Graeme Philipson
October 20, 2016

Gartner spruiks algorithm economy

Data

Gartner spruiks algorithm economy

Peter Sondergaard: At the cutting edge of terminology in a growing market for the same

Here’s a new phrase for you, from the jargon generation factory, otherwise known as research group Gartner.

The firm’s latest predictions on the size and growth rate of the Australian IT industry says that expenditure on information technology in Australia will reach $80 billion this year, as the ‘algorithmic economy’ approaches.

The what? The ‘algorithmic economy’? I used to work for Gartner – 20 years ago – and we used to love making up new trend phrases. But this one’s a beauty – it rolls so nicely off the tongue.

The company’s senior vice president and global head of research Peter Sondergaard introduced the new phrase at this week’s annual Gartner Symposium on the Gold Coast. It’s one of the biggest events on the IT calendar, attended this year by more than 1400 CIOs and IT vendors.

“Interconnections, relationships and algorithms are defining the future of business,” Mr Sondergaard explained. “Gartner predicts worldwide spending on Internet of Things (IoT) hardware will exceed US$2.5 million every minute in 2016.”

“In five years, a million new devices will come online every hour. These interconnections are creating billions of new relationships. These relationships are not driven solely by data, but algorithms.”

Ah – algorithms. A mathematical term that has entered the popular lexicon. “a small procedure that solves a recurrent problem,” or a “self-contained step-by-step set of operations to be performed.”

In the modern world the term is usually used to describe a computerised process. Algorithms act on data, and we have a lot of that.

“Data is inherently dumb,” Mr Sondergaard said. “It doesn’t actually do anything unless you know how to use it. Algorithms are where the real value lies. Algorithms define action. Dynamic algorithms are the core of new customer interactions.”

So, there. We have moved beyond data, and big data, to the New World of algorithms. Mr Sondergaard gave examples such as: Amazon’s recommendation algorithm that keeps customers engaged and buying; Netflix’s dynamic algorithm – built through crowdsourcing – intended to keep people watching; and the Waze algorithm that directs thousands of independent cars on the road.

“The algorithmic economy will power the next great leap in machine-to-machine evolution in the Internet of Things,” he said.

“Products and services will be defined by the sophistication of their algorithms and services. Organisations will be valued, not just on their big data, but the algorithms that turn that data into actions, and ultimately impact customers.”

So what does this mean for the Australian IT industry? Gartner’s figures say local spending (which includes New Zealand) will reach $80 billion in 2016 this year (“as the algorithmic economy approaches”), a modest 2.8 per cent increase from 2015, driven by digital business and the connected world.

Gartner does not break the numbers down by industry sector, but I know from my own work there and from looking at the numbers from IDC and Gartner’s other competitors that the largest part of this is from government.

IDC puts the annual spend by the Federal Government at around $6 billion, and the NSW Government will spend $2.5 billion a year, a figure announced at the recent GovDC conference.

Take out the $12 billion of the $80 billion accounted for by the Kiwis, to give $68 billion for the size of the Australian IT market.

If you add up IT expenditure by all the other states, in proportion by population, and you get federal and state government IT expenditure of around $14 billion, or about 20 per cent of the total.

And it’s going up, as governments increasingly put their services online. In the private sector that is called by Gartner digital revenue.

“CIOs in the region expect their organisation’s digital revenue to more than double in the next five years, from 14 percent now to 32 per cent of total revenue,” said Mr Sondergaard. “Digital business is when new businesses designed with both the physical and digital world are brought together."

“As analogue revenues flatten and decline for many industries, businesses are shifting to digital revenue from digital business. Global digital commerce is now over $1 trillion annually.”

He said that leading CEOs have told Gartner that their digital revenue will increase by more than 80 percent by 2020. “For digital business to succeed, companies are creating innovation units. New digital initiatives are running alongside their traditional analogue businesses.

“Organisations are creating separate business units, focusing on digital, separate from their traditional businesses,” Mr Sondergaard said. “They are trying new ways of reaching the customer, of running operations, of driving diverse innovation.

“They are acquiring and investing in digital technology companies, not waiting on existing suppliers to build capabilities because they have to start in a different place. “The new platform is less about data gathering, and more about intelligent algorithms to act on the data.” Those pesky little algorithms again.

He also spoke at length about cyber security, an issue that has risen to the top of the IT agenda in recent years.

“Many companies are concerned with old technology risks. They’ve become obsessed with external hacks, chasing the impossible goal of perfect protection. But 65 per cent of CEOs say their risk management approach is falling behind."

”Organisations know this, and they’ve slowly devoted more resources to security, as safety and quality issues have come more dominant factors. Gartner predicts that by 2017 the typical IT organisation will spend up to 30 per cent of its budget on risk, security and compliance, and will allocate 10 per cent of their people to these security functions. That’s triple the levels of 2011.

“You can’t control the hackers. You can control your own infrastructure by using more automation, more outsourcing, and more network-based algorithms,” Mr Sondergaard said.

“Simplify your systems. We must move away from trying to achieve the impossible perfect protection, and instead invest in detection and response.”

He said most malware lies dormant, unnoticed, for more than seven months before it is activated or detected.

“IT leaders must get better at sensing these dormant threats. CIOs need to rethink their security and risk investments. Gartner recommends that enterprises move their investments from 90 percent prevention/10 per cent detection and response, to a 60/40 split.”

Perhaps they need better algorithms.

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