Digital Transformation

by Thomas M Siebel

  Former U.S. Secretary of State

  Former National Security Advisor

  Former Provost, Stanford University

  PREFACE

  Post-Industrial Society

  In 1980, as a graduate student at the University of Illinois at Urbana–Champaign, I happened upon an anthology at the Illini Union Bookstore, entitled The Microelectronics Revolution: The Complete Guide to the New Technology and Its Impact on Society, freshly published by the MIT Press.1 The penultimate chapter, entitled “The Social Framework of the Information Society,” was written by Daniel Bell.

  My interest in this subject had been piqued by my classes in Operations Research and Information Systems—classes that led me to the computer lab to explore information technology in the early days of mainframe computing: CDC Cyber computers, FORTRAN, keypunch machines, and batch computing. I found it all quite fascinating. I wanted to know more.

  I was particularly intrigued by Daniel Bell’s big idea, first published in his book The Coming Post-Industrial Society, in 1973.2

  Bell began his career as a journalist. He received his PhD from Columbia University in 1960 for the body of his published work and became a professor there in 1962.3 In 1969, he was recruited to the faculty at Harvard, where he spent the balance of his career. He was a prolific writer, having published 14 books and hundreds of scholarly articles, and is perhaps most renowned for having coined the term “Post-Industrial Society.”

  Bell was a highly influential 20th-century American intellectual. In a 1974 study of the top 70 U.S. intellectuals who contributed most to widely circulated magazines and journals, Bell was ranked in the top 10.4

  Professor Bell explored the developmental history of the structure of human economies and the evolution of the underlying philosophical thought behind those structures, in the context of economic trends and ongoing developments in information and communication technology.

  Bell introduced the concept of the Post-Industrial Society and went on to predict a fundamental change in the structure of human economic and social interaction—a change with impact on the order of the Industrial Revolution—a change that he called “The Information Age.”

  Professor Bell theorized the emergence of a new social order—driven by and centered around information technology—dramatically altering the manner in which social and economic interactions are conducted. The way in which knowledge is promulgated and retrieved. The way in which we communicate. The way in which we are entertained. The manner in which goods and services are produced, delivered, and consumed. And the very nature of the livelihood and employment of humankind.

  The Post-Industrial Society

  Bell conceived of this idea before the advent of the personal computer, before the internet as we know it, before email, before the graphical user interface. He predicted that in the coming century, a new social framework would emerge based upon telecommunications that would change social and economic commerce; change the way that knowledge is created and distributed; and change the nature and structure of the workforce.5

  The concept resonated. It was intuitively comfortable. It was consistent with my view of the world.

  The term post-industrial society was used to describe a series of macro-economic and social changes in the global economic structure on the order of magnitude of the Industrial Revolution. Bell developed his theory in the context of the history of economic civilization, positing three constructs: Pre-Industrial; Industrial; and Post-Industrial.

  Pre-Industrial Societies

  Bell described pre-industrial society as a game against nature. In a pre-industrial society, raw muscle power is applied against nature, primarily in extractive industries: fishing, mining, farming, forestry. The transformative energy is human. Muscle power is moderated by the vicissitudes of nature. There is a high dependence on natural forces: rain, sun, wind. The main social unit is the extended household. Pre-industrial societies are primarily agrarian structures in traditional manners of rhythm and authority. Productivity is low.6

  In pre-industrial societies, power is held by those who control the scarcest resources, in this case land. The dominant figures are the landowners and the military. The economic unit is the farm or plantation. The means of power is direct control of force. Access to power is primarily determined by either inheritance or military invasion and seizure.7

  Industrial Societies

  Bell described goods-producing industrial societies as a game against fabricated nature. “The machine predominates,” he wrote, “and the rhythms of life are mechanically paced: time is chronological, methodical, evenly spaced…it is a world of coordination in which men, materials, and markets are dovetailed for the production and distribution of goods.”8

  The game is about the aggregation of capital to establish manufacturing enterprises and apply energy to transform the natural into the technical.9

  In industrial societies, the scarcest resource is access to various forms of capital, especially machinery. The essential economic unit is the company. The dominant figure is the business leader. The transformative energy is mechanical. The means of power is the indirect influence of the company. Bell argues that the function of organizations is to deal with the requirements of roles, not individuals. Power is determined by ownership of property, political stature, and technical skill. Access to power is through inheritance, patronage, and education.10

  Post-Industrial Societies

  A post-industrial society is about the delivery of services. It is a game between people. It is powered by information, not muscle power, not mechanical energy: “If an industrial society is defined by the quantity of goods as marking a standard of living, the post-industrial society is defined by the quality of life as measured by the services and amenities—health, education, recreation, and the arts—that are now available for everyone.”11 The core element is the professional, as he or she is equipped with the education and training to provide the skills necessary to enable the post-industrial society.12 This portends the rise of the intellectual elite—the knowledge worker. Universities become preeminent. A nation’s strength is determined by its scientific capacity.13

  In a post-industrial society the primary resource is knowledge. Data becomes the currency of the realm. The most data—the greatest volume, the more accurate, the timelier—yields the most power. The central focus is the university. Researchers and scientists, including computer scientists, become the most powerful players. The class structure is determined by technical skills and levels of education. Access to power is provided by education.14

  Bell traced the evolution of the U.S. economy from a pre-industrial agrarian society as recently as 1900, to an industrial society in the mid-century, to a post-industrial society by 1970. He supported his argument with an analysis of the U.S. workforce, showing the steady decline of farm workers and laborers from 50 percent of the workforce in 1900 to 9.3 percent in 1970. He showed the increase of white-collar service workers growing from 17.6 percent of the U.S. workforce in 1900 to 46.7 percent in 1970.15 He provided the data showing the increase in “information workers” from 7 percent of the U.S. workforce in 1860 to 51.3 percent in 1980.16

  Bell identified knowledge and data as the crucial values in the post-industrial era. He wrote:

  By information, I mean data processing in the broadest sense; the storage, retrieval, and processing of data become the essential resource for all economic and social exchanges. These include:

  (1) Data processing of records: payrolls, government benefits (e.g., social security), bank clearances, and the like. Data processing for scheduling: airline reservations, production scheduling, inventory analysis, product-mix information, and the like.

  (2) Data-bases: characteristics of populations as shown by census data, market research, opinion surveys, election data, and the like.17

  The Information Age

  In later writings, Bell introduced the idea of the emerging Information Age, an age that would be dominated by a
new elite class of professional technocrats. He foretold of the day when scientists and engineers would replace the propertied bourgeoisie as the new ruling class.

  It’s hard to overstate the scale of Bell’s vision for the Information Age. “If tool technology was an extension of man’s physical powers,” he wrote, “communication technology, as the extension of perception and knowledge, was the enlargement of human consciousness.”18

  Bell envisioned the confluence of technologies to create the Information Age. In the 19th and first half of the 20th century, the primary means of communication of information was through books, newspapers, journals, and libraries. In the second half of the 20th century, these were supplanted by the radio, television, and cable—encoded communications transmitted by radio wave or wire. The confluence of these technologies with the advent of the computer in the second half of the 20th century was the spark that initiated the Information Age.19

  Bell identified five structural changes that would transpire to shape the Information Age:20

  1. The confluence of telephone and computer communications into a single medium.

  2. The replacement of printed media by electronic communications enabling electronic banking, electronic mail, electronic document delivery, and remote electronic news.

  3. The dramatic expansion of television enhanced by cable communications, allowing for a panoply of specialized channels and services, linked to home terminals for immediate and convenient access.

  4. The advent of the computer database as the primary centralized aggregator of the world’s knowledge and information enabling interactive, remote group research and immediate personal access to homes, libraries, and offices.

  5. A dramatic expansion of the education system through computer-aided education on virtually any subject immediately and remotely accessible at global scale.

  Looking at the future from the perspective of 1970, Bell didn’t miss much. The internet, email, cable and satellite TV, search engines, database technology—he even predicted the emergence of the enterprise application software industry. He clearly saw this development. By example he explicitly hypothesized the creation of a new, Information Age reservation industry: “This ‘industry’ sells its services to airlines, trains, hotels, theater box offices, and automobile rental companies through computerized data networks.…If a single company created an efficient reservation network…it could sell to all these industries.”21

  As we look back on these predictions from the first quarter of the 21st century, it may all seem quite obvious. It is amazing that a man could predict this future a half century ago during a decade of stagflation and war, when the economy was dominated by General Motors, Exxon, Ford Motor Company, and General Electric. Exxon’s revenues were one-tenth of what they are today. The Intel 4004 processor had just been invented. Its primary use was to enable electronic calculators that automated addition, subtraction, and other relatively simple mathematical calculations. The Home Brew Computer Club, the genesis that later sparked the invention of the personal computer, first convened two years after Bell published his book. The big names in computing were Control Data, Data General, Sperry—all irrelevant today. Information technology was a nascent industry. This man had great vision.

  Much of the balance of my educational, professional, and community activity has been about pursuing this idea. Understanding this idea. Developing this idea. And attempting to contribute to the realization of this idea. It proved a point of inflection in my life. This idea drove me to enroll in the graduate school of engineering at the University of Illinois to pursue and complete a graduate degree in computer science.

  Motivated to develop a fluency in the languages of engineering and information technology, I pursued a graduate education in those fields. This, in turn, brought me to Silicon Valley where I founded, managed, and financed companies. Served on corporate and university boards. Engineering college boards. Business school boards. Published. Spoke. Built businesses.

  My goal was to have a seat at the table as this vision to which I strongly subscribed played itself out. The years from 1980 to today in fact unfolded pretty much as Bell predicted. Information technology has grown from roughly a $50 billion industry in 1980 to a $3.8 trillion industry in 2018.22 It is expected to reach $4.5 trillion by 2022.23

  This is my fourth decade in the game. I have had the opportunity to have a seat at the table with the many giants who made this happen: Gordon Moore, Steve Jobs, Bill Gates, Larry Ellison, Lou Gerstner, Satya Nadella, Andy Jassy, and many others.

  I have had the great privilege to be an innovator and active participant in the development of the database industry, enterprise application software industry, and internet computing.

  As we power into the 21st century, it is clear to me that the trends identified by Daniel Bell are accelerating. We are seeing a new convergence of technology vectors including elastic cloud computing, big data, artificial intelligence, and the internet of things, the confluence of which enables us to address classes of applications that were inconceivable even 25 years ago. We can now develop prediction engines. This is what digital transformation is all about. This is when the fun starts.

  Chapter 1

  Punctuated Equilibrium

  I am not sure history repeats itself, but it does seem to rhyme.1 In management, I find one of the most important skills is pattern recognition: the ability to sort through complexity to find basic truths you recognize from other situations. As I approach my pursuits in information technology, my decisions and choices are made in historical context.

  I recently addressed an investment conference in New York. There, I was intrigued by a discussion at lunch with Jim Coulter, a founder of Texas Pacific Group. Jim was thoughtfully wrestling with the similarities he saw between the dynamics of evolutionary biology and societal change. His talk highlighted the idea of evolution by “punctuated equilibrium”—a relatively new take on how and why evolution occurs. It piqued my curiosity, and I began to research the topic.

  In his pioneering book On the Origin of Species,2 Charles Darwin proposed that natural selection was the driving force of speciation and evolution. Darwinian evolution is a force of continuous change—a slow and unceasing accumulation of the fittest traits over vast periods of time. By contrast, punctuated equilibrium suggests that evolution occurs as a series of bursts of evolutionary change. These bursts often occur in response to an environmental trigger and are separated by periods of evolutionary equilibrium.

  The reason this idea is so compelling is its parallel in the business world: Today we are seeing a burst of evolutionary change—a mass extinction among corporations and a mass speciation of new kinds of companies. The scope and impact of this change, and the evolution required for organizations to survive, are the focus of this book.

  According to Darwinian natural selection, organisms morph gradually from one species into another. Species go through intermediate forms between ancestor and descendant. Thus all forms should persist in the fossil record. Evolutionary biologists like Darwin relied heavily on fossils to understand the history of life. Our planet’s fossil record, however, does not show the same continuity of form assumed by natural selection. Darwin attributed this discontinuity to an incomplete fossil record: dead organisms must be buried quickly to fossilize, and even then, fossils can be destroyed by geological processes or weathering.3 This core assumption of Origin has been hotly debated and widely criticized since its publication in 1859. But no critic provided a viable alternative that could explain the scattered fossil record.

  FIGURE 1.1

  In geologic time, the fossil record shows discontinuity as the rule, not the exception. Evidence for the first forms of life dates back to about 3.5 billion years ago, as microscopic, single-celled organisms. These bacteria-like cells ruled the planet in evolutionary stability for almost 1.5 billion years—about a third of our planet’s history. Fossils then show an explosion of diversity resulting in the three cell types that founded
the three domains of life. One of those cell types was the first ancestor of everything that is commonly considered life today: animals, plants, fungi, and algae.

  According to the fossil record, another 1.5 billion years passed in relative equilibrium before life on Earth experienced another evolutionary burst approximately 541 million years ago. This rapid diversification of multicellular life, known as the Cambrian Explosion, was vital to transforming simple organisms into the rich spectrum of life as we know it today. Over a time span of 20–25 million years—less than 1 percent of Earth’s history—life evolved from prehistoric sea sponges to land-dwelling plants and animals. The basic body shape of every plant and animal species alive on the planet today can be traced back to organisms born of the Cambrian Explosion.4

  The known fossil record indicates that species suddenly appear, persist, and more often than not, disappear millions or billions of years later.

  In 1972, Darwin’s foundational work in evolutionary theory was successfully reinterpreted in the context of such a punctuated fossil record. Evolutionary biologist and paleontologist Stephen Jay Gould published his new theory of evolution in Punctuated Equilibrium,5 “hoping to validate our profession’s primary data as signal rather than void.”6 Punctuated Equilibrium suggests that the absence of fossils is itself data, signaling abrupt bursts of evolutionary change rather than continuous, gradual transformations. According to Gould, change is the exception. Species stay in equilibrium for thousands of generations, changing very little in the grand scheme of things. This equilibrium is punctuated by rapid explosions of diversity, creating countless new species that then settle into the new standard.

  An essential piece of this evolutionary theory is scale. In punctuated equilibrium, Gould focuses on species-wide patterns of evolution, whereas Darwinian evolution draws insight from the traits, survival, and reproduction of individual organisms through generations. A finch and its direct descendants, for example, will certainly show small changes in form as they are passed down through the generations. Much like agricultural corn has become plump and juicy from generations of breeding and interbreeding only the plumpest and juiciest kernels, finches with beaks that enable them to access and eat their main food source most easily will pass their beak structure on to future generations. Some finches have a longer beak to reach insects in small cracks; others have a thicker, stouter beak to crack open seeds. But the crucial point Gould makes is that a beak is still a beak—this is not a revolutionary innovation. It is the difference between graphite and ink, not pen and printing press.