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How Digitalization Will Improve Productivity – Eventually

Digital technology, and the subsequent digitalization of business, offers huge promise for reinventing life, work, and economic productivity, but it won't happen overnight

Electricity, or its absence, has been in the news recently thanks to the hurricanes that have devastated such big swathes of the Americas in the past few weeks.

Most of Puerto Rico, roughly half of Florida households, and many thousands more across the Caribbean, and the United States went from thinking very little about electricity to thinking about almost nothing else as Hurricanes Irma and Maria left large areas in the dark. Electricity is so pervasive, so essential, and so seamlessly integrated into business activities and daily lives that it almost disappears from conscious thought. Until it is gone.

It wasn’t always this way. Thomas Edison (pictured above) built generating stations in New York and London in the early 1880s. For the first 40 years or so of electricity’s existence in industrial form, exactly the opposite was true. Electricity was poorly integrated into industry and people’s individual lives and it took a lot of thinking to figure out how to exploit it.

But eventually business found a way to harness electricity and did so with dramatic effect. That’s the point Tim Harford makes in his excellent series for the BBC on “50 things that made the modern economy”To those who like to point out that digital technology has not brought transformational economic growth and productivity, Harford responds with the example of electricity. It is indeed illuminating.

40 Years Later – Making Good on Electricity’s Promise

First some background. According to Warren Devine in From Shafts to Wires: Historical Perspective on Electrification, electricity as a form of energy for driving industrial processes didn’t produce transformational results until after 1920 – 40 years after Edison’s generating stations. Until that point, steam engines powered a majority of mechanical drive shafts in factories but, right around 1920, electrical motors supplanted steam-driven drive shafts as the dominant form of power in factories.

According to Devine, the reason firms began to adopt electrical motors with greater enthusiasm wasn’t the cost savings associated with replacing steam with electricity, although there were some. Rather, it was the step-change leap in productive efficiency they began to see as firms reinvented factories and the flow of production to take advantage of electricity’s unique ability to deliver power to specific machinery. Notably, at this same time, energy use per unit of GDP began to fall steeply as the cost of electricity fell and labor and capital productivity climbed rapidly.

That is Harford’s point as well. Much of the digital technology that garners so much recent attention – the internet, data analytics, broadband, artificial intelligence – only began to be adopted in the past 30 years or less. Over this time, digital technology has often been deployed, like electricity once was, as a lower cost substitute for other, often manual, ways of working. What hasn’t happened yet, except in very limited cases, is a fundamental reinvention of how work, in particular knowledge work, gets done as a result of what digital technology uniquely enables, such as more distributed teams, localized decision-making, and more fluid access to knowledge and skills.

Time to Change Your Operating Model

Digital capability enables a degree of connection, intelligence, immediacy, and responsiveness between individuals and firms that has already transformed large sectors of the world’s economies. Firms who have successfully developed business models making use of what are often called “network effect” attributes – such as Alibaba, Alphabet, Amazon, Apple, and Facebook, among others – have been rewarded with extraordinary growth and valuations.

Perhaps not surprisingly, then, much of the attention on digital capability has centered on business models. In comparison, far less attention has focused on how firms could and should work – essentially, the operating models they deploy – in light of these same capabilities.

Failure to reinvent their operating model has left most firms trying to navigate through a rapidly changing array of technological and market innovation using siloed, compartmentalized, and hierarchical operating models designed for a pre-digital industrial age. The results of using old models in a new age are reminiscent of early-stage electrification: pretty underwhelming.

In fact, Gartner research indicates that over 40% of technology projects are not contributing to net profit. Meanwhile, corporate strategists we recently surveyed indicate their firms are investing in too many small, fragmented, and low impact technology projects. It is no wonder the transformational promise of digitalization has shown up in only a handful of firms and hasn’t led yet to stronger GDP and productivity growth overall.

How to Start Making Changes

An earlier generation of business leaders eventually reinvented factories to take advantage of the unique attributes of electricity and in doing so fundamentally reshaped the economy. This generation of business leaders must reinvent their operating models if they hope to do the same thing with digital technology. Taking three steps will help.

  1. “Side-to-side” operations: As businesses begin to deploy business models that make use of network effects, functions need to acquire and provide the knowledge and capabilities they have across (and in some cases beyond) their company.

    New emerging operating models must distribute decision authority closer to the market, promote cross-functional and cross-firm collaboration, and enable firms to operate “side-to-side” rather than “top-to-bottom” within and outside of the organization.

  2. Governance “products”: The most aggressive companies are beginning to view and run functions as “products”, serving their internal customers in the company with all the attention to good product design and service quality expected of any market-facing product.

  3. Network leadership: Whether a leader is effective is increasingly determined by how well the leader works across and beyond the company both interpersonally and strategically.

    Our research has identified “network performance” as a characteristic of high performing enterprise leaders. They become even more important and impactful where digital transformation is most intense.

Harford concludes his piece about the slow take-up of electricity by writing, “Changing everything takes time and imagination and courage – and sometimes just a lot of hard work.” If digital technology follows a similar path to that travelled by electricity, then transformational returns to digitalization won’t come by simply substituting technology for existing arms, legs, pencils, and paper. Rather, it will require fundamental reinvention inside the business, as well as out.

 

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