The Paradox of Applying AI

The Paradox of Applying AI. AI, Martec’s Law, and the Management… | by Tristan Post | Medium

AI, Martec’s Law, and the Management Challenge of the 21st

Century

An analysis of the history of technology shows that technological

change is exponential, contrary to the common-sense “intuitive
linear” view. So we won’t experience 100 years of progress in the 21st
century — it will be more like 20,000 years of progress (at today’s
rate). The “returns,” such as chip speed and cost-effectiveness, also
increase exponentially. There’s even exponential growth in the rate of
exponential growth. Within a few decades, machine intelligence will
surpass human intelligence…

Ray Kurzweil (2001) “The Law of Accelerating Returns”

Technology progresses at an exponential rate. One of the first people to

denote this trend was Gordon Moore, co-founder and chairman
emeritus of Intel. Moore predicted in 1965 that the number of
transistors that fit on a computing chip doubles approximately every
two years. Moore’s law not only inspired futurist’s Ray Kurzweil’s Law
of Accelerating Returns, but would set the pace for our modern digital
revolution, as his observation had widespread impact in many areas of
technological progress, including artificial intelligence (AI).

Danny Hernandez and Tom Brown from OpenAI observed that AI

models are becoming cheaper to train at an exponential rate faster
than Moore’s Law, as algorithmic efficiency and hardware efficiency —
two key driving factors for the advance of AI — are growing
exponentially.
AI models becoming more efficient
Compute usage for AI models has increased exponentially.

Looking ahead, we can only speculate as to what decades of

exponential improvement in the efficiency of AI algorithms will bring
to the future. We have already observed major breakthroughs in the
last years, when we witnessed AI algorithms coming at par — and even
surpassing — human capabilities. Algorithms such as AlphaGo, GPT-3
or AlphaFold are impressive breakthroughs that pushed the
boundaries of what seemed possible and have defined the history of AI.
However, we must emphasize that the idea that AI is progressing
exponentially is slightly misleading, as anyone who has used a
conversational assistant might tell you. My experience repeating
impatiently my commands to Alexa, who has been my companion for a
couple of years now, sometimes leaves me wondering if there is any
progress at all. Similarly, if the AI applications driving self-driving cars
would have progressed exponentially, I would not always have to ask
my brother to pick me up with his car from the train station whenever I
visit home. When I say AI is growing at an exponential rate, I thus refer
to the growing range of applications and capabilities that we see in the
field of AI.

As developments in AI speed up, organizations must react in order to

keep up and prosper. However, many organizations are not adept at
changing, especially as they grow in scale. If a company increases in
size it also increases in complexity and bureaucracy. We human beings
are limited in our ability to organize and handle complexity and scale.
According to Charlie Munger, investor and vice chairman of Berkshire
Hathaway, the greater the number of people working together in an
organization, the more bureaucratic, self-interested and dysfunctional
they tend to become:

“They also tend to become somewhat corrupt. In other words, if I’ve

got a department and you’ve got a department and we kind of share
power running this thing, there’s sort of an unwritten rule: “If you
won’t bother me, I won’t bother you and we’re both happy.” So you
get layers of management and associated costs that nobody needs.
Then, while people are justifying all these layers, it takes forever to
get anything done. They’re too slow to make decisions and nimbler
people run circles around them.”
Entrenched interests slow organizations down and create resilience.
Compared to the exponential rate of change of AI technology,
organizations change at a logarithmic rate. The idea that technology is
changing faster than organizations is at the center of Martec’s
Law formulated by Scott Brinker, founder and chair of the MarTech
Conference. Brinker sees the gap between the rate of change at which
technology progresses and the ability of organizations to adapt as the
quintessential management challenge of the 21st century

Martec’s Law: Technology changes exponentially (fast), yet organizations change

logarithmically (slow)

The same challenge can be observed when we look at the struggles of

organizations starting to adopt AI: Many still struggle to embrace AI or
fail to extract value. One study found that only 6% of companies have
adopted AI. A survey from BCG from 2019 found that “many AI
initiatives fail. Seven out of 10 companies surveyed report minimal or
no impact from AI so far. Among the 90% of companies that have
made at least some investment in AI, fewer than 2 out of 5 report
obtaining any business gains from AI in the past three years.”
Recent research from 2020 found that even though “organizations are
using AI as a tool to generate value […] the majority of companies [are]
still struggling to capitalize on the technology.”

Teslas, who has adopted an AI first approach, saw its market value skyrocket compared to
traditional car makers

Even though many still struggle to turn AI into value, they understand
the opportunities that AI can bring for their organization. The benefits
of adopting AI can be seen from the handful of (primarily tech)
companies that have been able to transform their organizations to
embrace and adopt AI at scale. These so-called AI-factories have
shifted their strategies to put AI in the center of their organizations’
business and operating models. Google became one of the first
companies to start this transformation when its CEO Sundar Pichai
announced in 2017 that Google would shift from a mobile first world to
an AI first world. An AI-first approach allows organizations to
automate decision-making, thereby transforming the way they create
and capture value. Not only have these companies been able to
increase their competitive advantage, but they have been rewarded by
skyrocketing stock prices. As of writing this article, all companies
valued over 1 trillion have adopted an AI first approach. One of these
AI first companies is Tesla, whose market value reached 1.01 trillion
USD in October 2021, making Tesla worth as much as the next 10 most
valuable global automakers combined, even though it sells only a
fraction of the cars of the others.
The paradoy of applying AI

The faster the field of AI progresses and the slower the rate of adoption
the greater the gap between expectations and practice will become. The
challenge is that AI requires fundamental organizational change. Most
companies, however, are far away from adopting an AI first approach,
as this requires a clear vision and a holistic approach to transform the
organization. This, in turn, requires rethinking and commitment over
all divisions and hierarchies. Historically, there have been especially
many large and successful companies that seem to be more likely
to struggle when new innovations require them to change their
organizational structures and reinvent themselves.

For instance, despite inventing the digital camera, Kodak struggled to

transform themselves and eventually filed for bankruptcy in
2012. Blockbuster did not manage to adapt their business model to the
internet and so lost out to Netflix, one of the big companies applying AI
at scale.

So, what should companies do?

First of all, there are no quick wins. A holistic transformational change

is not an easy task and requires substantial resources. However, doing
nothing is not an option. McKinsey predicts that AI technologies could
lead to a performance gap between front-runners and nonadopters. As
with Tesla, front-runners are likely to benefit disproportionately, while
late adopters might see their cash flow decrease as they become less
competitive and eventually might face similar consequences as Kodak
or Blockbuster.

One way to reduce the gap between technological change of AI and

organizational change is to become more agile and start setting up the
company in a way that enables the adoption of AI. Organizations must
make sure they have the right structures in place to adapt, innovate,
and take AI to scale. This process starts with acknowledging the value
that AI can bring to the organization, defining a vision for AI, working
on a strategy for building an AI-powered organization, and enabling
data driven decisions. As AI can help to automate decision making it
also empowers the whole organization to become more agile and
responsive, increasing the rate at which an organization can adapt to
change and incorporate technological progress.
Another solution could be an organizational “reset”. Because of their
small size and their entrepreneurial can-do attitude, startups often
show a high degree of flexibility and innovation. This agility allows
them to adapt to change to a greater degree than the more complicated
bureaucracies found in large organizations. These startups do not have
to rely on old legacy systems and processes that slow them down. At
the heart of the organizational reset lies the question: “If we were to
build the organization from scratch, what would it look like?”
Organizations can achieve a reset through an internal reorganization or
by spinning off a new group that can operate with a fresh start, without
the inertia of the existing organization. Digital transformation
initiatives typically take one of those two approaches to leapfrog to a
new baseline on the technology curve. As organizational resets can be
extremely disrupting, some larger organizations have created
incubator-like structures to systematically spin-up small,
intrapreneurial startup teams.

Looking back, we see that most organizations will not be able to adapt.
Ultimately, a reset will happen when a company fails and the resources
are reallocated to the market. This happens much more often than we
do realize. From 1955 to 2014 88% of Fortune 500 companies failed ,
having undergone ‘creative destruction’. Even Jeff Bezos believes that
one day Amazon will face inevitable death: “[…] I predict one day
Amazon will fail. Amazon will go bankrupt. If you look at large
companies, their lifespans tend to be 30-plus years, not a hundred-plus
years.”
AI brings a lot of opportunities. For many existing organizations its
adoption will be a challenge. However, it is not too late to start the
necessary transformation. Many organizations are still at the beginning
of this process. As the technology progresses they will face increasing
competition from other players more capable of leveraging AI.