Where is the value of technology really hidden?
Tech companies are often created on the promise that an IT tool is capable of replacing humans and achieving significant productivity gains. But these tools are complex to implement, require a very large critical size to succeed and make development costs profitable. Nevertheless, these technologies, instead of replacing humans, can provide additional value either through scale change (IoT, IA) or by network effect.
In theory, the model of value creation through technology is quite simple. It all starts with a product or service in which all or a part of the value chain can be automated or digitized and can be developed in a tool. The large-scale distribution of this product or service will amortize development costs. Customers then benefit from a better quality and less expensive service.
New startups are created every day on this model. The reality is unfortunately systematically more complicated because the technology does not seem to have the expected magic effect. The web crisis of the 2000’s made it possible to rationalize a market that had become absurd. Investors became more cautious on technological issues, even if the first investment rounds are still often very risky because they are based on very high expectations in terms of value creation through technology. Investment funds mitigate their risk by multiplying small investments in the hope that the outperformance of a few (less than 10%) will compensate for the failures of others.
The almost 20 years of experience of tech startups, now behind us, should contribute to better target tech investments and draw some lessons from it.
First of all, the amount of work required to transform something developed for a few clients into a generalizable and scalable tool is systematically underestimated. Humans are more flexible than machines. Taking into account all possible solutions in tool making requires an investment much higher than what is envisaged. For instance, la SNCF, which sells tickets through the minitel, doesn’t offer all the possibilities offered by a physical agent online yet.
It is also common to consider technology as an asset in the same way as real estate. In reality, the R&D effort is not one-off. The technical asset requires a continuous investment effort. Besides, the company that decides to slow down the development of its product is doomed to failure.
Nowadays, the expectations from customers are very high. Until the 2000s, it was common to notice bugs in software. It was also frequent for services to be interrupted for maintenance periods on a regular basis. The requirements from users of software or online services are now much higher. The tools available online can no longer afford a service interruption and even less a loss of data. The quality has a very high price.
In the end, a generic tool that correctly meets a need with the right richness of features and expected quality of service takes a long time to develop. Even in countries where labor is not cheap, it is not uncommon for the automated solution to be more expensive or of lower quality than the human solution. Developing a tool with the idea of making it profitable and sustainable, you’ll have to reach a very large critical size (Slack, Workday, SalesForce). The race for size is still one of the main challenges for startups today. The uncertain outcome of this race makes investment in technology still random.
In any case, it is important to consider that technology can bring more than just automation of tasks. Therefore, the value created by technology is less dependent on hyper-growth or a “winner-takes-all” strategy. To reduce the risk of a technological investment, technology must then make possible what was not possible without it. Below are two areas of real value creation that technology enables.
The change of scale
Since human management cannot go down to a very detailed level, issues are therefore aggregated into broader problems and decisions are made at the level of these aggregates. With the rise of artificial intelligence, it has become possible to multiply decision-making by shifting the required intelligence to the finest level, in the form of a model. In online advertising (at Criteo or Adikteev), technology has enabled the development of optimized programmatic purchasing for each individual space. Scaling is also possible thanks to IoT, with RFID chips or electronic labels from SES-imagotag. The technology makes it possible to multiply the points of interaction and service capabilities. Machines has not replaced humans, it acts at a level where humans cannot act.
The network effect
Marketplaces and social networks provide multiple direct relationships between network nodes. It is now possible to directly connect a specific buyer with the corresponding seller. Marketplaces (e. g. Uber or Ocus) allow a new, homogeneous offer that didn’t exist without the network effect. Each new member registered on these platforms is reinforcing the value of the whole. The arrival of blockchain technologies allows a new type of network effect in which the initiator user can delegate to the blockchain a large part of his responsibility. Therefore, the service will be more independent of its central authority. Although the instances are not numerous, we see many initiatives in this direction.
The replacement of humans by machines has been the main driver of value creation since the industrial revolution. The massive replacement of current professions by machines is not yet in the agenda. It is now crystal clear that online stores have not dethroned physical distribution, which hold the vast majority. Future value creation will come from the network effects and scale changes that are made possible by the technological breakthroughs we are experiencing today, such as artificial intelligence and IoT.
