Getting Busy

A US productivity revival may be on its way, thanks to the diffusion of emerging technologies.

By Rob Preston

Summer 2018

Scale is a relative concept. A huge market opportunity for a midsize business represents little more than a rounding error for a much larger company. But when a leading economist talks about growth potential in the trillions of US dollars, everyone had better take notice.

Research conducted by Dr. Michael Mandel asserts that US gross domestic product could grow by an additional US$2 trillion cumulatively during the next decade, just from the “diffusion” of advanced technologies and industry best practices made possible by widespread business adoption of cloud services.

As cloud software and platform services make new technologies such as AI, blockchain, predictive analytics, autonomous systems, and IoT readily available to small and big companies alike, they will drive “a new wave of productivity that will accelerate growth and living standards in the United States and worldwide,” according to Mandel.

A senior fellow at the Wharton School’s Mack Institute of Innovation Management, Mandel presents his findings in two separate reports: “Intelligent Finance: How CFOs Can Lead the Coming Productivity Boom,” which was commissioned by Oracle and builds upon a 2017 study, and “The Coming Productivity Boom,” commissioned by the “Technology CEO Council.

The start of the two-year Great Recession in late 2007 through the subsequent eight-year recovery was a “peculiar period” for the US economy, Mandel says. Corporate profits were up an average of only 1% per year (adjusted for inflation) during that period, compared with 4.7% during the previous business cycle. In the same 10-year period beginning in 2007, average annual productivity growth was a paltry 1.2% for US nonfarm businesses, compared with an annual rate of about 2.8% in the decade prior, according to Mandel’s report.

What we need to be able to do, both for the benefit of the companies at the bottom and for the country as a whole, is to figure out how to make sure they’re on the escalator going up.”–Dr. Michael Mandel, Senior Fellow, Wharton School’s Mack Institute of Innovation Management

What’s more, the productivity gap between digitally advanced industries (such as financial services, automotive, energy, and pharmaceuticals) and all other industries has been widening, as has the gap between the top 5% “frontier firms” and everyone else in each industry. That’s mostly because the top companies have had better access to the latest technologies and brightest talent, the report maintains.

“What we need to be able to do, both for the benefit of the companies at the bottom and for the country as a whole, is to figure out how to make sure they’re on the escalator going up,” Mandel said during a keynote discussion at Oracle’s Modern Finance Experience conference in New York City in February.

Cloud: The Great Equalizer

That notion of getting companies on that escalator going up perfectly encapsulates the power of cloud services. Most companies don’t have the technical expertise or financial resources to build their own AI, blockchain, predictive analytics, and IoT systems. Cloud services build in those emerging technologies, making them available over the internet to a much wider range of companies through a monthly subscription.

For example, cloud-based chatbot applications powered by AI will let financial services companies of all sizes offer investment advice at much lower cost. Cloud services are allowing even the smallest colleges to use predictive analytics to identify which students are at the highest risk of falling behind, reducing dropout rates. Cloud-based blockchain applications will help farmers and their distributors as well as supermarkets and restaurants track produce from seed to table, improving product quality and reducing spoilage. A range of healthcare providers is starting to use cloud-based predictive analytics and other advanced tools to boost their efficiency and improve health outcomes.

“Technology has been the greatest leveler of the playing field,” says Frank Sorrentino, CEO of New Jersey–based ConnectOne Bank, who is quoted in Mandel’s latest research report. Sorrentino attributes the community bank’s 40% efficiency ratio—which roughly measures expenses as a percentage of revenue and, in ConnectOne’s case, compares favorably to a national average of about 60%—to its use of cloud technology.

Sorrentino says the company’s use of cloud services helped it cut seven days from its monthly close cycle, cut weeks from its regulatory reporting, speed up audits by 10% and keep up with changing regulations and accounting standards. “Today we can pretty much bring to the competitive battlefield the same weaponry that the largest companies would have at their disposal,” Sorrentino says in the report.

What’s clear, Mandel says, is that “having access to these new capabilities delivered in the cloud isn’t a luxury, but rather an imperative for survival.”

A Different Take

Mandel’s calculation that cloud services will add a cumulative total of about US$2 trillion to US GDP over the next 10 years is based on estimated gains in low-productivity industries only. It doesn’t even take into account the fact that widespread cloud adoption will drive further productivity growth in high-productivity industries as well, making the potential GDP stimulus even greater.

Not every economist is so sanguine about the prospects for US and global GDP and productivity growth. The so-called secular stagnationists, including Northwestern University professor Robert Gordon and former Obama economic adviser Lawrence Summers, argue that the global economy will stumble along for many years because of rising income inequality, excess savings at the expense of investment, debilitating national and household debt levels, aging workforces, and other reasons. Gordon is skeptical about the “techno- optimist” notion that the advances of the cloud revolution will do much to boost productivity.

But Mandel’s optimism is consistent with much of the economic mainstream, including the findings of a recent report from Germany-based Berenberg Bank, which argues that slow productivity and GDP growth worldwide is only temporary.

The Berenberg report’s authors, led by senior UK economist Kallum Pickering, maintain that companies worldwide are still adjusting to stage one of the latest three-stage economic “supercycle”—the “discovery” stage—in which entrepreneurs struggle to turn the major tech breakthroughs of this digital era (AI, blockchain, IoT, and so on) into economic and societal gains. During this stage, “the technologies remain expensive and difficult to reproduce en masse,” the Berenberg report states. “As only a few industries and firms at the forefront of the technological frontier benefit initially, the economy overall does not see major gains yet . . . . Although the potential gains from such technologies are set to be enormous, the risks and costs are initially too high.”

Technology has been the greatest leveler of the playing field.”–Frank Sorrentino, CEO, ConnectOne Bank

Mandel’s argument is that those risks and costs are no longer too high in this era of cloud computing, because cloud services don’t require deep IT staff and capital investments, letting even the smallest, most technology-challenged companies take advantage of the latest tech breakthroughs.

Get Moving

“One of the main themes in recent years is that new technologies take longer to diffuse than we expected,” Mandel writes in his report. “We see smartphones in everybody’s pockets, but most businesses have not done the hard work of integrating mobile into their production processes. Similarly, we hear about artificial intelligence programs achieving world-class performance in chess and Go, yet most businesses have not deployed artificial intelligence to improve their back-office efficiency.”

Why the slow march to the cloud? Many companies reason that their current systems are “good enough,” Mandel writes, “and they worry about the transition being too disruptive. They don’t see how their reluctance hurts everyone—shareholders, workers, the larger economy.”

That’s all the more reason this cloud revolution needs a champion. Mandel maintains that CFOs in particular are well positioned to lead the charge, given their overarching company view as well as their early experiences using machine learning, predictive analytics, and other cloud-based technologies.

“The initial jump to the cloud, the initial retraining is scary,” Mandel acknowledged at the Modern Finance Experience conference. “But what’s interesting is that a lot of people I talked to said it turned out to be a lot less scary in practice than they were expecting, that they had budgeted money for training that they didn’t use, that the process of moving to the cloud was easier than they thought it was going to be.”

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Illustration by Wes Rowell