The spectre of process deflation haunting US enterprise
- Summary:
- Digitization presents a $2.2tn opportunity over the next decade, says McKinsey. But the flipside of process deflation hangs over those who fail to adapt
A fascinating report published last week by McKinsey Global Institute identifies a potential $2.2 trillion boost to US GDP by 2025 from digitization. But this optimistic projection has a dark side — as one collaborator on the report tweeted yesterday, "Digitising a non-digital process almost always means disruption." To understand what that will mean for those who don't move fast enough, it may help to discuss the twin concepts of process debt and process deflation — as I'll explain in a moment.
But first, some more about the McKinsey report. Titled Digital America: A tale of the haves and have-mores, it provides some measure of how poorly digitized most industries remain in America today (and it's probably even worse in most other countries). A chart from the report shown above ranks each industry sector for their digital progress, based on a number of different measures.
According to the findings, the best performing industries have a four-fold lead over the rest in the extent of digitization achieved, with the worst barely making any progress at all. But every sector can still do much more, as the report explains:
The 'have-mores' continue to push the boundaries of digitization, particularly in terms of augmenting what their workers do, while everyone else scrambles to keep up with them. This gap points to substantial room for much of the economy to boost productivity. In fact, since some of the lagging sectors are the largest in terms of GDP contribution and employment, we find that the US economy as a whole is reaching only 18 percent of its digital potential.
As industries begin to catch up, digitization will inevitably bring disruption. While some companies will prosper as they gain competitive advantage, many established businesses will struggle and fail. Workers will unexpectedly find their skills and experience are no longer in demand. According to the report, rising automation will almost double the rate at which middle-skill jobs get displaced in the coming decade compared to prior decades.
Why will the dislocation caused by digitization be so much greater than in previous eras of computerization? A common fallacy is to assume that the impact of technology must be constant. One imagines that more automation inevitably produces greater efficiency. But statistics show that over the past few decades, average productivity has actually fallen, even while investment in computerization swelled significantly. What matters is how the technology is applied.
This is where the interlinked concepts of process debt and process deflation can help explain the dynamics in play.
Technical debt, process debt
Process debt is a concept that builds upon the existing notion of technical debt, originally conceived by Ward Cunningham, one of the pioneers of agile software development. Cunningham proposed that, while it sometimes made sense to cut corners to make faster progress, if you didn't go back from time to time to refactor the work properly, it would be like never repaying credit card debt, and over time the software would become more and more expensive to maintain and operate.
As well as knowingly taking short cuts to meet immediate goals, debt also builds up when early workarounds are left in place even though better ways of achieving the same result have since become available. As Brian Sommer noted last month, nowadays your technical debt can also include cloud functionality made available in continuous updates that you haven't yet implemented.
Process debt applies the same principle to the automation of business processes in the enterprise (and as I pointed out earlier this year, process debt also occurs in manufacturing). It arises because it's often faster to adapt and automate an existing process as it stands, even though many elements in the process only persist for historic reasons that no longer apply. No one ever goes back to properly scrutinize and refactor the underlying process, simply adding new layers of activity, reporting and governance to meet additional business requirements. As time goes on, the efficiencies achieved through introducing more and more automation of these increasingly convoluted processes become ever smaller.
It is this creeping process debt that most likely lies behind the ever-diminishing productivity achieved through computerization of enterprise processes. Increasing investment in IT has merely served to keep the tottering stack of piled-up process debt from falling over, rather than producing any substantive gains. That worked fine so long as the established client-server model of computerization held sway — everyone had the same level of debt, so no one had any meaninful competitive advantage. It all started to fall apart with the advent of the cloud and the new generation of connected digital computing, which suddenly opened up huge gaps in capability.
When deflation strikes
As any student of economics knows, debt is sustainable so long as the underlying assets continue to produce enough of a return to pay the interest due. A sudden fall in returns can be catastrophic, which is why the spectre of deflation is so feared. Returns are no longer enough to repay the debt, and demand for the underlying assets melts away.
Process deflation is the result of harnessing digitization to introduce dramatically refactored processes to an industry. Connected digital computing cuts across longstanding, originally paper-based processes, at a stroke making it possible to get things done in seconds instead of hours or days. The collapse in time and cost to produce business outcomes is such a radical departure from established norms that it's often a newcomer to the industry that takes the first steps, although sometimes an incumbent will test a daring new approach in the hope of leapfrogging its competition.
This process deflation is so rapid and unexpected that the accumulated process debt that established enterprises have been sitting on for so many years is suddenly called in. Incremental enhancements in competitiveness are no longer any use at all. The only effective response is a root-and-branch refactoring that finally purges all of the process debt that has sclerotically accumulated over the years.
Of course, many enterprises find themselves in denial when this reality strikes without warning. Instead of undergoing the necessary emergency surgery to their legacy processes, they embark on a series of ineffective cosmetic changes and palliatives (Gartner's bimodal IT, anyone?) that they hope will tide them over the crisis.
My take
In summary, as you can see, I'm not as sanguine as McKinsey. Of course there will be winners, and all of us like to believe we'll be on the winning team. But it's not going to be a comfortable transition for those less fortunate. Process deflation is painful and it will have a devastating impact on a significant number of enterprises and individuals. Don't let it take you unawares.
Image credit: Man in suit holding needle pricks bubble - © anankkml - Fotolia.com; MGI digitalization industry index chart courtesy of McKinsey Global Institute.