Earlier this month W. Brian Arthur published an excellent article in the McKinsey Quarterly about “The Second Economy.” By the Second Economy, Arthur is referring to how business processes that once took place among human beings are now being executed electronically.
Arther predicts that “In about two decades the digital economy will reach the same size as the physical economy.” He used an example from the supply chain to illustrate his point:
“Twenty years ago, if you were shipping freight through Rotterdam into the center of Europe, people with clipboards would be registering arrival, checking manifests, filling out paperwork and telephoning forward destinations to let other people know. Now such shipments go through an RFID portal where they are scanned, digitally captured and automatically dispatched…What used to be done by humans is now executed as a series of conversations among remotely located servers.”
There are a few key enabling technologies, which are enabling corporations to fully digitize business processes by Machine to Machine (M2M) technologies collect and transfer information about physical assets. Examples include RFID, sensors, video cameras and GPS devices. Consider the following examples of how M2M technology is poised to take people out of many processes:
- Utilities – Next generation appliances located in your home will automatically connect to the Smart Grid to assess the current power load. When demand for electricity falls the grid will automatically instruct your dishwasher or dryer to run.
- Health Care – Remote diagnostic equipment in a elderly person’s home will automatically monitor vital signs, blood pressure and glucose levels. Abnormal readings might trigger the dispatch of an emergency technician on-site or a phone call to schedule an appointment for an onsite visit.
- Government – Closed circuit surveillance cameras in public buildings automatically scan crowds of people. Facial recognition technology analyzes the images to identify known terrorists or felons then routes information about sightings to the nearest law enforcement agencies.
Business to Business (B2B) Integration technologies also play a critical role in the second economy. Consider the following examples of how B2B is fully digitizing business processes in various industries:
- Financial Services – Hedge funds develop algorithmic trading programs to monitor stock market trends. These machines also generate instructions to buy or sell securities which are passed via FIX networks to brokers for trading. The details of the trade are then collected, matched and forwarded electronically to a depository for clearing and settlement. The “straight through processing” of securities transactions has been facilitated by B2B technologies for many years now.
- Health Care – Hospital billing systems generate claims for the care delivery services they offer patients. These claims are packaged into EDI format then routed across a clearinghouse to insurance companies. Along the way the claims are adjudicated, validated and processed with minimal (if any) human involvement. Remittance advices for payments are sent back to the hospitals in EDI format. Computers will automatically reconcile the payments to claims then post the receivables collected to a general ledger.
- Supply Chain – Demand signals such as point of sale data, inventory positions and RFID reads are transmitted from retailers to their key suppliers each night. The data is fed into a planning algorithm which forecasts potential out-of-stock scenarios at various stores. These supply chain applications generate replenishment orders which are then relayed to supplier warehouses. Goods are loaded on the trucks and dispatched to the retail locations in a just-in-time manner. The only human involvement required is to load the trucks.
These are just a few of the examples of digital business processes in the second economy. The next step will be to elevate the role of machines to begin making business decisions.
Gartner published an interesting report on this topic earlier in the month suggesting that predictive analytics applications powered by BIG DATA will soon be tasked with many of the operational decisions in large corporations.