and the dramatic advances in semiconductor technologies.  From mainframe and supercomputers to PCs and workstation, IT was now being used in a wide variety of applications, from financial services and oil exploration, to computer-aided design and office systems.  “The economy for the first time had serious computational assistance.”

Then came the second era in the 1990s and 2000s, which enabled us to link computers together, share information, and connect digital processes.  “Everything suddenly was in conversation with everything else,” giving rise to “the virtual economy of interconnected machines, software, and processes…, where physical actions now could be executed digitally.”

We’re now in the third era, which began roughly in the 2010s.  It’s brought us smartphones, ubiquitous sensors, IoT devices and oceans and oceans of data.  Powerful computers and intelligent algorithms are enabling us to make sense of all that data by searching for patterns and doing  something with the results, including computer vision, natural-language processing, language translation, face recognition and digital assistants.

The Top Ten Emerging Technologies of 2017

Earlier this year, Scientific American, in collaboration with the World Economic Forum, published a special report on The Top Ten Emerging Technologies of 2017.  These technologies, - selected by a global panel of experts, - “are expected to become increasingly commonplace in the next few years,” and are “attracting increased funding or showing other signs of being ready to move to the next level.”

Here are the 10 technologies comprising the 2017 list, along with the reasons cited in the report for their selection:

A Novel Approach for Measuring the True Impact of the Digital Economy

Gross domestic product (GDP), the basic measure of a country’s overall economic output, is generally used by governments to inform their policies and decisions.  “What we measure affects what we do; and if our measurements are flawed, decisions may be distorted,” noted a 2009 Commission convened to look at the adequacy of GDP as an indicator of economic performance, - which was led by Nobel-prize winning economists Joseph Stiglitz and Amartya Sen.

GDP is essentially a measure of production.  While suitable when economies were dominated by the production of physical goods, GDP doesn’t adequately capture the growing share and variety of services and the development of increasingly complex solutions in our 21st century digital economy.

Digital Spillover, a recent report co-developed by Huawei and Oxford Economics, explores how to better define and measure the true impact of the digital economy.  It argues that the scope of the digital economy is expanding and proposes a novel way of measuring its impact.

“A truly digital economy is one in which businesses from across the industrial spectrum are investing in digital and making the most productive use of it,” notes the report.  “The mechanisms by which this is happening are complex and evolving.  Over and above the direct productivity boost that companies enjoy from digital technologies, a more profound chain of indirect benefits also takes place, as the impact spills over within a firm, to its competitors, and throughout its supply chain.  These digital spillover effects materialize through numerous channels, and are integral to understanding the role digital technologies play in the economy.”

The Evolution Toward Digital Supply Chains

Two years ago, a group of leading CEOs from around the world met in China to discuss the major issues facing their companies in the global marketplace.  The meeting was organized by the Center for Global Enterprise (CGE), - the nonprofit research institution founded by former IBM Chairman and CEO Sam Palmisano to study the contemporary corporation, globalization, economic trends, and their impact on society.  The CEOs at the meeting in China concluded that their highest research priority was the evolution toward Digital Supply Chains (DSC), and its potential to transform organizations and the conduct of business around the world.  In response, the Digital Supply Chain Institute (DSCI) was launched a few months later.

In October of 2016, the DSCI, in partnership with CREATe.org  published its first research paper, Digital Supply Chains: A Frontside Flip.  The paper explains the key differences between traditional and digital supply chains, and provides practical advice to help companies prepare for the digital supply chains of the future

The traditional supply chain has evolved over the years as a crucial process used by many companies for the production, handling, and/or distribution of their products or services.  Traditional supply chains generally comprise five separate back-office functions: transport, warehousing, purchasing, marketing and finance.  Their key objective has been to improve the efficiency of getting goods and services from suppliers to customers, through a series of intermediate steps including manufacturing, distributors and retailers.  But, these supply chains were quite fragmented, with limited interactions and information sharing among their various functions and steps.

Over the past couple of decades, the explosive growth of the Internet has made it much easier for companies to transact with each other around the world.  The connectivity and universal reach of the Internet has enabled companies to integrate and better coordinate all their various processes, as well as to go beyond the boundaries of the firm and develop highly sophisticated global supply chains.  Vertically integrated firms have evolved into virtual enterprises, increasingly relying on supply chain partners for many of the manufacturing and services functions once done in-house.

The DSCI paper argues that it’s time to focus on the transformation of the whole supply chain process, not just in further increases in efficiency.  Their traditional linear nature is increasingly misaligned with the more networked nature of today’s global production.

Jobs, Skills and Education

Earlier this year the communications firm Burson-Marsteller along with research firm PSB interviewed 1,500 Americans from all walks of life to shed light on their feelings about the current state of the economy and their expectations for the future.  “Americans are concerned about the present, but optimistic about the future,” was the survey’s overriding finding.  “However, opinions about the economy and the future are somewhat driven by education level.”

While only 33% said that the country is headed in the right direction, 67% said that they were somewhat or very optimistic about the future.  To a large extent, this optimism is based on the belief that their jobs are safe over the next 5 years, with 62% believing that they won’t be laid off and 60% that a machine couldn’t replace them.  In their opinion, the high cost of living, unemployment and jobs, the gap between rich and poor and taxes are the top issues facing the US economy, ahead by a fairly wide margin over corporate corruption, loss of manufacturing jobs, and falling or stagnant wages.

Their feelings about the future differed by educational level.  71% of Americans with a college education or more said that they have the right skills to succeed in the 21st century, compared to 42% of those with a high school education or less.  Only 14% of survey participants with a college education worried that their jobs could be automated within five years, compared with 30% of those with high school or less.  And 55% of Americans with college or more felt that technology will improve overall employment compared to 45% of those with high school or less.

Blockchain and the Future of the Firm

Last week I wrote about Machine, Platform, Crowd: Harnessing Our Digital Future, a recently published book by MIT’s Andy McAfee and Erik Brynjolfsson.  The book is organized into three main sections: Mind and Machine, Product and Platform, and Core and Crowd, each based on  a business trend that’s significantly reshaping the business world.  I based my discussion on the Mind and Machine section, which I found to be an excellent explanation of recent advances in artificial intelligence.

I now want to focus my attention on the provocative questions raised in the book’s latter chapters.  “In this era of powerful new technologies, do we still need companies?”  How are firms likely to evolve given the continuing advances of Internet-based technologies, as well as emerging blockchain-based technologies such as distributed ledgers and smart contracts?  “Are companies passé” in an increasingly decentralized economy?

Following the Great Depression and WW2, the country welcomed the stability promised by corporate capitalism.  Big, multinational companies dominated most industries, - GM, Ford and Chrysler in cars, Citibank, American Express and Morgan Stanley in finance, and Esso/Exxon, Mobil and Texaco in oil and gas.  It was an era characterized by bureaucratic corporate cultures, - not unlike military hierarchies - focused on organizational power and orderly prosperity.

This all started to change a few decades later with the advent of a more innovative, fast moving entrepreneurial economy.  The 1980s saw the rise of young, high-tech companies, - e.g., Microsoft, Apple, Oracle, Sun Microsystems, - and Silicon Valley became the global hub for innovation, emulated by regions around the world.  Turtlenecks and jeans replaced blue suits, white shirts, and ties.

The advent of the Internet and e-commerce pushed all these trends into hyperdrive in the 1990s.  The Internet made it much easier for companies to transact with each other around the world.  Vertically integrated firms evolved into virtual enterprises, increasingly relying on supply chain partners for many of the functions once done in-house.  Management experts noted that large firms were no longer necessary and would in fact be at a disadvantage in the Internet era when competing against agile, innovative smaller companies.

Minds and Machines

A few months ago, Andy McAfee and Erik Brynjolfsson published Machine, Platform, Crowd: Harnessing Our Digital Future, - their third book on the impact of the 21st century digital revolution on the economy and society, - following the publication of The Second Machine Age in 2014 and Race Against the Machine in 2011.  Brynjolfsson and McAfee are professor and research scientist respectively at MIT’s Sloan School of Management, as well as co-Directors of MIT’s Initiative on the Digital Economy.

The book is organized into three sections, each focused on a major trend that’s reshaping the business world: the rapidly expanding capabilities of machines; the emergence of large, asset-light platform companies; and the ability to now leverage the knowledge, expertise and enthusiasm of the crowd.  These three trends are combining into a triple revolution, causing companies to rethink the balance between minds and machines; between products and platforms ; and between the core and the crowd.

I cannot possible do justice to all three trends in one blog, so let me summarize the key themes of the Mind and Machine section, which I found to be an excellent explanation of the current state of AI.

Artificial Intelligence is Ready for Business; Are Businesses Ready for AI?

AI is now seemingly everywhere.  In the past few years, the necessary ingredients have come together to propel AI beyond the research labs into the marketplace: powerful, inexpensive computer technologies; advanced algorithms and models; and most important, oceans and oceans of data.

“Artificial intelligence is getting ready for business, but are businesses ready for AI?,” asks McKinsey in a recently published report - Artificial Intelligence: the Next Digital Frontier.  “AI adoption outside of the tech sector is at an early, often experimental stage,” is the report’s succinct answer.  “Few firms have deployed it at scale.”

The report is based on a survey of over 3,000 AI-aware C-level executives across 10 countries and 14 sectors.  Only 20 percent of respondents had adopted AI at scale in a core part of their business.  40 percent were partial adopters or experimenters, while another 40 percent were essentially contemplators.

AI encompasses a broad rage of technologies and application.  It’s often viewed as the leading edge of IT.  As soon as AI is successfully applied to a problem, the problem is no longer a part of AI.  The McKinsey report is focused on five technologies being increasingly deployed in business, that most everyone agrees are part of AI: robotics and autonomous vehicles, computer vision, language, virtual agents, and machine learning.

Platforms, Blockchains, and the Evolution of Trust

“In primitive economies, people traded mostly with members of their village and community,” wrote David Brooks in a June, 2014 NY Times OpEd, - The Evolution of Trust.  “Trust was face to face.  Then, in the mass economy we’ve been used to, people bought from large and stable corporate brands, whose behavior was made more reliable by government regulation.  But now there is a new trust calculus, powered by both social and economic forces.”

Brooks’ article focused on the rise of the on-demand economy, - aka, the collaborative, sharing, peer-to-peer economy, - and in particular on the surprising success of Airbnb.  Rooms for rent in boarding houses and child and pet care services are nothing new.  What’s new is the impact of technology, platforms and blockchain in particular, on the growing on-demand economy.  Companies are being disrupted as consumers are now able to deal with each other bypassing traditional hotels and taxi services.  All kinds of on-demand products and services are now coming to market.

The on-demand economy wouldn’t be possible without the mobile devices and platforms that enable peer-to-peer transactions among individuals any time and place; the digital payment systems that reliably and securely broker the transactions between buyers and sellers; and the social reputation systems, where people rank buyers and sellers, - a critical requirement for the smooth functioning of collaborative markets like Airbnb.  In the digital economy, our online reputations follow us everywhere, whether we are the renters or the ones renting, the service providers or the service consumers.

Automation Anxieties - We’ve Been Here Before

“The rise of artificial intelligence is the great story of our time,” notes What to Do When Machines Do Everything in its Preface.  The book was published earlier this year by Malcolm Frank, Paul Roehrig and Ben Bring of Cognizant’s Center for the Future of Work.  “Artificial intelligence has left the laboratory (and the movie lot)…  It’s pervading all the institutions that drive our global economy.… And this is just the beginning.”

The book deals with a number of important questions: When machines do everything, what am I going to do?; Will a robot take my job away?; How are humans going to make a living?; What will my industry look like in 10 years?; Will my children be better off than I am?

Overall, the authors are optimistic about the future, reminding us that we’ve been here before.  Automation anxieties have been with us ever since the 1810s, when the so-called Luddites smashed the new weaving machines that were threatening their textile jobs, and they continued to resurface over the past two centuries right along with advances in technology.

Over 60 years ago, the advent of computers led to a new round of automation fears.  In 1965, Newsweek devoted a special issue to The Challenge of Automation, which it called  “the most controversial economic concept of the age.  Businessmen love it.  Workers fear it.  The government frets and investigates and wonders what to do about it.

In his 1964 Bill creating the National Commission on Technology, Automation and Economic Progress, President Lyndon Johnson said that “Technology is creating both new opportunities and new obligations for us, opportunity for greater productivity and progress - obligation to be sure that no workingman, no family must pay an unjust price for progress.”

Should Your Company Get on the Blockchain Learning Curve Now or Wait?

A few weeks ago I wrote about the current state of blockchain.  In particular, I asked whether blockchain is ready to cross the chasm from its early adopters, - who are already involved with blockchain in one way or another, - to the considerably larger set of mainstream users who may be considering blockchain but are waiting for results and assurances before jumping in.

I explored this question by comparing blockchain today to the Internet in the early-mid 1990s, which is roughly when the Internet made its own transition from early adopters to mainstream users.  My conclusion was that blockchain isn’t quite ready for this important transition.  It’s still in its early adopters stage, - perhaps akin to the Internet in the late1980s.  A lot is going on with blockchain, so much so that last year the World Economic Forum (WEF) named The Blockchain one of its Top Ten Emerging Technologies for 2016.  But much remains to be done in key areas, including standards, applications and governance.  Blockchain has the potential to make our digital infrastructures much more secure, efficient and trustworthy, but it will take time.

The Internet in the early-mid 1990s was clearly more advanced than blockchain is today.  On the other hand, the business environment in 2017 is quite different from the one back then.  The Internet and associated technologies like smartphones and cloud computing have significantly lowered the costs of collaboration and experimentation, enabling innovations to emerge more rapidly.  In addition to providing a good set of lessons for blockchain’s adoption, the Internet is smoothing the way for the development of blockchain platforms, applications and ecosystems.

What should  your company do?  Get on the blockchain learning curve now or wait until the technology is more mature before jumping in?  Become an early adopter of this potentially transformative technology, or run the risk of being left behind by more aggressive competitors?  How should your company decide when and how to best embrace a disruptive new technology like blockchain?

Is Blockchain Ready to “Cross the Chasm”? Lessons from the Internet

Earlier this year, IBM conducted the largest study to date on the state of adoption of blockchain.  The study interviewed almost 3,000 C-Suite executives from over 80 countries and 20 industries to learn about their company’s blockchain plans.  Survey responses where classified into three groups: explorers, investigators and passives.

Explorers are already involved in blockchain pilots and experiments.  They make up an average of 8 percent across all industries, with higher activity in certain industries like financial services.  25 percent of organizations are investigators, - considering but not yet ready to deploy blockchains, and 67 percent are passives, - not considering blockchains so far.

These survey results are not surprising for a technology as new and complex as blockchain.  With such technologies, you typically have a relatively small number of early adopters.  A larger number of followers are waiting to learn from the early adopters’ experiences, while the laggards are not yet sure what the technology is about or if it applies to them.

The Productivity Puzzle

Last year, Foreign Affairs focused its March/April issue on Surviving Slow Growth.  “The first decade of the twenty-first century was a time of unprecedented economic growth,” said the issue’s introductory article.  “The rich world got richer, and the developing world raced ahead: by 2007, the emerging-market growth rate had hit 8.7 percent… Then came the fall… growth has ground to a halt almost everywhere, and economists, investors, and ordinary citizens are starting to confront a grim new reality: the world is stuck in the slow lane and nobody seems to know what to do about it.”

Economic growth has two main components, productivity growth and the growth of the labor force.  Fewer workers is one of the key reasons for our stagnant economic growth.  The labor force is still growing in some developing countries like India, Nigeria and the Philippines, but it’s already shrinking in China, Japan and Germany.  In the US, the labor force is growing very slowly.

Over the coming decades, the labor force is expected to shrink in most parts of the world as fertility rates continue to decline.  The 2016 US fertility rate was the lowest it’s ever been.  Increasing productivity is thus more crucial than ever to promote economic growth.  But, in the US and other advanced economies, productivity growth has significantly slowed down over the past few decades.

On the Governance of Blockchain: Lessons from the Internet

A few weeks ago, the World Economic Forum (WEF) released Realizing the Potential of Blockchain, a report by Don Tapscott and Alex Tapscott, authors of Blockchain Revolution which was published in May, 2016, and founders of the recently launched Blockchain Research Institute.  “The last few decades brought us the internet of information.  We are now witnessing the rise of the internet of value,” wrote the authors in the report’s Executive Summary.  “Like the first generation of the internet, this second generation promises to disrupt business models and transform industries… pulling us into a new era of openness, decentralization and global inclusion.”

“However, this extraordinary technology may be stalled, sidetracked, captured or otherwise suboptimized depending on how all the stakeholders behave in stewarding this set of resources - i.e. how it is governed,” they add in a strong note of caution.  “How we govern the internet of information as a global resource serves as a model for how to govern this new resource: through a multi-stakeholder approach using what we call global governance networks.”

I totally agree.

The Internet and World Wide Web brought a badly needed culture of collaboration and standards to the IT industry.  In the 1980s, it was quite difficult to get different IT systems to talk to each other.  Just sending an e-mail across two different applications from two different vendors was quite a chore, as was sharing information across disparate systems.  Then in the 1990s, the open Internet protocol, - TCP/IP, - was widely embraced by the general IT marketplace, making it possible to interconnect systems and applications from any vendors.  Internet e-mail protocols, - SMTP, MIME, POP, IMAP, - enabled people to easily communicate with anyone on any system.  At the same time,  the Web’s open standards, - HTML, HTTP, URLs enabled any PC connected to the Internet to access information on any web server anywhere in the world.

A similar story played out with Unix.  In the 1980s, Unix became a popular operating system for technical workstations, supercomputers and other kinds of systems.  Every vendor had developed its own version of Unix, - IBM’s AIX, Sun’s Solaris, HP’s HP-UX, and several others, - and they were all somewhat different and incompatible, making it difficult to port applications across these different flavors of Unix.  Attempts to unify UNIX were not successful.  Finally, in the 1990s Linux emerged as a Unix-like operating system that over time was embraced by just about all vendors.

The Growing Value of a Dual-Track Education

A few weeks ago I read a very interesting article in The Chronicle of Higher Education, - Why Colleges Need to Embrace the Apprenticeship.  The article raised a number of important questions on the future of college education, in particular, the value of an education that combines formal schooling with real-world practical experience, often referred to as a dual-track educational system.

Lots has been written about the critical importance of a good education in our knowledge-based digital economy.  At the same time, lots of questions are been raised about college and careers.  Is a four-year college education necessary to attain a good job and to have a successful long-term career?  Is it sufficient?  Are colleges properly preparing students for the job market?  Is there a role for liberal arts colleges?  Is college still worth it, given their increasing costs and the student loan debt crisis?  Should we continue to encourage young people to get a college degree? 

The Chronicle article addresses a number of these questions.  It writes that “Apprenticeships - long embraced as a work-force-training method in other countries - may now have an opening to become a far more common pathway to education and employment in the United States.  The enthusiasm for apprenticeships represents a kind of refutation of college education - a recognition that something about the path from college to career is not working for many people.”  The article explains why vocational apprenticeships have not fared as well in the US as they have in other advanced economies, and why apprenticeships, and similar dual-track systems, are increasingly important for all careers, including white-collar and professional careers requiring a bachelor’s or higher professional degree.