Technology's Disruptive Effects

Technology- multiplier of manpower, driving force of innovation, cutter of prices, improver of living standards

Technology- destroyer of jobs, wrecker of industries, change run amok, reducer of investment values

Technology is an awesome and typically unpredictable force in our society.

Yesterday, my partner was remarking on a factoid he read last week concerning financial services employment among large US companies. At least, I think that was the universe.

Anyway, the fact was that, before the recent purges of financial services employees, following last year's credit debacle and subsequent writedowns, financial services employment had just about reached the same level it had prior to the sector's last major cuts, following the attacks on the World Trade Center on 9/11.

He and I were frankly puzzled that the labor force in the sector had swollen by so much again. He asked whether the industry should not have become more productive, and, thus, had fewer employees at its recent peak?

That seems correct to me. We discussed productivity, and he asked how I would define that measure. I cited the method I've always used, which is value-added divided by the number of employees. Value-added, the meaning of which my partner inquired, is, classically defined, the net of revenues and purchased goods and services.

Our conversation brought me back to a similar one in the library of the then-headquarters of my former consulting employer, Oliver, Wyman & Co., in 1995. I was discussing issues of size of markets, growth, revenues and gross margins among financial services businesses with my then-colleagues John Stroughair and David Boone. We gradually came around to discussing the role of IT in the sector, beginning in the early 1960s.

This led me to conjecture that it was possible that the industry's gross margin dollars had remained relatively constant as the application of information and electronic technologies to financial services had expanded the number of customers while reducing prices. For example, credit cards, money market and mutual funds became more ubiquitous, and fees for these services fell, thus opening them up to a much larger and broader mix of customers.

Even if the gross margin dollars grew, they probably grew at a slower rate than that of revenues or customers.

My point is, the application of technology has a decidedly mixed effect, even upon industries which undertake it for its supposed benefits.

In financial services, the thinning of gross and, ultimately, net margins probably led to less cushion against risk, as ever larger customer bases were served against shrinking profitability levels.

Technology tends to lower or remove barriers to entry, which, of course, leads to lower profit margins.

Returning to my discussion this week with my business partner, I mentioned an industry with which he is familiar, and in which he has had some fairly influential contacts- recorded entertainment.

Does anyone doubt that electronic and digital technology has gradually, at first, then rapidly decimated the businesses of producing and marketing audio and video entertainment?

Prices and margins fell through the floor with each new technology- cassettes, CDs, DVDs, VCRs, MP3 & 4 players.

This is part and parcel of what Joseph Schumpeter observed and codified almost a century ago. Businesses which enjoy substantial growth, especially from technological sources, open themselves to a bargain with the devil. Technology allows for the dramatic growth in new products and services, but with the accompanying shrinking of margins and ease of competitive entry. Thus, once on a path emphasizing technology-based change and growth, businesses which pause tend to get overrun by market forces- either consumer- or competition-based.

Existing products and services, like those in entertainment and banking, become cheaper, and, thus, appear more costly to offer, in terms of gross margin. Thus, firms which fail to move forward by shifting their business mix to new, higher-margin products and services, suffer from lower profitability, even if they were initially pioneers in the technologically-based changes.

Technology is, indeed, a two-edged sword. Having initiated its use to spark growth, firms run the risk of longer-term obsolescence if they fail to appropriately continue to ride the back of this tiger. Once begun, a business' affair with technological advances can't safely be ended, or even brought to a point of just 'maintenance.' To do so is to invite an early death.