Technology and Economic Value Creation

Last night I attended TiE Chicago’s “The Great Chicago Tech Debate,” which turned out to be a rousing panel discussion (no, that’s not necessarily an oxymoron 😉 replete with insights. As it was my first TiE (The Indus Entrepreneur) event, I enjoyed taking an informal survey of members afterwards, and everyone I spoke with found it extremely valuable (not awfully surprising, but still..). TiE, which was founded in The Valley and has chapters globally, is a network to support entrepreneurs. As its name suggests, many of its leaders originally hail from India, and many have founded, led or helped to launch successful start-ups that have leveraged offshore partners in India.

Although the setting of this tale is Chicago, its lessons will apply to many other cities, provinces or countries that find themselves in a global knowledge economy, with the need to form a vision to galvanize their citizens to make changes in order to succeed in the new environment. Two of the main challenges are: making the shift from the industrial economy to the knowledge economy and the need to differentiate to compete. “Technology” plays a supporting role, which we’ll discuss more in a minute. After some observations on the debate, I will offer what I think we have to do differently and how Chicago, and other industrial economy regions, will blossom again.

Part One: A Technology Soufflé

The panel had excellent representation from major players in the model “tech economy”: Ellen Carnahan, Managing Director at William Blair Capital Partners, David Weinstein, President of the Chicagoland Entrepreneurial Center, Tom Churchwell, Managing Partner at ARCH Development Corp, Jerry Mitchell, President of the Midwest Entrepreneurs Forum, and Jack Lavin, Director, Illinois Department of Commerce and Economic Opportunity, with the indefatigable Michael Krauss moderating. As many know, David was CEO of Blue Meteor, Jerry is a serial entrepreneur and Tom has entrepreneurial and corporate experience. Ellen has been a VC forever and Jack was on top of what the State of Illinois is doing to support entrepreneurs.

Although everyone (except Jerry, who was unapologetic ,^) tried to cast remarks in a neutral context, the angst in the room was palpable. Chicago, one of the most powerful cities in the world during the industrial economy, is clearly underperforming in its quest to create a tech economy when compared to Silicon Valley, the Route 128 Corridor (Massachusetts), Austin, Texas, The Research Triangle (North Carolina) and even Wisconsin, Michigan and Indiana according to some metrics. As we have all said countless times, Chicago has all the ingredients to make a blue ribbon soufflé: world-class universities, global corporations, fantastic physical infrastructure (airports, fiber, etc.), innovative professional services firms, powerful financial services firms. But our soufflé never rises.

The problem is, we fell in love with the soufflé on some enchanted evening. And if it’s any consolation, we’re not alone. Just look at the proliferation of “Silicon ____” around the U.S. and around the world. It’s an impressive idea for economic development in the “tech economy.” Everyone is justifiably fascinated with these technology companies due to their ability to create fantastic wealth quickly and repeatedly. Of course, the original soufflé makers were the people in Silicon Valley, a great portion of whom have disruption in their blood (reach the Pacific, gold prospecting). The other regions mentioned have understood and transplanted the formula in their soil. However, none of these regions has such a diverse and powerful industrial economy such as Chicago’s, and they were therefore incented to adopt the “tech economy” model more fervently, to be more focused on the “tech economy” as the main thing. Therefore, in terms of creating a “tech economy,” Chicago’s strength has been its weakness. To understand more about this, see the Sidebar: Industrial Economy DNA.

The “Technology”

Computing is the infrastructure of the knowledge economy (in this case, I’m lumping network and concomitant services with it). As you’ve read before, scaling information is transformative: Gutenberg’s printing press was even more revolutionary than the computer because it shifted information transfer from oral to written, which led to the scalability of information. Computing is arguably a much more advanced version of the same phenomenon. At first, hardware was the focus of innovation, but software usurped hardware’s part of the value chain in the 80s and 90s. Today, software is undergoing rapid transformation; the industry is maturing rapidly. All traditional software models are falling by the wayside: custom software that is tightly coupled to hardware is going away, and standards-based services are an elegant way to transition away from it; the packaged software model of selling customization, installation and service is waning. Software as a service and open source software will continue to age the industry. My point is that the *technology* part of the knowledge economy is graying because it has grown fast; the rest of the knowledge economy has to catch up.

The Bomb*

Creating software is a very abstract proposition. Information and manipulating information is close to mechanizing thought, which is inherently abstract. Abstraction of this type is not in Chicago’s DNA, nor in that of most of the country. Individuals don’t count here; to create a Silicon Valley, you need a critical mass of people with that DNA, who play off each other and create the sustained process that leads to the explosion (*Please forgive this bad metaphor; it’s the only one I can muster to capture the original meaning of “critical mass” and to reflect the degree of difficulty of creating the sustained process). When the panel identified the six components of a “tech economy,” they were: 1) talent, 2) infrastructure, 3) business policy, 4) capital, 5) R&D commercialization and 6) social networks. It is a complex endeavor to combine the ingredients to create the outcome. For fun, I would say that talent, infrastructure and capital are raw materials, where policy, commercialization and social networks are forces.

The lesson for Chicago is to cease trying to create a “tech economy” because the real value is going to morph to something else much closer to Chicago’s traditional strengths…

Part Two: Knowledge Omelets

So what’s after IT and its current iteration, software? Due to the increasing proliferation of the object-oriented software paradigm at the hands of service-oriented architecture, Web services and the like, IT’s legendary inflexibility is steadily fading. IT is becoming more agile and will therefore impose a decreasing amount of constraint on business. Keeping in mind that the context of our discussion is the knowledge economy, the next big thing will be digitizing and mechanizing business processes, so they can be standardized, transferred and scaled. This will also be critical for Transourcing.

Digitizing business process is important because that will enable us to improve quality, efficiency and scalability. It will enable more collaboration of all kinds, including offshore. It will require—relative to today—little IT knowledge and much more domain knowledge. For example, reducing the drug discovery process is less about IT and more about having insight into why the processes are the way they are, so they can be realistically represented digitally and enhanced. Look at how e-business disappeared. In the beginning, having “Internet” and e-business knowledge was a specialty, but as the real-time ubiquitous model became more widespread and companies started to take it seriously, the value chain shifted: to apply the Internet to business, it was more important to know the business than the Internet. As software becomes more open and networked, it will matter less in terms of absolute value creation. More important will be applying technology to specific processes deep within the enterprise. Software and IT will still be very important, but they will increasingly play a specialized, supporting role.

I was happy to hear David Weinstein’s repeated remarks about the importance of enlarging our scope past IT to address our economy at large. He is leading the Chicagoland Entrepreneurial Center in that direction. We should do that in all of our other organizations that are trying to make Chicago an IT town.

To close the loop on the metaphor, we can take our eggs, cream and cheese and make omelets; let’s stop trying to make soufflés.

Some Humble Recommendations

During the Q&A last night, there were as many opinions offered as questions because everyone was so engaged and passionate. I reserved mine for here.

• Let’s see beyond the venture-funded software iteration of the knowledge economy, which is waning in importance anyway. It requires a preponderance of abstract thinking, which does not play to Chicago’s native skills (strengths). With so much hands-on industry domain knowledge, Chicagoans are gifted for applying technology to the business, not abstractedly thinking up new technology.
• Once we stop trying to be an IT town, we can refocus on our strength, which is the business. BTW, Chicago is very much a technology town, but more in the sense of technologies that are tightly linked with the underlying process or material (less abstract). For what it’s worth, I think nano, as applied to materials into which we have insight, stands a good chance. Also, industrial and agricultural technologies.
• If we accept the hypothesis that business knowledge will be increasingly important, we should create knowledge transfer bodies whose focus is domain knowledge of various industries. In so doing, we will bring corporations and entrepreneurs together naturally.
• Increase the awareness of the importance of domain knowledge in engineering programs, especially at the elementary and high school level. This means getting direct corporate knowledge into the classrooms; corporations can help with real issues and problems and make them real in schools. Getting more real business examples into universities would carry another key benefit, bringing downstate Illinois and Chicago together. None of these other “tech success” regions has the amount of direct domain knowledge that Chicago has. It stems from a diverse economy, and it’s a huge advantage. It hasn’t played out for Chicago yet because the lion’s share of the value of the knowledge economy has been in IT and abstraction, areas in which Chicago is weak.
• Funding: as technology entrepreneurs temper their abstract software engineering expertise with domain knowledge, they will have more insight into corporations’ business issues. Getting corporate support will be easier.
• Venture and early stage financiers need more domain knowledge, too. What about collaborative programs focusing on certain domain problems? These have to be fairly close to meat and potatoes business problems. One example: Bret Johnson told me about the Homeland Security Innovation & Entrepreneurship Center: one of its key projects is advancing the security around freight containers. This should be a focus; in the face of security problems, Chicago’s position as a distribution hub would be severely impacted. The domain knowledge of all the mechanics of intermodal transportation is rich here.
• We have to infuse “traditional” industry associations with a more digital model. Everyone’s been trying and making incremental improvements, but there hasn’t been a burning platform. Part of the problem is that “technology” has been seen as distinct from “business,” which was necessary when technology was custom made and intense focus was required. Now that hardware, software and network protocols are all rapidly moving towards standards-based models, the dichotomy will be less. If we focus on their natural convergence, we can accelerate it.
• A huge part of the knowledge economy will be customer experience and marketing. I will deal with it separately, but it is much more up for grabs because its inputs are information; it’s abstracted away from industry. Chicago can make a strong play for that competence as well.

I’ll close with a disclaimer. Obviously, the above is not a studied treatise, it’s an accumulation of thoughts that’s being delivered off the cuff.