Realising productivity gains from the tremendous technological advances in recent years will require redesigned processes and changed mindsets. There will be a need to think big to win big.
That's according to Dr. Thomas L. Hager, who runs IBM's Banking and Financial Services industry segment in Europe. Johan Trocmé from Nordea Thematics interviewed Hager for the latest Nordea On Your Mind about Industry 4.0.
We note in macroeconomic data that productivity growth seems to have stalled in advanced economies since the global financial crisis in 2008-09. Do you have any thoughts on why this is the case, and do you think the manufacturing industry is a key part of the problem?
TH: It is interesting, because I see a big potential for productivity gains just about everywhere from today's starting point, as we are entering a completely new phase of digitalisation. The question is, will we realise and be able to monetise those productivity gains? If you do an internal business case and see most productivity gains stemming from simplifying, automating and standardising, you might face the question of what to do with the 20 people left over when you can run a process with ten people instead of the 30 it used to require. Freeing up 20 people is of course a cost saving, but that is often only half of the benefit. If we make use of the experience and skills these 20 people have, perhaps re-train and re-tool them, we may be able to redeploy them in areas which contribute much more to our value creation for our clients.
The full benefits from productivity growth initiatives are only realised when people, processes and technology come together. But it starts with people. You need to think about what skillsets, qualifications and abilities your people have, how they can be enhanced and how your people can be re-purposed for what you are trying to do. Technology will not only make things faster; it will also change the process.
We have done a study across banking in Europe, and we estimated that the industry's IT costs could easily be reduced by 10-15%. That is pure cost cuts in existing structures. But we see a potential for a 50-60% cost reduction if we look at the process! It will now allow us to create a new end-to-end digitalised process. This goes beyond incremental change, changes the whole playing field, and is what we really need to look at. Process and technology obviously go hand in hand, but if we do not take the people along, we will not be able to realise the full potential from productivity gains. If you are serious about it, it is tough transformational work. People being freed up need to be convinced there are new opportunities out there, and that if they are not able to see them, they will ultimately need to seek professional opportunities elsewhere, in other departments or even in other companies. This is a difficult task, which takes time.
In short: Technology has advanced rapidly in recent years and people and processes now need to catch up. You have probably heard economics professor and Nobel prize winner Robert Solow's quote "You can see the computer age everywhere but in the productivity statistics". It is as if we can see all this productivity potential, but it does not materialise. I think it does not materialise because it is not realised. But another part of the explanation is that we do not measure it. Today, we have goods and services produced in the economy for free. Platforms like Google can keep track of our location - we give them free data. This data is not monetised, it is not part of anyone's production cost. And yet it is there to use.
There has arguably been a lack of investment in productivity in some countries. You could say that the US has outsourced much of its productivity development in manufacturing by importing goods from China. With today's pressures for reduced trade, the US will have an opportunity to upgrade technology and processes, and re-train and re-tool their people. Wal-Mart is an example of a company that has used a lot of technology from the computer and communications industries to optimise its supply chains, often sourcing at low cost from China. It is now considering if it should onshore more sourcing going forward, and if technology could allow this to be done cost-efficiently. New technology includes concepts like digital twins, a virtual version of a product we make, which we can manipulate and test. I admire architects, because they are able to envision things. They can anticipate appearances and properties of rooms or buildings before they have been made. Digital twins give room for significant productivity gains by making it possible for different people, perhaps in different locations, to give input on designs, appearances and other characteristics before a physical product even exists. Much of evaluation and testing, trial and error, can be carried out prior to any actual manufacturing taking place. You can see evidence of this in the car industry, where the life cycle of a car model has been shortened significantly. More virtual design, testing and evaluation lets you bring a new car model much faster to the market.