Digitalization and Its Broader Impacts

We have discussed several times in the past few years the impacts of digitalization on the corporate landscape with a particular focus on the technology industry. We have also explored the key constraints of organizations to keep pace and to innovate. But the recent pace of digitalization is causing rapid change in corporations and has implications for broader and more radical change at a societal level. These are certainly important topics for the IT leader, and there are more significant implications for the broader society.

It is perhaps relatively easy to consider the latest technology innovations as additional steps or an extension of what we have seen since the internet era began in the mid-90s. And it was nearly 20 years ago when Deep Blue beat Gary Kasparov in chess, so the advances in machine intelligence could be viewed as incremental and measured in decades. But the cumulative effect of technology advances in multiple realms over the past 40 years has now turned into not just a quantative acceleration but a qualitative leap as well. This leap is well explained in The Second Machine Age by Erik Brynjolfsson where he discusses the cumulative effects of exponential growth over time even from a small base. This is the essence of the power of digitalization. But where Erik portrays ‘a brilliant’ future with man and advanced machine working together, Martin Ford in his book, The Rise of Robots, sees a very troubled world with massive unemployment and inequality.

As an IT leader in a corporation, you must ensure the competitiveness of your firm by leveraging the new technologies available at a pace that keeps you abreast or better, ahead of your competitors. It is a relentless pace across industries, driven not only by traditional competition but also by new digital competitors that did not even exist a few years prior. And every old line firm is driven by the fear of becoming another Kodak, while firms on top of their industry worry they will be another Nokia. For those firms able to keep pace and leverage the technologies, they are seeing substantially reduced costs of production, with significant qualitative advances. These advantages will occur across industries as digitalization is revolutionizing even ‘physical’ industries like logging and sawmills. But where does this leave communities and society in general? Is it a brilliant or troubled future?

Let’s explore some digitalization scenarios in different industries to shed light on the longer term. Shipping and logistics is an excellent example where near term there continue to be significant improvements due to digitalization in shipment tracking, route management, navigation, and optimization of loads. Leveraging sensors and interconnected planning, scheduling and communication software can result in greatly improved shipment fill rates while increasing shipment visibility. In the next 5 years, the most advanced shipping firms will completely eliminate paper from the shipment chain and have integrated end-to-end digital processes. These fully digital processes will enable more timely shipment and distribution while reducing errors and enabling greater knowledge and thus flexibility to meet emerging demands. They will also reduce the manual labor of administration – and with embedded sensors, reduce the need for intermediate checkpoints. The introduction of robotics in distribution warehouses (such as Amazon’s) currently greatly extends the productivity of the workers by having the robots run the floor and pick the product, bringing it back to the worker. The current generation of robots provide a 30% productivity gain. The next one – within 5 years, could expect perhaps a further 30% or even 50%? Amazon certainly made the investment by buying it’s own robotics company (Kiva) not just for its warehouses, but perhaps to build a relentlessly productive distribution chain able to deliver for everything (and not very dissimilar to their cloud foray). While the distribution center is being automated with robot assistants, within 15 years we will see commercial trucking move to highly autonomous trucks. Not unlike how commercial pilots today work with the autopilot. This could be good news as in the US alone, trucks are involved in over 300,000 accidents and cause more than 4500 deaths each year. It would be a tremendous benefit to society to dramatically reduce such negative impacts through autonomous or mostly autonomous trucks. Robots do not fall asleep at the wheel and do not drive aggressively in rush hour traffic. Drivers will become mostly escorts and guardians for their shipments while robots will handle nearly all of the monotonous driving chores. Convoying and 24 hour driving will become possible, all the while enabling greater efficiency and safety. And within 10 years, expect the shipment from the warehouse to the customer for small package goods to change dramatically as well. Amazon unveiled it’s latest delivery drone and while it will take another 2 generations of work to make it fully viable (and of course FAA approval), when ready it will make a huge impact on how goods are delivered to customers and enable Amazon to compete fully with retail stores, fulfilling same day if not same hour delivery. In the US, the trucking industry overall employs about 8 million, with 3.5 million of those being truck drivers. So whether a scheduler, distribution clerk or truck driver, it is likely these positions will be both greatly changed and fewer in 10 to 12 years. Just these impacts alone would likely reduce labor requirements by 20 or 30% in 10 years and possibly 50% in 15 years. But there is the increasing volume effect where digitalization is causing more rapid and smaller shipments as customers order goods online that are then rapidly delivered to their home, thus potential increasing demand (and required labor) over the longer term. Yet these effects will not overcome the reductions — expect a reduction of 20% of shipping and logistics labor where humans partner with robot assistants and autonomous vehicles as the normal operating mode. And increased demand in direct to customer shipments will come at a cost to the retail industry. Already online sales have begun to exceed in-store sales. This trend will continue resulting much lower retail employment as more and more commerce moves online and stores that do not offer an ‘experience’ lose out. It is reasonable to expect retail employment to peak around 5.3M (from the current 4.8M)  in the next 5 years and then slowly decline over the following 10 years.

Manufacturing, which has leveraged the use of robotics for four decades or more, is seeing ever greater investments in machines, even in lower wage countries like China and India. Once only the domain of large companies and precisely designed assembly lines, the relentless reduction of the cost of robotics with each generation, and their increasing ease of use, is making it economical for smaller firms to leverage such technology in more flexible ways. The pace of progress in robotics has become remarkable. In another two generations of robotics, it will be unthinkable to be a manufacturer and NOT leverage robotics. And if you combine robotics with the capabilities of 3D printing, the changes become even greater. So the familiar patterns of moving plants to where there are lower wages will no longer occur. Indeed, this pattern which has repeated since the first industrial revolution started in Britain is already being broken. Factories in China and India are being automated, not expanded or moved to lower cost countries or regions. And some manufacturing is being greatly automated and moved back to high cost regions to be closer to demand to enable greater flexibility, better time to market, and control. The low cost manufacturing ladder, which has lifted so much of society out of poverty in the past two centuries is being pulled away, with great implications for those countries either not yet on the developing curve, or just starting. This ‘premature de-industrialization’ may forever remove the manufacturing ladder to prosperity for much of India and for many African and Asian countries still in great poverty.  And while these trends will require drive more designers and better creative services, the overall manufacturing employment will continue its long term decline. Perhaps it will be partly offset with an explosion of small, creative firms able to compete against larger, traditional firms. But this will occur only the most developed regions of the globe. For the 12 million manufacturing jobs in the US, expect to see a very slight uptick even as factories are brought back due to re-shoring in an automated format and the growth of smaller, highly automated factories leveraging 3D printing. But globally, one should expect to see a major decline in manufacturing jobs as robots take over the factories of the developing world.

And whither the restaurant business? McDonald’s is experimenting with self-service kiosks and robots making hamburgers, and new chains from Paris to San Francisco are re-inventing the automat – staple of the mid-1900s. While per store labor has declined by 30 to 50% in the past 50 years, there is potential for acceleration given the new skills of robots and the increasing demand for higher wages for low level employees. These moves, combined with easy-to-use mobile apps to order your food ahead of time likely means fewer jobs in 10 years, even with more meals and sales. One should expect the return of the 1950s ‘automat’ in the next 5 or 10 years as restaurants leverage a new generation of robots that are far more capable than their 1950s predecessors.

Just a quick review of a handful of major employment industries shows at best a mixed forecast of jobs and possibly a stronger negative picture. For developed nations, it will be more mixed, with new jobs also appearing in robotics and technology as well as the return of some manufacturing work and perhaps volume increases in other areas. But globally, one can expect a significant downward trend over the next 10 to 15 years. And the spread between the nations that have industrialized and those that haven’t will surely widen.

What jobs will increase? Obviously, technology-related jobs will continue to increase but these are a very small portion of the total pool. More significantly, any profession that produces content, from football players to musicians to filmmakers will see continued demand for their products as digitalization drives greater consumption through ever more channels. But we have also seen for content producers that this is a ‘winner take all’ world, where only the very best reap most of the rewards and the rest have very low wages.

Certainly as IT leaders, we must leverage technology wherever possible to enable our firms to compete effectively in this digital race. As leaders, we are all familiar with the challenges of rapid change. Especially at this pace, change is hard — for individuals and for organizations. We will also need to be advocates for smarter change, by helping our communities understand the coming impacts, enabling our staff to upscale to better compete and achieve a better livelihood, and advising for better government and legislature. If all taxes and social structures make the employee far more expensive than the robot, than shouldn’t we logically expect the use of robots to accelerate? Increasing the costs of labor (e.g., the ‘living wage’ movement in the US) is actually more likely to hasten the demise of jobs!  Perhaps it would be far better to tax the robots. Or even better, in twenty years, every citizen will get their own robot – or perhaps two: one to send in to do work and one to help out at home. The future is coming quickly, let’s strive to adjust fast enough for it.

What is your view of the trends in robotics? What do you see as the challenges ahead for you? for your company? for your community?

Best, Jim Ditmore

 

About Jim D

Jim has worked in the IT field for over 25 years and as a senior leader for over 15 years. He has successfully turned around a number of IT shops to become high performing teams and a competitive advantage for their companies.
This entry was posted in Efficiency and Cost Reduction, Looking Ahead, Vision and Leadership and tagged , , , . Bookmark the permalink.

7 Responses to Digitalization and Its Broader Impacts

  1. Michael V says:

    Great article, when looking at society and the integration of technology vs. the rest of your articles that focusing solely on the operation. I have degrees in computer science and sociology from a liberal arts school, DePauw. The last comments about robots reminds me of when livestock or a horse was a means. Do you see an abstract correlation to how the robots represent livestock and what further changes are caused by this “switch”.

    Furthermore, where do you see start up companies having an edge on future problems like this? What role does data play?

    • Jim D says:

      Dear Michael,

      Thanks for the additional perspective. In your question, what I would note is that the horse was replaced in the first machine age by machines that provided ‘power’ just like the horse – that is provided mechanical force that could free man from physical labor. In the second machine age, machines can not only remove physical labor but can also replace ‘mental’ labor. For example, the robots that can now sort parts and manage a station in the factory line just as effectively, if not more efficiently or accurately – than the human. Or no longer just ‘power’ the car, but also ‘drive’ the car and free up the human from doing this primarily mental task. So, I do think it is a dramatically different transformation than the change from horsepower to machine power.

      As for startups, I see they will continue to have both advantages and disadvantages in the digital revolution. Their most critical advantage is agility – to leverage digital technology more quickly, unburdened by legacy products, systems and processes.

      Best, Jim Ditmore

  2. Nils Thomassen says:

    Hi Jim,

    High productivity sawmills and drone delivery service are still just tweaks to a gear and cogwheel based model. Noone really questions the rationale of improving such areas by robotics and supersmart computers.

    Howevver, while HAL, Skynet and (my personal favourite) Kitt are still just out of reach, such AI systems will surely become reality given another generation or two. And while at first it will be the warehouse staff layoffs and the de-industrialization of the less developed countries which will rock our boat, more fundamental issues about robotics will begin to concern us.

    At that point it will become a question of humans self regulating technological progres: How far do we actually want robotics (and other areas such as medicine) to go? Are we, in 30-50 years or so, willing to go beyound a singularity point and let robots/networks become so aware and able that human intellect will become as irrelevant and mediocre as human labour is already beginning to be? And if so, where do we stand on the ethical and existential issues that come with such capabilities?

    http://dilbert.com/strip/2015-11-28

    • Jim D says:

      Dear Nils,

      I agree that if the pace of AI continues – especially given the evident improvements in the past few years – we have some bigger questions and quandaries in front of us. I simply would suggest it is difficult to imagine this future world. I suggest we are with AI and robots at a similar positions as with cell phones in 1987 where if you looked the bulky car phones then you might not have imagined a world of iPhones and a million apps. Maybe Elon Musk is onto the right path with his most recent investment…

      Best, Jim

  3. Rimantas says:

    Great summary. Thanks. Sensor/robotic/digitalized age near the door of our lives and this door is already open. Question is – are we ready in our thinking to “outsource” our current duties to digitalized world and are we prepared to welcome and trust sensors infrastructure. For a while, from my point of view, full digitalization, supporting fully automatic service, could be achieved in areas, where big sensor-based infrastructure is not required, such as financial sector where “outsource” to digital environment can be clearly described, which is major rule for outsourcing process. Do you now banking/financial companies, where majority (or even full) service offered is fully “outsourced” to digital technology solution?
    BR, Rimantas

    • Jim D says:

      Rimantas – glad you like the post. Full digitalization will be occurring in many sectors – think of how you can now check into an airline flight entirely from your mobile phone, and use it a kiosk to enter airport security and then again at the gate – where all can be done without any human contact. Of course this is happening quickly in the banking sector as well – in almost all developed countries, mobile banking transaction now greatly exceed bank branch visits by customers. The key is for the banks to digitalize more of their processes and do it completely. As for the outsourcing, I suggest two opposing trends. First, traditional outsourcing is on the decline versus 5 or 10 years ago – there is an excellent article on this in the WSJ – where digitalization has resulted in the change in view of outsourcing: “Why has the tide turned against IT outsourcing? The idea only made sense when companies viewed technology as a cost of doing business. The rise of digitization, big data analytics and cognitive technologies has made IT strategic again. And it is often difficult to get innovative, differentiated outcomes when you turn IT over to someone else.” Second, companies are outsourcing, either by leveraging cloud or by leveraging standard software platforms (especially SaaS) to lower their costs and then of course they hope to differentiate elsewhere in their software portfolio.
      In sum, remember that digitalization makes software the key differentiator, which means you must keep pace or preferably win in this capability to win in your business sector.

      Best, Jim Ditmore

      • Rimantas says:

        Hi and thank you for so prompt comment. In fact, using the word “outsource” I had in mind new possible meaning (may be twenty first century meaning) of “outsourcing”: movement not to some third party company (traditional approach), but movement to robots environment.
        Exactly, as you mention, airline ticketing/check-in task is very close to fully digitalized human-free robotic infrastructure.
        But, in other areas, before full control and prepare for full digitalization, from my point of view, step-by step in-house approach can be used when only limited(small)/specific IT areas where company does not feel strong could be delegated to third parties, while strategic visionary and innovation control is fully delegated to in-house personnel.
        Talking about full digitalization, it seems for me that software used for robots-based platform operations should be able to execute not only full processing but also, talking in chess-terms, make few forward-thinking assumptions for the future depending on current customer behavior. And that is more or less scientific research data management and organizing task.
        p.s. I wish you don’t stop with “recipes” in the upcoming year. World is changing and we want to stay “on the wave”…
        BR, Rimantas

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