KNOWLEDGE-BASED SERVICES: IT TAKES A BUNCH TO TANGO
The world is undergoing a tsunami-like economic transformation that is throwing the young and the old alike for a loop. And even when Argentina is experiencing a rough patch with its economy playing havoc, runs on the dollar, inflation reaching stratospheric heights, and surreal key rates, there is another side to it: that of insanely driven, innovative, and forward-looking entrepreneurship attempting to leapfrog into the future.
No doubt, technology ushered in not only unthinkable methods for doing business, but also a wholly new worldview. State-of-the-art tech, hyper ingenuity, ultra innovation, and latter-day entrepreneurs are metamorphosing the global economy and, counterintuitively to many doomsayers, Argentina has not been left in the dust. Wait.... at a scale, of course. Local start-ups and established firms are reinventing themselves at light speed in the face of an unfolding disruption while leaders and policy makers are accompanying this attempt to create a future-proof economy.
In order to shed some light on what came to be known as KNOWLEDGE-BASED SERVICES (KBSs), the epitome of Peter Drucker’s knowledge age, IterTranslations turned to an expert on the subject, PhD in economics Andrés López, who has been wittingly trapped in the KBS’s web since, we may venture to say, their very dawn.
Full audio of the interview in Spanish above. It takes a few seconds to begin
Economist graduated from the University of Buenos Aires
PhD in Economics from the University of Buenos Aires
Director of the Department of Economics of the University of Buenos Aires
Andrés, when we speak about Knowledge Based Services (KBSs) what are we in fact speaking about? Most people usually and mistakenly associate them with India, with very low-end services, but actually they are very wide-ranging, including at present a sizable number of industries.
Well, services have always been - at least to us, economists - the ugly duckling in the sense that traditional discussions on productive structure revolved around the agricultural industry, particularly in Argentina, and services were a sector just a few people paid attention to. Services such as banking, utilities, and transportation were some sort of production support. A few decades ago, a set of activities that we now know as knowledge-based services (KBSs) began grabbing attention and comprised wide-ranging fields like, among others, software, engineering and architecture consulting, accounting and legal services, marketing intelligence, R&D, audiovisual services, design, and so on, which have relatively high-skilled human capital, and the use and generation of knowledge as a common thread. Most of these services support other activities and allow them to boost productivity or improve goods offerings. Let’s take a cell phone as an example: today a cell phone is hardly used to make phone calls, it is a whole set of apps based on software programs that enable people to play, watch videos and the like. And the same goes for a car: it has a GPS, a computer onboard that interacts with you, and all this will grow in the future through Artificial Intelligence (AI). Your refrigerator will also interact with you through the Internet of Things (IoT). On the one hand, we have what is known as servification of the economy, that is, the incorporation of highly sophisticated services into traditional activities. On the other hand, we have precision agriculture, with which instead of the traditional agricultural engineer checking how the harvest is developing, there are people providing services based on satellite data or historical records that afford guidelines to improve herbicides or animal feeding and so on. This permeates every economic activity. Also, people are consuming more and more entertainment through an increasing multiplicity of channels, with a resulting explosion of video game markets, mobile apps, and ever-growing platforms. Through Netflix, for instance, you have the emergence of unprecedented audiovisual offerings, along with a creative services universe, etc. But there is something else off the radar, the outsourcing of activities in the industrial sector, the energy sector, and so on and so forth. In the past, a major company, say an automaker, had very likely its own IT or accounting or legal department, which in the last few years have been outsourced. When people think of IBM or Hewlett Packard, they think of computers or printers makers, which is still true, but their core business today is services such as IT support, accounting support, human resources, etc. So, a carmaker makes cars and now it outsources the rest to specialized units which have optimized processes to provide this type of services and free them of these non-core activities.
In the past, as from Adam Smith, we thought of the division of labor in industrial processes, but for the last 20-, 30-odd years such division of labor has also comprised service processes, which used to be performed within a company and are now outsourced. At one point you mentioned call centers, which may be in-house or outsourced to specialized companies; for example, American Airlines core business is not getting calls from people, but selling airfares. In addition to this phenomenon of the servification of the economy, the outsourcing of non-core activities, and the explosion of the entertainment world, there are other factors, but the ones I mentioned before are very likely the main ones. We must also point out that all these activities can be provided on the Internet. India is the main exporter of this kind of services. They began with very basic activities, the clearing among airline companies, that is, sharing the costs of a ticket among all the companies that have to do with it. This case was easy because airline navigation has always been computerized, but in the 1980s it would have been impossible for IBM Argentina to do the accounting of a German company due to all the physical paperwork involved, which is today cost-free and done virtually in real time. This allows lots of countries to go into a global market as knowledge-based service providers, which governments also find very interesting as they can not only export soybeans and cars, but also software and accounting services. This goes from call centers - very low end, with no special skills required, just a foreign language eventually and not a significant export in Argentina - to way more sophisticated activities; for example in Cordoba, a small group of McAfee, which people associate with antivirus, works on McAfee’s security systems for US McAffee. These people are not making phone calls, they are doing research in an area like IT security. Of course the bulk of the market is low end, routine jobs, but we have a whole gamut comprising architectural design, engineering works planning, pharmaceutical research, and so on, which of course will never be the main share for market size reasons. No
Based on what you say, we can infer that there are two markets for these services, an internal one, and an external one. People are already used to the idea that when they pay for services like Spotify or Netflix, they are importing services. But there is an interesting domestic market through the interconnection of companies.
When you read academic literature on this subject, you can see that in Europe they are not thinking about exporting these services, but about how to interlink companies within Europe in order to boost competitiveness. Instead, in the developing world is all about exporting perhaps because domestic markets are less sophisticated with less demand for this type of services. For example, if any given car has a GPS installed, it is sort of unlikely that the company, whichever, say Toyota, will entrust Argentina to do it because Toyota has someone else to do it somewhere else. As many of these industrial markets are in the domain of multinational companies that take rational decisions from a corporate standpoint, they generally concentrate certain activities in a given location, and it is unlikely that a company will outsource an AI system to Argentina. There are still chances in certain fields. Before we spoke about precision agriculture; we have a powerful agricultural sector, and in this kind of service you have to be deal personally with the producer. You can do it remotely, however you are not working with a multinational, but with an individual. The producer might buy a service from, say, Australia that also has satellites and drones, but he/she will very likely want to deal with a local provider for cultural reasons and that’s why there are many local companies involved in this service. There are also idiosyncratic opportunities, a car may be assembled anywhere, but when we speak of oil exploitation, an oil field like Vaca Muerta is not the same as others. Some companies, in the wine industry for example, are not fully technified, but in this industry there could be more actors demanding this kind of services and have a more flourishing market.
This might be leading, without the man on the street being aware of it, to a new economic order, what the economist Joseph Schumpeter called creative destruction, and this also gives rise to detractors and supporters. What do you think the origin of all this was? Was this something that evolved naturally or some sort of Deus Ex Machina that could save many people by giving them work opportunities, breaking through borders, in the face of such an abrupt automation of activities?
In my view, when it comes to complex phenomena, there is no plan behind. Obviously, things are not totally random. In this case, you have the emergence of technological systems that allow transferring, processing, and saving great amounts of data at low cost, in real time, and corporations increaseingly tending to outsource non-core activities in order to cut down on costs and specialize in their core business….
Which for security reasons would have been unimaginable not long ago.....
Well, data security is not only about individuals, but also about the whole universe of businesses. Cloud computing has been used for some time now, so companies instead of having their files and apps on their machines they use outside servers, but data is discussed with the companies, like Google, taking care of it. There are many legal and regulatory questions about this.
Now, going back to our point, we mentioned technology, outsourcing for costs and streamlining reasons, and then, why are India and now China participating in this? Because they have millions of people willing to provide these services. When I began to study this field, in the late 1990s, India exported many of these services in a modality called body shopping, that is, the Indian programmer went to Silicon Valley, worked, and went back to India. The wage differences were so big that companies preferred to pay for their two-way airfares, their stay, and they still did good business. This poses a concern, the demand for skillful people in IT or engineering is behind the supply. This lack is not only Argentina’s problem, but also the States’. There are a few reasons for it: people might think these careers are hard - you need some mathematical skills, abstract thinking - or they regard them as nerdy careers. Many people want to become creatives and do publicity, but very few people want to do industrial engineering to meet our present needs. India and China do not have this problem as they have a lot of people studying these careers and on much lower wages vis-à-vis other countries. So you have 3 factors: companies outsourcing non-core tasks, a whole bunch of guys in India and China much less expensive than those in developed countries and willing to perform the tasks that others are not willing to, and a technological need that brings together supply and demand. Everything adds up.
Now, you mentioned automation before, but don’t forget that automation may also come from other sectors, for example an algorithm can write code lines and replace a programmer, which in fact is already taking place. A case in point is Web pages on which you hardly ever find a phone number. They lead you to interface with bots and just when you reach a dead end, a human being takes over, as a last resort.
Another striking thing - and surprisingly Trump is not talking about this - is that in the US someone came up with the idea of taxing activities outsourced as some sort of punishment because when a US company outsources an operation to India, a job is lost in the States. The US company may argue that it does not find the right fit for that operation. We are in a world with threatening trade wars, we used to know goods trade wars, not yet services trade wars because physical goods are easy to spot, but what goes on among computers is way harder to control, however it should not be ruled out.
As you were speaking, I was thinking that to many people virtual services are still something abstract next to the materialization of a car, many people are being taken aback by this phenomenon. Talking of phenomena, how are KBSs growing? How are they spreading? What’s their share in the world’s GDP? Are they reaching significant levels?
Services as a whole are the bulk of the global GDP. I cannot tell you now the exact figure off the top of my head, but all in all services in developed countries, and in those with higher middle income in Latin America, like Argentina, amount to 60% of GDP and labor. If you take a look at the highest labor rates increases, they are in services. Of course some fall into the knowledge based ones and others are traditional ones.
Nevertheless, one of the criticisms that knowledge-based services receive is that they will never be a significant source of employment because a sizable share of the population should be trained in particular skills and that would take a long time and a huge investment.
If my memory serves me well, Argentina receives around US$7 billion annually from the export of knowledge-based services. Based on this, we did some calculations, checked them out with people involved in the field, and this implies about 120,000 people employed, it is no minor number. Of course to be in this field you need skillsets and therefore it is not the sector that will do away with structural unemployment in lower classes. But, even so, there are job opportunities. People think that in order to work at a software company they have to be college graduates, that is not true. In fact most people who work at software companies dropped out of university, though most of them went to university and then dropped out. But there are more basic tasks for which you don’t even have to set foot at university and in one year you can learn how to program, and if you know how to program, you become employable. Many times employability requires what is known as soft skills, that is, being able to interact in a work, corporate environment, and that might also present some barriers to some people. The Argentine government tried to do something with this issue through a program called 111,000, training people who were dissatisfied with their jobs or unemployed in programming.
I believe coding is beginning to be compulsory as from grammar school in the US...
Maybe. Today programming is way easier than in the past, there are more accessible programs. No doubt people who attend university should know how to program. I think that these jobs require certain basic skills, but I also think there are some tasks that people who did not attend college can acquire to become employable.
In one piece you wrote, you dealt with something indeed gripping: the dematerialization of the economy, and with just a few examples people will know at once what you are speaking about because it is what they consume or what they’re learning to consume.
I am old school and if someone comes home, they will see a wall covered with vinyl records, CDs, and books, and even video cassettes. Younger generations do not have any of these objects. Books might have miraculously put up a harder fight, but vinyl records and CDs have become a collection item, they are not in a massive market, they are just for music lovers, while DVDs and CDs are endangered species as people watch everything online. Therefore, books, movies, and music have become dematerialized.
This has impacted several industries. The music industry has been hard hit. A huge number of US bookstore chains have gone out business ....
..... the value chain. Bookstores, for example, have preserved a niche audience. But ... this was just the first step. This transformation we have been speaking about is already past tense. Then the second step is coming that might be the dematerialization of other objects we still see in their physical format. How long will it take for someone to implant a chip on us for us to see virtually what we today see on phones, and project it on walls like some Black Mirror episode? Additionally, something else that some people are already pointing out will happen, telepresence. Today you go for some medical procedure and the physician is next to you, but in the future he may well be managing a mechanical arm from the Philippines. Telemedicine already exists. Operations have been performed remotely although it is not still massive. In fact when a doctor performs magnetic resonance imaging, he is not with you, but in some other room, well, why not in a distant location then? And some people are thinking of some kind of virtual reality Skype. Today virtual education exists, but in my view, it does not replace personal contact, but how long will it take for someone to be present in a class as a hologram if there is perfect wifi connection? That will be telepresence.
Going back to medicine, at the Italian Hospital in Buenos Aires there is a machine that operates and a doctor manages it from a computer, but it could very well be an American or Russian expert operating with his own software from anywhere else in the world.
Well, everything has pluses and minuses , but when you are in a remote town, for example, and even when you need the machine in question, it is perhaps easier to install a machine than take a doctor to that place. That is to say, there is a whole set of potentialities that may lead to not only the dematerialization of tangible goods, but also to services, which today need personal contact, being performed remotely.
What is the network of knowledge-based services in Argentina like? Is it interlinked with companies? Is it wholly widespread or is it in its infancy?
There is an organization, with many years of existence, called Argencon that brings together the largest exporters of knowledge-based services, foreign and local ones, I do not know how many members it has, but they amount to a significant number. This is the sector more focused on knowledge-based services exports, but also the Chamber of the Argentine Industry of Software, CESSI, is very consolidated on the market, with public recognition of the private sector. The thing is that sometimes people, even those in the know, downplay this kind of initiatives. In turn, I don’t agree with those who say that everyone is turning to services. When we say that you will interact with a refrigerator, it is because a refrigerator was manufactured and when when we speak of precision agriculture, it is because someone is growing wheat. But I do believe that these activities are increasingly adopting these services.
In general, reality changes first and then institutions change. It’s a fact.
Initially in Argentina these services were going to have tax incentives, but as from this year, they will be taxed. How do you think this will impact?
If we speak of promotion of services, Argentina has had for some time a Law of Software that sets tax reductions. However, last year - for the first time - the supply of services began to be taxed because of Argentina’s special fiscal needs, despite the fact that the current administration had stated repeatedly that services were a priority in its agenda. This is economic politics; when other sectors began to be taxed, the service sector could not go unscathed. They set a tax of ARG$ 4 per dollar, but the dollar moved from ARG$20 to ARG$40. Of course an agricultural producer may say that with the dollar hike his return in pesos improved as his exports are in dollars, but, in turn, all his inputs rose in price because they are mostly imported. In this case the situation is quite different because knowledge services are largely all labor intensive with just software - except in the audiovisual field - so the devaluation has a next to nil effect. What these companies may argue is that the rules of the game changed for them, that is, foreign headquarters were persuaded to come here and suddenly they are taxed. But I think that if this more competitive exchange rate is consolidated and taxes begin to gradually go down, this will have no major effect.
Also, the government will send to Congress a Law of Economy of Knowledge which will expand this tax reduction to all these sectors of knowledge services and also to some industrial high tech sectors like that of satellites.
One piece from the Harvard Business Review stated that one edge these activities have over others is being very adaptable to change, they can adapt easily to what people demand while others, say the automobile industry, are not. And something that came to my mind is that this adaptability might be translated into hopping easily through tax regions, you can pack up and go, for instance, from Argentina to Uruguay.
Sure. These industries are what in jargon are called footloose industries. Call centers are the extreme case; if wages increase in dollars in one place, I move somewhere else. If you are Volkswagen and your salaries move upwards in dollars, making a decision to move to another place is more complicated because you have a huge investment in fixed assets, or you have to dismiss lots of people, or you have contracts, or a distributors network, you will not leave a place overnight. For example, in 2001 we had our worst economic crisis and the automobile industry put up with it. If at the time service companies had been affected instead, they would have flown away, because it is easy for them to leave, there is virtually no sunk cost. There is a lot of arbitrage in this field. I have spoken with people from international companies who come here to explore the market and one of the first things they do research in is tax incentives. It is easy for them to move around. Many times they work on an operation basis, by projects, so when one project is over, they can easily move to another more convenient place such as Uruguay, India, Colombia, or Costa Rica. You pay staff severance, you sell the real estate you might have, and that’s pretty much about it.
You, when doing research, must have dealt with lots of people. You have also spoken about the incentives given, even with back-and-forths, by policy makers, but what about the other side, the number of people interested in providing these services? We already have unicorns, like Mercado Libre, people who were very interested, had a plan, and carried it out. Is there a market for that or do you still see people who are fully unaware of the subject?
Well, the world of entrepreneurs is a smaller world than that of wage earners. In the younger segments of the population, there is usually a huge number of people with ideas. There is a big number of business accelerators in Argentina packed with people with ideas. They are closer to the next frontier that is AI, Data Science, Virtual Reality, that is, the next generation of technology. A start-up that makes software for companies is already sort of old-fashioned. Of course this new generation of companies need financing leverage, they have to survive what is called the Death Valley, in other words, I have a good idea and begin doing business, but if I don’t scale I die. These businesses are born to be global, not domestic.
Are there investors in Argentina for this kind of businesses?
There are, but of course not nearly as much as in the States or Israel because you have the chicken/egg dilemma. You have people with ideas, however you not only need people with ideas, but also with the ability to carry out projects, which is not the same thing. That’s why accelerators aid them by asking them questions about their target audience, plans of expansion, a planned timeline, sales plans, and so on and so forth. But the higher the number of risk companies, the higher the number of investors in risk companies who put up money in 20 companies to bear fruit in some or one of them. Also, the higher the amount of available capital, the more people willing to do business. Something is brewing. There’s some progress made. A while ago there were no accelerators or there were many fewer. At times, start-ups try to get financing abroad, but the domestic capital market is still very small.
And we don’t have those angel investors like Reid Hoffman (co-founder of PayPal and LinkedIn) who live on that.
No, we don’t have them.
Surely someone who studies these subjects does not have a mainstream brain, he may love technology, he is forward-looking, and - in all likelihood - likes science fiction. How do you see, on a global scale, the path and potential of these activities and how do you see it, more selfishly, in Argentina.
Well, it seems that intangible assets are more and more important than tangible assets. In the past, countries competed for steel production. Of course none of them competes in code production, but now they do compete for knowledge. The US-China war, at the end of the day, is about that: intellectual property, it is not about economic dumping any more. That crossed the point of no return. What about the implications for the world? That is difficult to predict. To give you just one example: self-driving cars, let’s suppose that every problem - accidents, insurance, technical factors - are solved. The Hugo Moyanos of the world (TN: An infamous Argentine union leader) may claim that they have been left out of a job, I don’t know. Will they be selfish and opposing progress? That may happen with any profession. If doctors were affected, they might react likewise. The thing is that all these most disruptive revolutions, which is not only knowledge-based services, but also automation, AI, etc have no minor social implications and also consequences on labor division on a global scale, competitive factors and so on, not mentioning data questions. Today companies we operate with every day on the Internet sell our data, this is absolutely known, which presents a lot of good things because they provide us with customized ads, but it also poses regulatory concerns as well as market concentration concerns, it is not that a thousand companies have our data, no way, just one or 2 have our data. The apocalypse presented by science fiction in the past might be present nightmares in the shape of fake news and the like.
It’s a whole new world. Even Luddites are different now.
What will happen with Argentina? Well, many of the things that can happen to Argentina will be decisions taken somewhere else and I don’t mean this in an imperialist, chauvinistic way, I just mean that Argentina will not be a big player in this game. What Argentina could do is generate, as you mentioned before, flexible and streamlined capabilities in order to adapt to a world that is coming and bear in mind that we are way behind, still defining university careers, very rigid things, thought out for a world that no longer exists.
There are also emerging - you spoke of business accelerators - new activities or professions of the Industrial Revolution 4.0, they didn’t exist just a few years ago or at least not massively.
There are many professions created in the past 4 or 5 years and you have to train people. Besides, people will live longer, and having just one profession throughout your life will no longer be the case.