1 February 2018
The latest generation of technology is totally transforming the way we live and work. The internet has profoundly changed the way we manage our lives, with a re-imagining of a vast range of activities such as hailing a taxi, socialising, shopping and booking all manner of events.
Job automation brought about by advances in technology will deliver some enormous opportunities from productivity improvements and hence cost reductions. This new digital economy also throws up many investment possibilities.
Moore’s Law, which governs the decreasing cost of computing and storage, is driving the artificial intelligence (AI) boom and propelling machines to new levels with speech and visual recognition rates already exceeding human capabilities. This is having a significant impact in terms of their ability to replace humans in certain workplace tasks.
Metcalfe’s Law, meanwhile, states that the usefulness of a network expands exponentially with every new user. The Internet of Things has enabled billions of connected objects and trillions of customer transactions. The combination of the two is leading to what we call a singularity, where intrinsic value explodes and AI will abruptly trigger runaway technological growth.
Exponential growth of computing
Source: Data from Intel Corporation. See also Gordon Moore, “No Exponential Is Forever… but We Can Delay ‘Forever,’ ” presented at the International Solid State Circuits Conference (ISSCC), February 10, 2003, ftp://download.intel.com/research/silicon/Gordon_Moore_ISSCC_021003.pdf. via Singularity.com
Research by global consultancy firm McKinsey reveals as many as 45% of the work activities individuals are paid to perform (as distinct from entire occupations) can be automated by adapting currently demonstrated technologies.
A 2013 report by McKinsey which highlighted 12 disruptive technologies suggested intelligent software systems which can perform knowledge-work tasks could have a potential economic impact by 2025 of between USD 5.2 trillion and USD 6.7 trillion. Additional labour productivity could lead to the replacement of the equivalent of up to 140 million full time workers.
A digital workforce
Robotic process automation (RPA) is having a major impact on businesses. DXC Technology, a global services company, says employees spend 10 to 20% of their time on repetitive computer tasks and IT departments spend 30% of their time on basic low-level tasks. Currently 50% of automation opportunities are being missed – a typical rule-based process can be 70 to 80% automated.
Software company Pegasystems last year made headlines when it acquired RPA and workforce analytics software firm OpenSpan. But the poster child for RPA is Blue Prism - indeed the company is credited with inventing the term. Its software enables business operations to automate manual, rules-based, back office administrative processes and create a “digital workforce”. Blue Prism’s clients include The Co-operative Banking Group, RWE npower, Fidelity Investments, the NHS and O2.
Many companies are now delivering low-cost enterprise software to a large number of users. There is more productivity enhancing software than ever before which is enabling these trends and, because of its low cost, it can often be implemented reasonably quickly without the need, for example, for board sign off. The ability to manage workflow better which such enabling software will lead to job losses at the margin.
Automation has had a huge impact on the banking sector. Citi’s March 2016 report “Digital Disruption – how fintech is forcing banking to a tipping point” highlights the significant levels of staff reduction in the industry. We are at an inflection point for retail banking in particular, driven by automation and digitalisation.
A further good example of workplace automation in action is within the UK’s Ministry of Justice. The HM Courts and Tribunal Service (HMCTS) Reform Programme to digitise courts aims to reduce the number of cases which are dealt with by courts (currently 95%) by handling one third in court, one third virtual and the remaining third digital self service. The programme aims to make savings of GBP 100 million per year by 2019. An automated track case management system will remove high volume, low level cases such as speeding, and fare and TV license evasion from courtrooms. This equates to 800,000 non-imprisonable cases per annum.
The social impact of workplace automation
We are also seeing a more socially responsible technology world. Facebook, for example, makes its software freely available. Application programming interfaces (APIs), which enable people to pull in data from other applications, have grown exponentially since 2011. There are now in excess of 50,000 public APIs making software more socially giving and more accessible.
While the social impact of workplace automation has little effect on our investment decisions it is a fascinating topic to consider. Up to now, the majority of workers who have been replaced by automation have been able to move into differently skilled jobs. However, we are now seeing a shift towards the permanent loss of jobs. This will have a profound impact on many people, and could drive a different social tone going forward.
We have already seen politics shifting in both the US and Europe, with disaffection with the status quo and the income gap between the haves and have nots driving an increase in support for far right political parties and the rise of populism. This creates a force which does have power. Governments may have to look at drastic measures in order to keep the populace happy and treat them fairly – perhaps finding a way of taxing people differently.
Our strategy aims to invest in the biggest and most disruptive trends in technology today, and key among them is the area of workplace automation. In the technology space we are seeing paradigm shifts of unprecedented proportions. Sheryl Sandberg, COO of Facebook, says: “Social media has created a historical shift from the historically powerful to the historically powerless. Now everyone has a voice.”
That necessitates change at every level, which opens up a huge number of opportunities for us as investors.
Important legal information
Nothing in this material constitutes investment, legal, accounting or tax advice and should not be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. The statements and opinions in this material are those of the author at the time of publication and may not reflect his/her views thereafter. The companies listed were selected by the author to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the author.