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--> 9 Unique Challenges: Computing and Telecommunications in a Knowledge Economy Ellen M. Knapp I will talk about discontinuities, opportunities, and challenges that we face as we move into the knowledge era, in the context of both the world economy and the business and organizational environment. I would like to highlight specifically some of the thoughts that I and others have had about the multifaceted role of computing and telecommunications in the transition from an industrial society to a knowledge society. I want to be very clear that I am neither an academic researcher nor a corporate researcher. I am a corporate executive in the area of management. I am a vice chairman of Coopers & Lybrand, a $6 billion organization with approximately 70,000 partners and staff, operating in 146 countries at last count. As chief knowledge officer, I have responsibility for all aspects of technology as it relates to that enterprise and the interface of the enterprise, its suppliers, and its clients, as well as learning and education and market research and analysis. Rather than bringing research results to this setting, I have created a knowledge-based collage. The remainder of my time is going to be a representation of a knowledge-based collage around the subject of computing and telecommunications in the knowledge economy. There are a great many thoughts about this move from the industrial economy to the knowledge economy (Box 9.1). There is little argument about the fact that this transformation is taking place and that human capital and intellectual capital are going to be the principal sources of competitive advantage in this new era. There is little controversy about the shift in balance among labor, capital, land, and knowledge as we have gone from an agricultural to an industrial economy and now as we move toward a knowledge economy. Representing the track that we are on into the knowledge era is not particularly controversial. However, it poses one very interesting question. That is, if you look at the relationship of 8,000 years to a century, roughly, or a little better than a century for the second major era, is the knowledge era going to be similarly collapsed with respect to its prior era? Or is it going to last for the next 8,000 years? There is also little controversy about what the principal sources of advantage are in these various eras (Figure 9.1). Where we begin to get into some interesting dialogue has to do not with the specific elapsed time of a particular era, but rather with the pace of the transformation or the transition from one era to the other. Different people have very different views of the pace (Box 9.2). Yet some people would point out that a very large part of the world's population is still living in the agricultural era. Not all of the world economy has even made the transition into the industrial era, even though that transformation took place in the middle of the last century. There is even some controversy about whether or not we are in the knowledge era yet or whether we are entering the knowledge era, which means that it is somewhere slightly ahead of us. My view is more like the last
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--> Box 9.1 The Knowledge Economy Knowledge is replacing matter and energy as the primary generator of wealth. —Thomas Stewart, Board of Editors, Fortune Today, knowledge and skills stand alone as the only source of comparative advantage. —Lester C. Thurow, The Future of Capitalism Tomorrow's economy will revolve around innovatively assembled brain power, not muscle power. —Tom Peters, The Tom Peters Seminar line of Box 9.2, which says that the future has already turned into the present. Despite the fact that economists disagree on the pace of this transformation there is absolutely no argument about the fact that this transformation will have profound implications for all aspects of the world economy, the political scene, our individual personal and social behaviors, the environment, and the business environment. There is, in fact, some concrete evidence that the knowledge era is already here. Some of that evidence is provided by both U.S. and global economic statistics. One of my favorites is this quotation from Thomas Stewart, Board of Editors of Fortune: 1991 was the crossover year when capital spending by U.S. companies was greater on telecommunications, copying and computer equipment than on industrial, construction, mining, and farming equipment. We tend to think of the mid-1990s as the transition point, but we actually made this shift, from a macroeconomic perspective, around 1991. Computing and telecommunications play very interesting roles with respect to this transition. After 25 years in the era of the computer, those roles are causing or catalyzing the transition from the industrial to the knowledge economy. In addition, computing and communications are also fundamental catalysts for the pace at which this transition is occurring. Unlike earlier transformations, the presence of and the advances within computing and telecommunications are, themselves, radically changing the pace of this transformation. I recently had an opportunity to speak at an Massachusetts Institute of Technology faculty seminar series on this topic. I represented that one of the most intractable—but terribly interesting and incredibly important—problems we face right now is how to get a better handle on the pace of the transition from the industrial economy to the knowledge economy and of what it might look like. This is important for the following reason. Figure 9.1 Economic eras and sources of advantage in each. Source: Ron Bohlin, vice president, Digital Equipment Corporation, ''Knowledge Networking: The Major Productivity Breakthrough."
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--> Box 9.2 Alternative Views of Timing of Transition Between Economic Eras We have entered the knowledge economy. —Brooks Manville and Nathaniel Foote, McKinsey and Company Intellectual capital matters as we are leaving the industrial age and entering the information age. —Thomas Stewart, Fortune For several decades the world's best-known forecasters of societal change have predicted the emergence of a new economy in which brainpower, not machine power, is the critical resource. But the future has already turned into the present, and the era of knowledge has arrived. —''The Learning Organization," Economist Intelligence Unit Many people have made the argument that world economies did not collapse when we went from the agricultural to the industrial era because there was a self-correcting mechanism during the transition phase. At the same time that labor was moving out of agricultural activities, there were new businesses, enterprises, and domains of human effort created in the industrial age that picked up this labor. As a result, there were no massive discontinuities in the work force. We do not know whether this will also be true of the next transition. We could, in fact, have some massive discontinuities in the work force in the United States and globally. We will not understand what is needed in the way of policy, and what is needed in the way of intervention to deal with those issues, unless we have a better understanding of the pace of change we are facing. To understand the implications a little better, I would like to back up a bit and say a few words about the industrial era in order to encapsulate a few thoughts about the knowledge era. One of the implications of the numbers and the information in Box 9.3 is that during most of the industrial age companies had to be located somewhere. They had a natural home. If you look at the industries that the Japanese Ministry of International Trade and Industry (MITI) put in its Vision for the Decade in 1990 (Box 9.4), all of them are what Lester Thurow refers to in his latest book (The Future of Capitalism, 1996) as brainpower industries. One of the attributes of brainpower industries is that they do not have a natural home. These industries, and the winners in these industries, can reside anywhere that someone has the capability to mobilize the brainpower required to be a winner in them. Today, economists (as well as the World Bank, which has published some statistics on this subject) estimate that human capital accounts for more than half of all of the wealth in the United States and other economically advanced nations. However, the difference between today and the future is that during the era of natural resources, Box 9.3 Aspects of the Industrial Era in Contrast with Those Anticipated in the Knowledge Era Of the 12 largest industrial firms in the U.S. on January 1, 1990 . . . 10 of the 12 were natural resource companies. Only 1 of these companies—GE—is alive today. Implications Those countries with natural resources were rich, and those without were destined to be poor. For most of the industrial age, companies had natural homes where they had to be located. SOURCE: Lester Thurow, The Future of Capitalism.
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--> Box 9.4 Leading Industries and Implications in the Knowledge Era—MITl's View In 1990, MITI published a list of industries it expected to be the most rapidly growing industries in the 1990s and into the early 21st century (The Vision for the Decade) Microelectronics Biotechnology The new material sciences Telecommunications Civilian aircraft manufacturing Machine tools and robotics Computers (software and hardware) Implications All of them are man-made brainpower industries. All of them could be located anywhere on Earth—they have no natural home. SOURCE: Lester Thurow, The Future of Capitalism, 1996. if you had natural resources you were destined to be rich; if you did not, you were destined to be poor. Just because human capital represents this aspect of wealth in our nation today does not necessarily imply that we are going to be a global winner in this knowledge era without deliberate intent. I have some thoughts for the Computer Science and Telecommunications Board (CSTB) in terms of challenges. At a macroeconomic level, I think we must better understand and prepare for the profound changes in the world economy, U.S. economy, business environment, and social structures during "this period of punctuated equilibrium," as Lester Thurow calls it. For business organizations, which is the world I live in, I think the most interesting representation of what is going on in business is the quote from Paul Saffo at the Institute for the Future: It is hardly news that the corporation as we know it is headed for the scrap heap of business history. Internal corporate structures are already mutating beyond recognition. Corporate boundaries are dissolving into commercial irrelevance as businesses explore entirely new modes of association and interaction. John Major, in his remarks at this symposium, made some very interesting and quite complementary comments about what is going on in the world of business and, even so, was referring primarily to the world of Motorola inside Motorola. I am going to talk a little about the inside of large multinationals like Motorola and my own organization, but equally interesting are the hypertext links being formed between multinationals and other enterprises. Again, at the macroeconomic level, computing and telecommunications are playing a multifaceted role in this transformation of the business world. Figure 9.2 comes from Business Week (December 1993) and encapsulates some of the more unusual business models that were evolving as a result of the massive influx of computing and telecommunications into the business sector. In work I did several years ago with Peter Keen (Figure 9.3), we came up with the notion of the relational business. That was before the Web was a major event. Now it is called the hypertext organization. 1 This is not quite the latest, but perhaps the second-to-latest, notion of what businesses are going to look like. As you can easily extrapolate, much of our ability to create organizations with this look and feel is empowered, if you will, by computing and telecommunications in our environments. Equally interesting, the Institute for the Future recently came out with a publication that contains multiple models of types of twenty-first-century organizations. The one that clearly and most directly represents the 1 Like an actual hypertext document, a hypertext organization is made up of interconnected layers or contexts: the business system, the project team, and the knowledge base. Nonaka, Ikujiro and Hirotaka Takeuchi. 1996. The Knowledge-Creating Company: How Japanese Companies Create the Dynamics of Innovation. Oxford University Press, Oxford.
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--> Figure 9.2 Business models for modern organization. Source: "The Horizontal Corporation, " Business Week, December 20, 1993. industry that I am in, the professional services industry, is the fishnet model (Figure 9.4) and, in that vein—from a business strategy perspective—it is the only pure play in the knowledge economy. Professional services firms are knowledge-based, knowledge-centric, knowledge-intense organizations. If anybody was going to have a chief knowledge officer (and I think it is a peculiar title myself) it would be an organization that has concluded that, in the future, both competitive advantage and comparative advantage will rest on its ability to mobilize both internal and external intellectual assets on behalf of its customers—and its ability to do it more efficiently and faster than its competitors. The fishnet organization does not incorporate notions of traditional secretaries, traditional flying around the world, or traditional buildings. I will share with you a fact (not a particularly competitive one) from a strategy perspective. Some years ago—maybe five—I told our board that technology then represented the third largest cost element in our business model. I remind you that this is not a manufacturing or financial services firm, but a professional services firm. Even then, technology represented the third largest cost factor in our economic model. I told them that it would be third until it overtook facilities to become the second largest factor. Then it would be the second largest factor until it overtook human capital to become the largest. I said that the trend line was not going to change anytime in their lifetimes or mine. The men in the boardroom looked at me as though I was crazy. Here we are, five years later, and technology has overtaken facilities as the second largest factor in our economic model. Just by going to a model in which-in this case, Motorola, BBN, DEC, and others—clients are providing the facility space for our people, as opposed to our organization providing it, the firm will substantially reduce costs. Brian Quinn has also devised an organization model (Harvard Business Review, March-April 1996) that is a spider web (Figure 9.5). In a certain sense, whether it is a hypertext or a spider web or a relational or a fishnet model, they are all enabled, specifically and finitely, by the transformation that is taking place. I gave the example of Coopers & Lybrand adding millions of dollars to the bottom line just to show you that this is not all theoretical. Another very real example is occurring in the manufacturing sector, not the professional services sector.2 If it is true that long-term prosperity and comparative advantage, as well as competitive advantage, are going 2 GE Lighting has closed 26 of 35 warehouses and replaced 25 customer service centers with one new, high-technology operation. Those buildings and stockpiles—physical assets—have been replaced by networks and databases—intellectual assets. Thomas Stewart. "Pursuing the Knowledge Advantage," Fortune.
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--> Figure 9.3 Relational model for the modern organization. Source: Peter Keen, March 1995. to come in large part from one organization's ability to manage its intellectual assets better than another, what is a model? What is a way of thinking about how a person might transform intellectual capital into revenue? Figure 9.6 is a very simple representation of what intellectual capital is—the transformation of human capital and structural capital into customer capital. The purpose, at least in our case because we happen to be a for-profit enterprise, is to create intellectual capital that can be transformed into financial capital. In my personal case, since I happen to be a partner, I want this transformed into wealth for shareholders. Although this model represents a for-profit enterprise, it can also be used for not-for-profit enterprises. In fact, I have had several conversations about this model with the World Bank, and I will provide a short vignette to demonstrate that this is not a professional services phenomenon. It is an across-the-economy phenomenon. The World Bank recently decided that it is not a bank, it never really was a bank, and it never should have Figure 9.4 Fishnet organization model. Source: Bob Johansen, Andrea Saveri, and Gregory Schmid, Institute for the Future, "21st Century Organizations: Reconciling Control and Empowerment."
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--> Figure 9.5 The spider web model for the modern organization. Source: James Brian Quinn, Philip Anderson, and Sydney Finkelstein. 1996. "Managing Professional Intellect, "Harvard Business Review, March-April. thought of itself as a bank. It is really a knowledge-centric professional services organization that, if it had only thought about this earlier, would have been able to generate (and still might in the future) enormous amounts of money—revenue is not quite the right term, but money, financial capital—through knowledge-based products and services. In fact, the World Bank has concluded that, about five years from now, its principal competitor will be Andersen Consulting. If the Bank wanted to look for best-practice, web organizations as models of what its computing and telecommunications infrastructure ought to look like, as well as organizational models, it ought to be looking at Andersen Consulting, not Citicorp. The Bank did not arrive at this notion all on its own, and I absolutely agree. In this model, computing and telecommunications technology has two fundamentally different "plays." One play is in the domain of structural capital itself, and this is where we use technology to build organizational assets. We are building intranets, networks, intellectual capital, knowledge-based systems, and so forth—all for the purpose of building structural capital. A very different role that computing and telecommunications play in this world is in the speed of the transformation process itself. Therefore, the ability to transform intellectual capital into financial capital and wealth—the speed with which competitors can go through this process—intrinsically is a major issue. At the same time we are moving into the information age in order to directly convert knowledge into revenue, we are also focused on creating and leveraging human capital and doing that with some speed and some facility. The following quote by Andrew Grove, chief executive officer of Intel, that I have been carrying around with me for some years is still true today, and to be perfectly honest, I do not know how old it is. Computers will become communications platforms . . . people will use them to tie their work together, to collaborate . . . [in ways] that will revolutionize the way groups of people work. We have moved fundamentally into a different world in terms of the reasons for which we expend financial capital on computing. Lest you conclude that I think that computing and telecommunications will create this whole new world all by themselves and propel us into the knowledge economy without attention to other details, I am not so naive. I understand that this will work only if people want it to work and are willing to make it work. Our fundamental design challenge—for organizations at least, if not for individuals—revolves not around building better networks, but rather around building better worknets. If you want something interesting to get excited about, this is it.
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--> Figure 9.6 An intellectual capital model. Source: CIBC Leadership Center. The collective power of computing and telecommunications can also bring us closer to our customers than we have ever been able to think about. Here is the good news and the bad news. Consider the Delta Shuttle card. There are only a few hundred of these in existence; I just happen to be the proud owner of one of them. Customers using the Delta Shuttle can put a credit card in a machine and get a ticket. Then you must go to the gate and get a boarding pass. You must keep your ticket so you do not lose it so that you can turn it in with your expense report. When I go to the Delta Shuttle, I go up to the gate, stick the Delta Shuttle card in a slot, and out comes not a ticket, but a boarding card. I take it and get on the plane. I have not spoken to a human being, and I do not need to carry any pieces of paper around with me or keep track of them. This phenomenon is most familiar to us with automatic teller machines. I also get out of my car and stick a card in the gas pump that I used to hand out the window to an attendant. This phenomenon has enormous social consequences, and we need to better understand it and its timing. We face not only an issue of leveraging knowledge; we also have to manage knowledge. The sad fact is that, for the most part, we do not. We are still measuring the one thing that all of our executives learned something about when they were going through school, financial capital (Box 9.5). We have to get much better at looking at and understanding how to measure intellectual capital. The conclusion is that if there is anybody in this room who is interested in the science of complexity or the emerging science of complex systems, this is one of the issues: the coevolution of economics, politics, social and environmental factors, and technology and what it is going to represent to our world is a very interesting, complex systems issue. Slightly more down to earth, I also have a couple of specific suggestions. We need a much better understanding of (1) the new business models, the organizational models, that are emerging; (2) what knowledge-centric cybercommunities are all about; (3) what we should think about in terms of continuous learning and delivery of continuous learning to highly dispersed populations; and (4) quality of life. We need a much better understanding of the pace of the massive shift in business process execution from labor to technology; the implications of this new era for wages, employment, and work location; intellectual capital asset management issues; and some of the new rules for the game that we are beginning to play. So the bottom line is managing or, at best, figuring out how to adapt to the simultaneity. We know who the winners were when the issue was natural resources and the parameters of winning, the characteristics of how to win, when financial capital was the issue. We do not know who the winners are going to be in this knowledge era. We barely understand what the parameters of winning might look like.
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--> Box 9.5 Lack of Attention to Managing Knowledge Assets Most corporations are still managed like old industrial companies . . . We're still managing our physical and financial assets, rather than our knowledge assets. —Thomas Stewart, Fortune How well do we manage assets? Cash A Every penny at work all the time Receivables A- Well controlled, ratios ok Inventory B+ Mostly accurate People C People stuck in boxes Knowledge D- Huh?? Room for improvement? SOURCE: Charles Savage, Knowledge Era Enterprises, Inc. "Implementing Knowledge Era Organizations." Discussion DAVID MESSERSCHMITT: We have heard much about the significance of the fact that apparently the investment in telecommunications and computing has not increased productivity as measured in traditional terms. I get the sense that perhaps you do not believe this is the case. Perhaps more importantly, what I think I hear you saying is that it is missing the point. The increase in productivity in the industrial economy brought on by computers and telecommunications is not really the benefit; rather, it is creating a whole new economy. Could you comment on that? ELLEN KNAPP: You are right. Unfortunately, you hit a very strong point with me. I happen to have been on the committee that produced the Computer Science and Telecommunication Board's report Information Technology in the Service Society: A Twenty-First Century Lever, and Stephen Roach at Morgan Stanley was also a member. It was really interesting, not the least of which is that he and I both have offices at 1251 Avenue of the Americas. We were in the same building and managed not to kill each other all those years until Marjory Blumenthal brought us together. To finish with the point that you ended with, I think that most of what Stephen had been measuring for many years was irrelevant. I think he was not asking the right questions about this transformation into a totally different world, rather than the productivity of a particular individual sitting behind a particular spreadsheet in the 1980s. RAJ REDDY: This was a fascinating talk. There are a couple of points I wanted to make related to what you said. About seven or eight years ago, Edward Feigenbaum and I were talking about this issue of knowledge. If knowledge is truly the future wealth of nations, how could we demonstrate it? There were two ideas that came out of this. One is to create a world bank of knowledge. That is, take away all the money and only offer knowledge to people. The question is, Can they—taking the knowledge with all of the resources being available only for cost—create a completely new society out of nowhere? For example, if you built a wall around Washington, D.C., and the only thing that could come in and go out were knowledge, would you survive? It was an interesting question. What technology might exist? So the idea of creating a world knowledge bank came out of that. I thought this might be an interesting idea to talk about. The second point you raised, that information technology is going to cause serious dislocations, is very important. Dislocations are going to happen much faster than society can handle. One thing I proposed a few years ago to an industry forum, which nearly lynched me, was that we should begin taxing the information industry—every computer and every piece of software at a 5 percent rate—and create a dislocation fund just like the North American Free Trade Agreement fund. Information technology is definitely going to cause dislocation. It is going to cause a lot of unhappiness in society. Middle managers of various kinds are going to be laid off, and a lot of other people, knowledge workers, are going to be laid off. Services industry people are going to be laid off. They need to be taken care of, reeducated, and retrained.
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--> KNAPP: I will focus on the second point first. I believe that this is the first major world economic transformation that we have to address globally. Before we think about taxing information industries—which are predominantly in societies that did well in the industrial age—and potentially hampering the ability of that portion of the economy to uplift the other portions of the economy, I think we should look at the intricacies of the whole balancing act and think long and hard about it. EDWARD FEIGENBAUM: What is the situation now with chief knowledge officers? How many companies have them? How have companies wrestled with the question of valuing knowledge assets for their assets and liability statement? KNAPP: I have only been a chief knowledge officer since Monday. It was announced in the Wall Street Journal. I happened to be in Europe, so I did not get to read it, but I do not know a lot yet about who my colleagues are. I know that both McKinsey and Hewlett-Packard have chief knowledge officers. Coca-Cola has a chief learning officer, with roughly the same set of responsibilities. There are perhaps a half a dozen companies that have this title, not all in the services sector. To address your second question, Skandia Corporation has, for the past three years, produced an intellectual asset balance sheet as a supplement to the annual report of the corporation. By far, Skandia and the Canadian Imperial Bank of Commerce are in the forefront of this field in terms of quantifying and measuring intellectual capital on an annual basis, and representing to the shareholder the fact that its valuation is as critical as financial capital valuation. Balance sheets that have to do with intellectual assets are as critical as balance sheets that have to do with financial capital assets. To my knowledge, Skandia is the only corporation today that produces these mirror-image balance sheets. I think you will see many, many more in the coming years. MISCHA SCHWARTZ: You mentioned the need for a science of complexity. A previous speaker also alluded to some basic knowledge in systems complexity. It seems to me this may be something we cannot really do. Those of us who have been around a long time remember something called systems science that people worked on many years ago. The National Science Foundation had programs. I worked on something called "urban system analysis." It all fell apart. Even a system like the AT&T network fails occasionally. AT&T executives have been saying for years, "It is a shame we do not understand that complex system, simple as it is." Now you start putting people into it, is there really a possibility here? KNAPP: There is a baby step that I think could be taken and has desperately been needed for many years. This is to get out of professional-academic, stovepipe-discipline problem solving. Even if we do not understand complexity theory and the science of complexity, we do understand team-based work. I do not know that universities do, but I do know that corporations do. If we could get some interdisciplinary, team-based work under way and energized within the university environment, I think that these teams could do some spectacular things that real-world people really need. DAVID CLARK: I look at the Web, and one of the things the Web did was sort of "dis-intermediate" access to a wide variety of information. It may be information you think is valuable. Maybe it is not knowledge specifically. Maybe it is Joe Twiddle's home page, but at least one of the conclusions is that we have had a hard time selling this stuff for money. A lot of people are giving Web pages away free and hoping they can hide the advertising in there. I am wondering if there is a possibility, in the long run, that we will succeed in making it possible for humans to have direct access not just to information, but to knowledge. At that point, you will not be able to sell it; the marginal cost of selling it is zero because there are not any humans in the loop. So there is not any value there. One possibility is that the whole market is doomed. Another one is that you think the product is the generation of knowledge and not the resale of it. Do you make most of your money creating knowledge or selling it multiple times? If you are going to sell it multiple times, do you think you can make any money at it, or do you have to sell it at zero marginal cost? KNAPP: That is a very interesting question. We had an earlier speaker who passed on the question. I have some thoughts that I would be happy to share with you after the session.
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