The Information and Services Economy a.k.a. Business Architecture and Services Science

1. The Information and Services Economya.k.a.Business Architecture and Services Science IS210 Profs Bob Glushko & Anno Saxenian UC Berkeley School of Information Fall 2006

2. Outline: Week of August 29-31 • Why study ISE? • What is ISE? • Early commentators on ISE • Definitional challenges • Explanations for growth of ISE • Globalization of ISE

3. Why study the service economy? • Service sector is largest sector of most economies • Services represent over 78% of US GDP • > 70% of GDP in other developed countries • > 52% in developing nations • Rapid growth of service sector in recent decades • Fastest employment growth in service sectors • Professional & business services #1 • Health & education services #2 • Leisure & hospitality services #3 • Manufacturing employment stable or falling

4. What is the services economy? • A residual in economic analysis • Primary sector: agriculture & extractive industries • Secondary sector: manufacturing industry • Tertiary sector: services (everything else) • What is included in the service sector?

5. Structural theories of development US employment, % share

6. The fate of manufacturing? • Share of manufacturing in US GDP has remained relatively stable since 1980, if measured in constant dollars • America is world’s largest manufacturer, Japan is #2, China #3 (measured by output) • But, China has six times as many manufacturing workers as the US • China, South Korea, Taiwan, Singapore have all lost manufacturing jobs since 1990

7. Early observers of service economy • Daniel Bell, The Coming of Post-Industrial Society: A Venture in Social Forecasting ,1973. • Rise of white-collar information and service jobs, liberation from drudgery of manual work, professionalism & creativity • Robert Reich, The Work of Nations: Preparing Ourselves for 21st c. Capitalism, 1991. • Inherent inequality of 21st c. economy: Routine producers, in-person servers & symbolic analysts • Peter Drucker, “The Age of Social Transformation” 1994. • Knowledge work requires not only new forms of work organization (teamwork), also social and political innovation

8. Defining the service sector, I 1992 SIC-based service sector, US census • Finance, Insurance, Real Estate Industries (FIRE) • Retail Trade • Services Industries • Transportation, communications, and utilities • Wholesale trade

9. Defining the service sector, II 1997 NAICS-based service sector, US Census • Accommodation and Food Services (Sector 72) • Administrative and Support, Waste Management, Remediation Services (Sector 56) • Arts, Entertainment and Recreation (Sector 71) • Educational Services (Sector 61) • Finance and Insurance (Sector 52) • Health Care and Social Assistance (Sector 62) • Information (Sector 51) • Management of Companies and Enterprises (Sector 55) • Other Services (Except Public Administration) (Sector 81) • Professional, Scientific and Technical Services (Sector 54) • Real Estate and Rental and Leasing (Sector 53) • Retail Trade (Sector 44-45) • Transportation and Warehousing (Sector 48-49) • Utilities (Sector 22)

10. Defining the service sector, III • Proposals for additional categories • Quarternary sector: information-based or information-oriented services (v. people-oriented services) • Quinary sector: health, education, culture, research • Re-definition of sectors • Limits of goods v. services • Tangible goods, intangible goods, services (Hill) • Data challenges • Inadequate, incomplete statistics • Blurring of manufacturing and service employment • Difficult to define and measure output of services • Quality and productivity changes misinterpreted

11. Explanations for services growth • Growing final consumer demand for services As incomes rise demand for “luxury” goods rises and increases demand for service output (high income elasticity of demand) • Lower productivity growth in service sector Productivity of labor in service sector fails to keep up with productivity growth in mfg. so services employ larger % of labor relative to other inputs • Globalization of trade Manufacturing jobs go overseas disproportionately, while service jobs are more locally tied

12. Explanations (cont.) 4.Growth of intermediate demand Role of services as intermediate input providers, due to both outsourcing/externalization of functions (design, legal) and rise of innovative new services and service providers/producers (software, e-commerce)

13. Irrelevance of old categories • Agriculture, manufacturing, services distinction (and its counterpart distinction, goods v. services) is outmoded—a barrier to understanding economy • Peter Hill’s categories: • tangible goods • intangible goods • services • Dramatic growth of intangible goods in recent decades due to advances in information technologies

14. Hill’s distinction: goods v. services • What distinguishes goods from services? • Goods are entities • Goods can be owned • Goods are tradable • Goods can be distributed to different locations and at different times but preserve identity • Separation of production/distribution from use is not possible for services

15. Tangible v. intangible goods • Intangible goods have all of the economic characteristics of tangible goods, but no physical dimensions or spatial coordinates • Intangibles have always existed, but have become far more economically significant • Originals that can be stored, transmitted, manipulated, replicated, distributed. • Blueprint, legal brief, software, musical score • Intangible goods: information- and culture- based goods (NAICS 51)

16. What distinguishes services for Hill? • All services involve relationships • Services cannot be produced without the agreement and co-operation of the consumer • Outputs of services are not separable from the consuming unit; no independent existence • Need for interaction between producer and consumer (customer and supplier) in service provision constrains location/scale of producer • e.g. surgery, massage, advertising,

17. How do advances in IT change things? • All services no longer locally bound: can provide services for remote customers • Medical screening via web • Custom application software development • Customer-specific research • Computer maintenance • Services transformed into intangible goods • Codification and re-use of information or cultural/artistic modules developed for individual client • E.g. software, accounting , consulting, architecture

18. Professional, scientific & technical services (NAICS 54) • Fastest-growing sectors (employment, output and productivity) in advanced economies • Includes finance, accounting, insurance, legal, consulting, graphic design, surveying, testing, etc. • Once a service, performed by individual practitioners, now can gain scale through re-use of components/modules of info or artistic output • About 45% of gross output by these sectors is intermediate output rather than to final customers • Aggregate services value-added to final manufacturing output now close to 25%

19. An alternative view of services Rapid growth of “services” sector result from re-organization of production and economy due to technological change and intensification of global competition. • Organizational changes are blurring boundaries of firms and sectors as supply chains open up • Web-based platforms and new software tools allow formalization and relocation of activities once considered local

20. Changing organization of production Intensification of global competition and pace of innovation destabilizing old organizational models • Shift from large-scale, vertically integrated companies to networks of specialized producers • Shift from mass production of standardized commodities to more highly differentiated output => Need to revisit theories of firm and economic behavior as well as management, law, finance

21. Dramatic growth of information-based goods IT allows unprecedented codification of knowledge and large scale storage, transfer, manipulation of info, even to geographically distant locations • New web-based platforms and reusable software components enable productivity gains that transform services as well as goods (e.g. Wal-mart) • Information systems allow geographic separation of production and consumption of services (e.g. global supply chain management, accounting)

22. Globalization of services? • 1st wave: Outsourcing and offshoring of IT/ software services--maintenance, Q/A, testing, porting, customization of applications, data processing • 2nd wave: Outsourcing and offshoring of IT-enabled services (e.g. legal and medical services, R&D) –potentially far more expansive

23. Information technology-enabled services • Research and development • Legal services • Accounting & financial services • Market research & management consulting • Architecture & technical consulting • Advertising • Manpower services (search, recruitment, etc.) • Engineering services • Industrial design services

24. Computer and software services trade

25. Trade in business, professional & technical services

26. Drucker’s “knowledge society” • Growing importance of specialists and specialized knowledge (applied knowledge) v. generalists • Shift from knowledge to knowledges • Requires knowledge workers to work in teams – teams, not individuals, as work units • If not employee, knowledge worker must have affiliation with an organization • “…the knowledge investment . . .determines whether the employee is productive or not, more than the tools, machines and capital ...”

27. Drucker on management in the knowledge society • Management is the distinctive organ of all organizations, even if they don’t use the term • Management is taught in business schools as a bundle of techniques & procedures (e.g. budgeting, personnel relations) • “The essence of management is to make knowledges productive.” • Management is a social function—and in its practice it is truly a liberal art

28. Management for Drucker • Management brings people together for joint performance—it is making human strengths productive in performance and human weaknesses irrelevant • Requires definition of objectives • Requires explicit assumptions about what organization does and doesn’t do • Requires strategy—means for achieving objectives • Requires organizational values, system of rewards and punishments, spirit, and culture • Twentieth century is century of organizations, will require social and political innovations