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Bret Swanson of Entropy Economics and Jon Gilman of Clear Software discuss the intersections between economics, technology, and public policy. We then examine how technology can help unlock the full potential of economic growth.

Transcript

[Intro] Welcome to the Voices of Innovation Podcast Series with Clear Software. Together we’ll explore how technology is shaping our lives through conversations with business leaders, academics, and others who are at the leading edge of digital transformation.
[Douglas Karr] Well, hello folks and thanks for joining us today. Our guests today are Bret Swanson and Jon Gilman. Bret is, I should say, he’s a friend of mine too. So we’ve known each other for years. Bret is president of the technology research firm Entropy Economics. He’s also a visiting fellow at the American Enterprise Institute Center for Internet, Communications, and Technology Policy, a scholar at the US Chamber of Commerce Foundation, and Vice chairman of the Indiana Public Retirement System, INPRS. That’s quite a list.
[Bret Swanson] Yes, it is. Too long but thank you. [laughter]
[Douglas Karr] And you have time for us. That’s fantastic.
[Bret Swanson] Thanks for having me.
[Douglas Karr] Jon is the founder and CEO of Clear Software. Clear is a cloud-based platform as a service that simplifies business software and makes the jobs of users easier and more productive.
[Jon Gilman] Thanks for having me. I have way less accolades than Bret does. [laughter]
[Douglas Karr] The Technology CEO Council of commissioned this analysis to better understand how new technologies can catalyze growth, and what policy-makers can do to accelerate this positive trans while making sure their benefits are realized by more Americans. The Technology CEO Council is a public policy advocacy organization comprising of CEOs from some of America’s leading Information Technology companies including Akamai, Dell, IBM, Intel, Micron, Qualcomm, and Xerox. Council members include Safra Catz of– did I pronounce that right? Oh, good I did it. Phew! Safra Catz of Oracle, Michael Dell of Dell Computers, Gini Rometty of IBM, and others. That’s quite a council as well.
Bret, in reading your research, you showed that we should expect an overall growth rate of 2.7% annually which will add nearly $9 trillion in wages and salaries over the next 15 years if we can extend investment in digital technologies into manufacturing. Within the physical industry sector, we’re seeing only 0.7% annual growth over the last decade far eclipsed by growth in digital industries which over 15 years has been robust at 2.7%. In addition, though digital industries account for around 25% of US private sector employment and 30% of private sector GDP, they make 70% of all private sector investments in information technologies. The physical industries, however, which are 75% of private sector employment and 70% of private sector GDP make just 30% of the investments in information technology. Tell us a little bit about this and what you describe as the information gap.
[Bret Swanson] Sure. Thanks, Doug. Just to give this a little context and give us a foundation for our conversation today, the last decade or 12 years we’ve had a really slow-growing economy in the US and around the world. Just about half the historical growth rates, we’ve been growing at just one and a half or 2% and we’ve also had very, very low productivity growth. And so about a year ago, a bunch of big tech companies came to me and a colleague of mine and asked us to what’s going on in the economy because on the one hand, we seem to see lots of innovations, lots of cool stuff, we’re always talking about robots and artificial intelligence and Silicon Valley. On the other hand, we have these productivity growth rates. The data is telling us that the economy is not growing fast. And we can also see that because we haven’t had strong wage growth, we haven’t had strong income growth in the US, we’ve had lots of economic dislocation. So what is this dissonance? What is this paradox? So they came to us and asked us to try to figure out what was going on. And there are of course a lot of factors, but what we found when we looked across the economy, and this had just sort of followed some of the other research we had been doing for the last couple of years was exactly what you just summarized. Which is that the US economy really, you can look at it as two different economies. And the way that we divided it up, was into one bucket, the digital economy. So that’s tech and content and media and finance and professional services which have demonstrated strong growth and strong innovation and strong productivity growth. But that’s just 30% of the economy. The other 70% of the economy, which is everything else, it’s health care, it’s manufacturing, it’s transportation, it’s logistics, it’s education, it’s retail, wholesale. This is really where we’ve seen the concentration of slow productivity over the past dozen years and that’s what’s pulling back the overall growth rate of the economy. And it’s not that there’s nothing innovative going on in these other industries, it’s just that relatively these industries have not leveraged information technology nearly as well as the digital economy has. And we can see that in the numbers. We can see it anecdotally, but we can see it in the numbers. And so if you look at this 70% of the economy, they only make 30% of the investments in information technology. And it’s not just the amount of investments it’s the way that they use it, the tools that they give their employees. And that’s why we’ve seen much lower wage growth and income growth in a lot of these industries as well. And so our view, that’s sort of the history, what’s brought us to this point. The optimistic part of this story is that even though 70% of the economy isn’t operating at its potential, that means if we can get 70% of the economy operating closer to its potential, more innovation, more new business processes, more entrepreneurial firms in manufacturing, healthcare, and transportation, we can actually boost overall productivity across the economy and raise living standards, raise income, have better jobs for more people in a more broad- based economic growth. So that we’re not just seeing successful new firms and employment opportunities on the coasts but we can also do it for these other industries across America. That’s the big summary of our research and we can talk more about the details.
[Douglas Karr] And let’s jump in just a little bit on that. So specific to manufacturing, what kind of insights did you guys glean that is holding them back?
[Bret Swanson] Right. Well, manufacturing is a particularly interesting story for the national economy. It’s been a big part of the discussion over the past couple of years. People worried about manufacturing job loss, people worried technology and trade, and it’s of course of particular interest here in Indiana where we’re talking today because we for a long time have been the most manufacturing-intensive state. So trying to figure this story out is really important and again here you see two different stories that make it difficult to figure out what’s going on. U.S. manufacturing output is 40% greater than it was 20 years ago. For the people that say we don’t make anything anymore, that’s not really true. Manufacturing output is way up over the past two decades, but it is true that we’ve had a manufacturing job loss of about 5 million, going from about 17 million manufacturing jobs, down to 12 million jobs. That’s a tough, frustrating story from the job perspective. On the other hand, you say, “We’re producing 40% more output with fewer workers. Seems to be manufacturing is very productive. That’s the definition of productivity. Then you look a little deeper and you see that different manufacturing subsectors perform much differently than one another, and that really, the productivity advances have been concentrated in the manufacturing sectors that are actually producing tech goods. We’re talking about semiconductors, and computers, and things like this. They are the ones that are really driving that output and productivity numbers higher, but a lot of the other manufacturing subsectors, whether you’re talking about food, or textiles, or all sorts of different manufacturing subsectors, we have not seen investment in new information technologies, software, computers, networking, etc. And, these manufacturing subsectors have not strong productivity growth, and in addition to that, it’s these manufacturers who have been the most vulnerable to foreign competition. This is where the automation and foreign trade stories intersect, where it’s not really tech or trade that’s stealing jobs. Our research finds — and these are somewhat generalizations, because every firm is a little bit different — but when companies don’t invest in new technology, give their workers new tools, become more productive, of course, they’re going to be the ones that are most vulnerable to low-wage foreign competition. The firms that have automated more, actually have done better versus foreign rivals. That’s a big picture take on again, what’s happening up until now in manufacturing. I’m happy to stop there, but there’s also an optimistic case for manufacturing.
[Douglas Karr] Let’s cut over to Jon. Jon, you’re an industry veteran. How does this compare with what Clear Software has seen across industries as it relates to technology investment? And then tell us how this relates to Clear Software, and what you guys are doing.
[Jon Gilman] Absolutely. What we see on the enterprise software space totally parallels exactly what Bret has been talking about. What we saw in the 1990s and early 2000s was this move from paper to digital platforms. We took our HR departments, our manufacturing teams, our finance departments, and we got them on some sort of technology. Ever since they’ve gotten on these technologies, they haven’t done any continuing investment to make these technologies better. We’ve seen productivity stagnation pretty much across any industry, but specifically within manufacturing, because people are not able to get more done with less. That’s essentially what you’re doing when you’re investing in technology is, you’re trying to get more done with less, have fewer people working on the same process, and we essentially have these companies that are now operating on 20 or 30-year-old software platforms that haven’t been innovative. They’re slow. They’re clunky. And it really adds to the operating expense for a lot of these organizations.
[Douglas Karr] This next question is a doozy [laughter]. So Bret, you also point out that quickly bridging this technology gap will require close cooperation between corporate America and government public policy. Can you elaborate on that a bit? This is my favorite topic, by the way. You guys know that from my Facebook entries [laughter].
[Bret Swanson] Yeah, sure. So if we want to help bring along to make the 70% of the economy that’s not operating at its potential, if we want to have it raise its game, produce more innovation, get more productive, grow faster, I think there are some things we can do. Part of it has to do with education. Making sure that the economy has enough people to do these increasingly sophisticated tasks. So we want more STEM, we want more computers, and so forth. So education, training, there’s a lot to do there. A lot of these industries that we’re talking about also tend to be more regulated than the digital economy. So there’s not as much opportunity for entrepreneurship and risk taking and trying new things, deploying new information technology systems, new capital, and equipment. So some things we could do there. I think we need a much better corporate tax code, and they’re working on this in Washington right now. Not making nearly as fast a progress as a lot of us would like to see.
[Jon Gilman] To say the least [laughter].
[Bret Swanson] But a better tax code that encourages investment, and growth, and hiring, I think would be a lot– would be good for a lot of these industries who don’t have as much access to venture capital. Say, so Silicon Valley, for example, they have access to billions of dollars worth of venture capital, and they can grow that way. A lot of the traditional older industries have to grow versus other financing mechanisms, and if you have lots of regulatory barriers, if you have big tax barriers, it makes that marginal investment, that risky new plan, that new project, or launching that new firm much more difficult. So I think clearing away the underbrush and encouraging innovation in healthcare, biotech, education, and manufacturing would go a long way towards encouraging the type of exciting, breakthrough, risk-taking, investment-oriented culture in some of these industries that we just haven’t seen if we compare it to some of the digital industries.
[Douglas Karr] And it seems– this is just my two cents. I’m not opposed to regulation and regulatory environments in some industries, but it seems like the problem there is the agility of the business to get a return on investment. That if I know that I have to fight for three years or four years to get systems in place to cover regulations, then that’s three or four years delayed to get a return on investment on my technology investment which might put me past a point of no return. And so it seems like these other countries that can crop up, that are more agile, that can accommodate that, they’re going to steal the business.
[Bret Swanson] Yeah. Agility’s the key word. That’s excellent. Well put. And of course, it doesn’t mean that we don’t have smart regulations in place to govern consumer safety and all these very important things, but the fact is that most of these industries we’re talking about are still operating under policies that were devised maybe 50, 70, 80, 100 years ago, that just aren’t realistic. Aren’t meant for today’s economy. So all it means is in a lot of cases we just need modernization. Like I said clearing away some of the obsolete underbrush and giving a lot of these firms and industries that incentive to make that new investment. To take that leap. To build that new product. To hire more people. Because I think there are lots and lots of people. We see them every day, you and Jon, who want to build great new products and services and new firms, if we just allow them.
[Jon Gilman] Absolutely. And Jon, we’re talking about these stunted productivity situations. What kind of issues are you seeing out there, even when technology investments have been made?
[Jon Gilman] Well, to kind of parlay on to what Brett was just talking about, there’s an advantage to being new, especially with countries like South Korea, and China, who have come onto the scene and had to build their Internet system, and they had to buy new technologies to manufacture products. They were able to choose from the latest and greatest, whereas our economy’s a little bit older. We had to invest in the 1990s as opposed to five or ten years ago. So we’re saddled with these old technologies, and if I’m a CIO, I’m looking at it and saying, “Well, I’ve got a sunk cost here. I’ve put a couple hundred million, or a couple billion dollars into these different technology products that we own, and to get off them, it’s going to be very cost prohibitive. I’d have to go through a complete reimplementation. I’d have to spend hundreds of millions of more dollars, so I’m kind of caught in this state of paralysis.” So you kind of get into the situation where you’re like, “Well, do I rehab, or do I build from scratch?” And that’s the conundrum that faces CIOs today is what sort of technology investment should I be making? And the reason why we exist is exactly because this conundrum exists: that we can take your existing technology investments that you’ve made, get them to work better together and get you to increase your productivity without having to reinvent the wheel. Without having to go spend another billion dollars on some software implementation or by buying $3 billion worth of robots for your factory. We can get your existing assets and investments to work better together. And that’s something that a lot of executives haven’t considered that possibility of being able to “rehab” your infrastructure as opposed to building from scratch. But there’s definitely advantages to being new to the game, kind of like we were talking about with some of the Asian countries.
[Bret Swanson] Doug and Jon, I think this gets to a really interesting point that we can start– that we’re seeing in the data if we look at this in aggregate. Although the physical industries and manufacturing have not invested in information technology the way they might have or the way the digital economy has over the past 20 years. In the past couple years we are starting to see a real spike in their spending on technology goods and services. So this isn’t capital investment or buying big new software that they install, this is spending money on things like software as a service, on cloud computing, other service-based platforms, and this is right where Clear and other software as a service platforms come in. Where they are offering a much more efficient way for companies across the economy to leverage this unbelievable computing power that we have in the cloud. These really much more easy-to-use software platforms that can be constantly updated, that don’t require massive installs on premises, that don’t require legions of consultants, that don’t require hard updates from time to time, that can sort of be updated on the fly, and we’re really seeing it in the data. There’s a real spike in like I said, these physical industry companies moving in this direction, but I still think it’s just the beginning. And this is the optimistic part of why I think this 70% of the economy is perhaps on the verge of a real productivity boom.
[Douglas Karr] And people don’t realize– what, a hundred years ago we had generators on every block [laughter]. Now we just use and pay for the electricity that we need and we get it from somewhere, we don’t even know where. And I think it’ll be fascinating to see that transition happening in the technology spaces as well. I mean, I think when you go out– and even Clear Software– when you go out, you’re buying storage, speed, bandwidth, memory, well all of that is kind of conversing into a, just buy resources. Just buy a piece of the cloud and it’s going to scale as you need it and you’re going to pay for it as you need it. And that makes it affordable to companies. They don’t have that initial investment to make that transformation. They just buy as needed, which is pretty exciting.
Yeah and part of the, I guess sort of the mountain that a lot of technology executives have to overcome is that they have all of this on-premise software and technology that they’ve bought and implemented over all of these years and being able to convert that to Amazon Web Services or Microsoft Azure or Google Compute could take decades, whereas an upstart like Tesla can use software as a service products from day one and not have to have an IT team of 500 people. And I think one of the things we’ve seen is that CIO and CTO positions are probably the shortest tenured of all the executive level positions, but for those who have been CIOs or CTOs for 10 or 20 years, what they’ve seen is 20 years ago in the ’90s when we started sort of digitizing, they had an IT team of 15 or 20 people and it was costing them maybe 5 or 10 million dollars a year. Now suddenly they have an IT organization that’s 500 people, 1,000 people and it’s costing them hundreds of millions of dollars a year to run their IT organization and they’re saying, “What has changed? If our productivity has flatlined for the last 10 years, but our spending on IT has increased 10 or 20 fold, what sort of ROI am I getting?” And to be honest the answer is often, none.
[Douglas Karr] Right. Right. And you’re probably spending more to maintain the system than you are to [laughter]–
[Jon Gilman] Yep and I mean, it’s given the rise to consultancies. Kind of my prior background in a former life is that these systems are behemoths. They’re expensive to maintain. Nobody really knows how to operate them or to implement them so the big consulting firms out there have a heyday with it because they can charge obscene rates and it costs an organization 2 or 3 hundred million dollars to implement a software system. It should never cost that much to do anything. I mean you can fly to the moon for 300 million dollars. You shouldn’t have to spend that much money on an IT system.
[Douglas Karr] I think we could talk about this all day. This is a fascinating conversation. I want to thank both of you guys for your time today. Bret, tell people where they can find Entropy– and by the way, I told Bret before our interview that I unsubscribe to so many newsletters every single week, but Entropy is one of those ones that I’m always keeping an eye on. And then I mentioned CB Insights before. Those are about the only two in the economics and information technology space that I really keep an eye on to keep my finger on the pulse. So tell people how they can subscribe and where they can find you.
[Bret Swanson] Sure. That’s very kind, Doug. You can find me on the web at entropyeconomics.com or bretswanson.com. You can find me on Twitter @jbsay or @entropyecon. And those are probably the easiest places.
[Douglas Karr] And you respond to emails, too [laughter].
[Bret Swanson] I try.
[Douglas Karr] Jon, tell people about what’s your target client with Clear, who should be looking for you as a solution, and where can they find you?
[Jon Gilman] Well, first you can find us at clearsoftware.com and you can also find us on LinkedIn, and Facebook. Our Twitter handle is @clearsoftware. Our target audience is really the Fortune 500. It’s anybody who’s, like we talked about, spending hundreds of millions of dollars a year within their IT organization. A lot of that spending, we feel, is a waste and our purpose for existence is to sort of clean up the mess that’s been left by the software industry and the technology industry. Something that’s happened over the last decade is this whole concept of best of breed. And everybody went out and bought best of breed for all these different units of their business and suddenly realized that these things don’t play well together. And that kind of gets back to the concept of a huge total cost of ownership. So really any Fortune 500 organization that’s experiencing that, that’s what we come in and fix. Kind of like the janitors for the IT mess.
[Douglas Karr] [laughter] Fantastic. Well, thanks for joining us today, gentlemen.
[Jon Gilman] Thank you.
[Bret Swanson] Thanks so much.
[Outtro] The Voices of Innovation podcast was brought to you by Clear Software. Visit us at clearsoftware.com. The podcast was recorded at DK New Media’s Studio at the Speakeasy in downtown Indianapolis.