CIOs: Transforming the Corporate Landscape, Not Just IT

This country’s one and only economic driver for the next several decades rests solely in the hands of CIOs. That’s the conclusion of economist W. Brian Arthur, Citibank professor at the Santa Fe Institute, who developed the modern theory of increasing returns. But Arthur isn’t talking about CIOs shelling out more cash for additional servers, pumping new revenue into Silicon Valley. It’s far more profound than that, he recently explained to CIO Deputy Editor Richard Pastore, and a little disconcerting if you happen to be a CIO or someone who takes the Terminator movies way too seriously.

Arthur postulates that as industries “encounter” digital technologies, they are being fundamentally and organically transformed. Technology inexorably invades an industry’s neurological process, connecting systems, processes and functions within and among companies. The technologies will carry on intelligent, ongoing conversations between themselves. The effect will be previously undreamed-of processes and functionality that will alter what companies do, fundamentally transforming their industries. Witness already the transformation of the pharmaceutical industry with the advent of genomics and combinatorial chemistry—breakthroughs that would have been impossible without IT. Arthur, who is speaking at the CIO 100 Symposium next month in Colorado Springs, Colo., says the only corporate leader who can harness and channel this digital transformation is you.

CIO: You’ve observed that since 1995 or so, the use of technology has undergone a shift from merely automating existing processes to making possible dramatically new functions, thus changing the nature of companies and industries. Can you explain what you mean?

W. Brian Arthur: What’s happening with technology is deeper than and different from what happened in the past. As different industries encounter digital technology—which includes telecommunications and satellites—the pattern seems to be that completely new activities spring to life. It’s not about speed and productivity enhancements—better, faster, cheaper. There are actual new tasks being accomplished. You couldn’t map genes without computers to control the biochemistry, do the algorithms and the sequencing, and that capability has changed the nature of drug development. You can’t do DNA fingerprinting without computers, which has transformed criminal investigations. In the financial services industry, you could not do risk engineering and financial derivatives, and now that’s a huge market. The rise of smart weapons means we need fewer troops to prosecute warfare. Those industries aren’t just applying computers to what they do already; they are making digital technology a component of new functionalities that would be totally impossible otherwise. And these new functionalities are profound enough to transform those industries.

Hasn’t this extended bear market put those transformations on hold for most industries?

No, not really. Growth at the moment is indeed on hold. Silicon Valley is getting by, but not doing much better than any other industry. On the other hand, the transformation process I’m describing is inevitable—and it’s well under way already in the military, banking, manufacturing and grocery retailing industries.

In what way?

Digital technology is reaching into lots of business and technical processes, and becoming an integral part of them. Businesses and technologies themselves are engaged in ongoing conversations. The Cruise missile is having a conversation with a GPS satellite and with its base aircraft carrier. In other words, digitization is becoming a neurological process in industry itself. And therefore, when the economy comes back, and even before it comes back, this process will continue apace, and industries will discover new functionalities and transform themselves. It’s unstoppable.

Sort of like mutations that inevitably transform or replace an organism’s original DNA and lead to evolution.

That’s exactly the phrase I would use. As digitization works its way into every process, it is linking all these processes in the manufacturing and service parts of the economy. And intelligent new things are emerging.

Is there a historical precedent for this?

Yes. In the 1880s, railroads were for the first time connecting everything to everything in the United States. They became the communication network of the day, the neurology of the day. And they were bringing new industries into existence: There wouldn’t be a beef industry in Chicago if you couldn’t get the cattle from the stockyards there by rail to be slaughtered, and then get the beef to the consumers. Now, the story of our time is the connection of all of these processes and technologies in ongoing conversation.

Assuming that these digital conversations extend externally from organization to organization, then trust and security issues will be major hurdles to progress.

Yes, there is a huge hurdle in terms of trust. Proper security and identification, and encryption and access have to be in place to ensure trust. This will take time.

What effect will industry encounters with technology have on the U.S. economy?

The encounters become the economic engine of growth. I don’t see the driver coming from anywhere else. I don’t see an enormous pent-up consumer demand, or the discovery of a vast new market (with the possible exception of China)—the traditional ways in which an economy would have expanded 150 years ago. I don’t see any other source that will provide deep growth for the next several decades.

What are the roles of the CIO and the IS organization in this engine of growth?

In the 1970s, the IT person would have said something like this: “My company is purchasing computers. And I am the guy who knows how to run computers. I will run the computers in the company, design the applications and get them working.”

Now the task is very different. Every functionality or process or task in the company is starting to be affected by every other one. So IT people are integrating applications, data, standards. They are supporting multiple platforms—PDAs, wireless devices, laptops. They are worrying about storage and multiple access to storage. All of this activity is about getting people, devices, processes and applications to interact, to talk with each other.

What CIOs need to do is, number one, realize what’s going on. Then, they can’t just react passively and say, “Yes, the people upstairs have demanded that we be in constant contact with Frankfurt or Boise, Idaho.” They must imagine how all of this should happen in a reliable and intelligent way, and initiate it themselves.

To make a logical conclusion then, the major engine of growth for the economy will be in the hands of IT practitioners.

Very much so. There’s no other corporate officer who can see how to do this. If you’re trained as an MBA, or a lawyer or a middle manager, you can’t be expected to have the imagination to see what’s possible—it’s too complex. So I think it’s going to be IT people showing top management what is possible.

In the short term, I think CIOs would be frustrated and say, “I’d love to get busy driving the economy. But because the economy is not growing, no one is giving me money to drive it.”

What I’m hearing from CIOs is, “No, we’re not buying new equipment because our budget is limited. What we’re trying to do is use the old equipment, and link it together, and get it all to talk to each other.” And that doesn’t depend on having a huge budget. It depends on taking your IT people and turning them loose to make the existing technology work far better for the company.

It’s the IT people, again, who are going to have to do this. So, it’s not because nobody is purchasing that IT is down and out and the IT people’s day is over. On the contrary, they will be the major force in our economy.