AI Impact on Outcomes Might be Hard to Measure

Quantifying the earnings impact of artificial intelligence is going to be as difficult as other relatively indirect measurements of information technology impact. Survey respondents almost always report that applied AI boosted revenue or sales, while reducing costs. 

Eventually, when there is enough deployment to study, we might find that, in some cases, AI has not measurably affected earnings, revenue or profits, at least in some cases. In at least some cases, we might even find that those metrics have gotten worse.

The reason is that the actual business impact of new information technology often is hard to assess, even if people think it is helping. When asked, managers almost always say they think AI has helped reduce costs and boost outcomes.

source: McKinsey 

Of course, those opinions often cannot be precisely verified. Even when cost decreases or revenue increases occur, there always are other independent variables in operation. For that reason, correlation is not necessarily causation. 

In fact, the impact of new information technology always has been difficult to measure--and sometimes even detect--over the last 50 years. This productivity paradox has been seen in IT since the 1970s, as global productivity growth has slowed, despite an increasing application of technology in the economy overall, starting especially in the 1980s. 

 

Basically, the paradox is that the official statistics have not borne out the productivity improvements expected from new technology.

 

Before investment in IT became widespread, the expected return on investment in terms of productivity was three percent to four percent, in line with what was seen in mechanization and automation of the farm and factory sectors.

When IT was applied over two decades from 1970 to 1990, the normal return on investment was only one percent. Also, the Solow productivity paradox suggests that applied technology can boost--or lower--productivity. Though perhaps shocking, it appears that technology adoption productivity impact can be negative.  

This productivity paradox is not new. Information technology investments did not measurably help improve white collar job productivity for decades. In fact, it can be argued that researchers have failed to measure any improvement in productivity. So some might argue nearly all the investment has been wasted.

Some now argue there is a lag between the massive introduction of new information technology and measurable productivity results, and that this lag might conceivably take a decade or two decades to emerge.

We might expect similar degrees of unclarity as artificial intelligence is applied in heavy doses. 

source: McKinsey 

Output and value added are the traditional concerns, but it is hard to estimate the actual incremental impact of new information technology. 

It is even harder in any industry where most of the output is “a service” that is hard to measure in a traditional output per unit of input way. Some say “value” and “impact” also matter, but those are squishy outcomes similarly hard to quantify. 

Services are, almost by definition, intangible. It often is nearly impossible to measure “quality” in relation to “price” in advance of purchase. Think about hiring any realtor, lawyer or consultant: “quality” cannot be measured until the actual service is consumed. 

And even then, especially for any infrequently-used service, there is no way to directly compare performance or value compared to other alternatives. 

“Productivity is lower in services because they tend to be less standardized than goods and some of them have to be delivered in person,” researchers at the Organization for Economic Cooperation and Development have said. 

That services often are heterogeneous and ambiguous, requiring interaction between people, is a good way of characterizing the problem of measurement. 

The ability to standardize is often a precondition for applying IT to business processes. And some services must be delivered--or typically are delivered--”in person.” That makes scale efficiencies challenging. 

Services often are not fungible in the same way that physical objects are. 

To complicate matters, many services used today are supplied at no direct cost to the end user. While we might try to quantify productivity at the supplier level, there is not a direct financial measure related to end user consumption, as that is “free.”

For public organizations, the challenges are equally great. No single agency can claim credit for producing health, education, national defense, justice or environmental protection outcomes, for example. Those outcomes depend on many things outside the control of any single agency, or group of agencies. 

So we often resort to counting activities, occurrences or events, as the ultimate outcomes cannot be quantified. The issue, of course, is that knowing “how many” is not the same thing as “how good” or “how valuable?”

Knowledge work poses additional issues. Desired outcomes have even less routine content, higher capital intensity and higher “research and development” intensity.

Does Creativity Suffer Because of Enforced Remote Work?

It remains unclear how well productivity, collaboration or creativity have held up during the enforced “work from home” policies. Knowledge workers who largely work alone likely have fared the best. Work outputs based on collaboration and teamwork arguably have suffered the most. 

source: Lucidspark 

It is possible that up to 60 percent of remote workers who had not been used to doing so experienced a producitvity drop, at least as they would define it. Up to 40 percent believe the at-home work made them more productive, though again this is based on self reports.

source: Lucidspark 

The point--assuming the self reports are accurate--is that enforced remote work might harm productivity, collaboration and creativity if it remains the only option for office and knowledge workers. The consensus is that hybrid approaches will eliminate some of that impact.

But it remains unclear how productivity, creativity and collaboration will hold up, depending on how the hybrid work pattern unfolds.

Platforms Add Value for Consumers by Reducing Information Asymmetry

Reducing information asymmetries between consumers and service providers is one outcome, and one precondition, for “platform business models.” Greater competition for incumbent suppliers is almost always an outcome. 

source: OECD 

A company with a platform business model earns its revenue by facilitating transactions between buyers and sellers. Often such facilitation includes rankings and ratings, but almost always includes the ability to purchase or make reservations as well. Travel websites are examples. 

Other platforms monetize otherwise unused assets (rooms, clothing, tools, cars, scooters or bicycles), enabling commercial revenue creation for assets that otherwise would not be in commercial service. 

Typically, information asymmetry protects prices. So platform business models should always increase competitive pressure, first by reducing information asymmetry, and secondly by creating new competitors to existing products.

Great Bosses are Relatively Rare

There is a reason people resonate with the TV show “The Office,” or in past decades have found the comic strip “Dilbert” so funny. Most of us who have worked a long time know it is somewhat rare to encounter “great bosses.” Most of the time, most employees realize their bosses are not especially talented in such roles, including both middle and top management. 

Very few people ever are ready to occupy the top rungs of any organization, research suggests. Nearly 70 percent of CEOs report they were not fully prepared or those new roles. 

In fact, companies fail to pick the right people for such spots as much as 82 percent of the time. 

In fact, according to Gallup research, only about 10 percent of people actually possess the skills necessary to provide leadership that makes a difference to organization results. Also, note that leadership and management are conceptually different matters. 

If you think about leadership as always involving change, stress or danger while management involves the conduct of processes on a day-to-day basis, without major external threats, you get some flavor of the difference.  

If leadership can be informal or formal,management is always organizationally determined. And the best of the best arguably are superior at both.

“It's important to note that another two in 10 people exhibit some characteristics of basic managerial talent and can function at a high level if their company invests in coaching and developmental plans for them,” says Gallup. 

All together, finding that 10 percent of top managers, and cultivating the additional 20 percent, can contribute about 48 percent higher profit by their companies, compared to firms that did not make those choices.

Companies that hire managers based on talent also tend to see a 22 percent increase in productivity, a 30 percent increase in employee engagement scores, a 17 percent increase in customer engagement scores and a 19 percent decrease in turnover, in addition to the 48 percent boost in profit. 

“Sure, every manager can learn to engage a team somewhat,” Gallup notes. But outperformance will not happen. “Being a successful programmer, salesperson, or engineer, for example, is no guarantee that someone will be adept at managing others.”

“Most companies promote workers into managerial positions because they seemingly deserve it, rather than have the talent for it,” Gallup notes. “This practice doesn't work.”

Gallup finds that great managers have the following talents:

• They motivate every single employee to take action and engage employees with a compelling mission and vision.

• They have the assertiveness to drive outcomes and the ability to overcome adversity and resistance.

• They create a culture of clear accountability.

• They build relationships that create trust, open dialogue, and full transparency.

• They make decisions based on productivity, not politics.

 

source: Gallup

As some other studies suggest, outcomes are more likely when organizations focus on strength, rather than attempting to overcome or compensate for weakness. “Companies repeatedly put people in manager roles because they were successful in previous roles or because they have been with the company for a long time,” Gallup notes. “This is a flawed strategy.”

 

source: Gallup

Hedonic Quality Adjustment and Broadband Prices

Hedonic qualIty adjustment is a method used by economists to adjust prices whenever the characteristics of the products included in the consumer price index change because of innovation. Hedonic quality adjustment also is used when older products are improved and become new products. 

That often has been the case for computing products, televisions, consumer electronics and--dare we note--broadband internet access services. 

Hedonically adjusted price indices for broadband internet access in the U.S. market then looks like this:

source: Bureau of Labor Statistics 

In other words, dial-up internet access and gigabit broadband are not the same product. 10 Mbps broadband is not the same product as 100 Mbps or 500 Mbps service. 

The same trend holds for mobile phone service, phones and other consumer electronics gear. The value and “quality” of a mobile phone subscription in 2000 is not the same as the 2020 value. Nor are the capabilities of a mobile phone the same in 2020 as was true in 2000. 

Without hedonic adjustment, it is hard to track value, capabilities or price over time. And that is before adjusting for inflation, or comparing prices to the overall cost of all goods bought in any single market. 

Telecom Is Not the Only Business With Tough Profit Margins

Slim profit margins also explain many other parts of the end user experience, automation imperatives and downsides, capital and operating cost concerns. Stranded or under-utilized assets are a business issue for both connectivity providers and airlines. 

Still, the next time the customer experience sucks, ask yourself whether you'd rather have a much-better experience for prices three times what they presently are. We might choose what we've got. 

Disaggregation Works Both Ways, Though Opportunities are Not Symmetrical

One observation about the way connectivity networks are becoming virtualized and disaggregated is that we most often see that the disaggregation brings new suppliers or partners into the business. Functions once conducted mostly internally become externalized.

source: STL Partners 

What we tend to see talked about relatively rarely are ways that disaggregation in other industries might similarly lead to opportunities for connectivity providers to enter value chains or assume new roles in other industries. 

Internet of things, private 5G or 4G networks and edge computing are among the areas where telcos or connectivity providers might have opportunities. But such opportunities tend to be anything but easy. 

In some cases that occurs because other contestants seemingly are better positioned to take on new roles in disaggregated operations. Existing system integrators, for example, might be better placed to act as 5G private network operators than would telcos. The same might be true for IoT system integration as well.  

In other cases the financial return from acting as app, platform or other value suppliers is challenging enough to discourage active pursuit. That is true for efforts to craft vertical market internet of things value propositions, for example. 

The other observation is that it almost always is easier to move down the stack and vertically integrate a lower-level function than it is to move up the stack and integrate a higher-order function. 

source: Vermont IT Group

In other words, the business process provider knows precisely what it requires from functions l;ower in the stack. 

But companies lower in the stack “have to guess” at what potential buyers higher in the stack will want, and have to be prepared to support all potential buyers (lowest common denominator) or optimize for a few verticals. 

There are other approaches, such as attempting to create horizontal platforms of some sort. Some argue that operating neutral host systems for in-building mobile network access are an example. Some might argue that operating as a wholesale-only access or transport platform is an example of horizontal specialization.

Most such examples use the computing industry notion of “platform” and not the business model sense of “platform.”

Operating edge computing real estate facilities might also qualify as a “platform” function, as the term is used within the computing industry (software or hardware that other software or hardware can run upon). 

But real estate functions for edge computing suppliers are not a “platform” in a business model sense, where an entity makes its revenue by facilitating exchanges and transactions between buyers and sellers. 

Disaggregation in other industries does offer opportunities for connectivity providers, albeit difficult opportunities in most cases.