2000 Larson Lecture

Stan Davis, Ph.D.
Roger G. Larson Memorial Lecture
American Hospital Association
January 31, 2000
Washington, DC

I'm going to give you a high altitude view--past, present and future-of what I see going on in the economy and in your field. I'm going to begin with a very simple notion that everything that has a beginning has an ending and, therefore, it has a life cycle. Whether we are talking about a plant or planet, whether we're talking about a product or a business or an industry or an economy or civilization.

The first economies known to mankind were hunting and gathering economies; their life cycle was hundreds of thousands of years. The next one was an agrarian economy, and its life cycle lasted 10,000 years. The ones after that were the industrial economies, first born in Britain in the 1760s. The first one to end was here in the United States in the early 1950s. So, from first in to first out in the industrial economies, a life cycle that covered a scant 19 decades.

Since the early 1950s, we have been in a fundamentally different economy, and for the first 20 years of that, we didn't know that we didn't know that. We didn't know what to call it: an information economy, a service economy, a "shopping and gathering" economy. Whatever you want to call it, we are almost five decades into it, and I want to give you some perspective because, in fact, we're in the third quarter of it and we're more than half way through.

How many of you are baby boomers? You're a unique generation in the history of mankind because baby boomers are defined demographically as born between '46 and '64. The mid-point therefore is '52, which coincides exactly with the last year that industrial manufacturing grew and dominated the economy; it has been shrinking ever since. So, in other words, your life cycle started when the economy started to shift to an information-based economy. And just actuarially speaking with a 75 to 80 year life span, you will end your life as the next economy has hit take-off and is growing very rapidly because life cycles continue and they overlap.

Bets have already been placed on what the next foundation for the economy will be after this information economy. The second largest investment capital bet after information technology, is on biotechnology. We will have a bio-economy in our grandchildren's generation. Right now that would be the equivalent of saying, in 1960, that we're going to be in an information economy. People understood the probability/possibility of that, but very few of us had any clue as to what it would mean. So, you've got agrarian, industrial, information, and bio-economies past, present, and future. That's to give you a kind of perspective of what's going on. I'm going to focus what's going to happen during the next decade.

Now, like the industrial economy, the information economy has an early first half and a late second half. In the industrial era, the first half was based on the steam engine and railroads; then the second half was based on the combustion engine and automobiles. The second half of the industrial economy was a shorter half than the first half. The same thing is happening here in the information-based economy. The first half was based on the computer as a crunching tool. It was a freestanding box, and basically what it crunched were numbers and words because spreadsheets and data processing and word processing were the two killer applications for the first four decades.

Today, more people buy computers to connect and communicate than they do to crunch. And so the focus has shifted from a crunching first half to a connecting second half, if you want a simple way to understand the difference in the economic foundation, the technological foundation that's driving the economy, or what we call the infrastructure. The take-off of the Internet is the basic change and then you get things like the AOL Time merger as the beginning of the maturation of this third quarter.

Life cycles overlap. So, what you are witnessing is the declining end of that crunching era and the take-off and growth of the second half, if you want to think of two halves within the overall information economy. During this schizophrenic period, you've got two major tasks. One task is to prop up that declining life cycle curve as long and as well as you can and that's basically an operating task. The other is a more strategic task and that is to migrate onto that new life cycle curve, which focuses on connectivity, as quickly and as well as you can. I'll say more about that in a minute. But, this is a very schizophrenic moment for much of American business, and you are in many ways on the forefront.

I recently completed an around-the-world speaking tour. My first non-U.S. stop was New Zealand. In New Zealand we did some wild stuff, including bungee jumping, which is where they invented the thing. We were fortunate enough to have the guy who invented bungee jumping and a photographer with us. The photographer took three very interesting pictures. Actually, it is the second that's the interesting one. In the first one you're on the platform, you're ankles are bound up, you are on terra firma and you're psyching yourself up. In the third picture you are master of the universe, with arms wide in a chasm bobbing up and down. The second photograph is a metaphor for what's happening to business today, because here, from the ankles down, you're firmly rooted on the platform you know is about to cease to exist momentarily. From the ankles up, you are fully committed in terms of momentum, psychic energy, resources, and your very soul to a world that does not yet exist. I want to suggest that that's where a lot of you are today, and I'd like to give you some insight as to what that means.

Now, this shift, from crunching to connecting, from the early to the late information era, is going to affect every sector of the economy. Health care is the largest sector, the second largest sector is education, and after that defense. And then you get into the more traditional business sectors. I'm going to say just a few words about those three largest sectors and, because you're a health care audience, in order to build the drama, I'm going to start with defense, then work our way up to education, and we'll then reach health care.

The purpose of defense, for example, is to protect the nation. You have got to be prepared to wipe out the enemy's productive capacity. Well, what the enemy's productive capacity is depends upon the economy that you're existing in. So, in agrarian times what it meant was that you had to burn the fields, and the ancillary actions were raping and pillaging in the villages. Then you got into an industrial era, and in order to wipe out the enemy's productive capacity, you had to bomb the factories, which were in the urban centers. And so the civilian population on a massive basis was involved in warfare for the first time. Then in the information era, you need to wipe out the enemy's information-based capacity. We are already worried about what it's going to mean when we get to bio-warfare. So the nature of warfare shifts all the time.

I'll give you just one statistic to show you an example of how it plays out. In World War II, from the time you sighted a target with your artillery until the time you hit it, on average took 20 shots. In the Gulf War, on average, it took 1.4 shots. That's why in the agrarian times you had the 100-year wars. In the industrial era, wars lasted about a decade, and in the information era you had the 6-day wars. So you can begin to see how, no matter what sector of the economy you're in, how all activities are carried out varies, depending upon the foundation of the economy and how it's shifting.

To change the picture and go to education for a moment, the same thing is happening. When we were an agrarian nation, the church and the family bore the major responsibilities for education. Then, when we became an industrial nation, we realized we had an educational system for a society that didn't exist any more, and so the mantle of responsibility passed. It passed glacially. and took 100 years, but the mantle of responsibility passed from church to state, that is to say government. Government emerged during the industrial era as the major educating institution in our society.

Now, we're in the same boat; we're no longer an industrial nation, and we have an educational system that was built by and for an industrial era. So, it's little surprise that we have an educational system in crisis, and it's a no-brainer to predict that the mantle of responsibility for education will have to pass to yet another institution. This time it's going to go from the public to the private sector, and business is going to emerge as the major educational institution in our society. Not because it wants the mantle-it doesn't. It doesn't feel it's in the business of education, but it doesn't have a vote. It also doesn't mean it's going to take over school systems.

Just to give you a sense of what's going to happen, for example, in the agrarian era, the "bandwidth" of education , speaking metaphorically, was 7 to 14 years of age. In the industrial era, the model became kindergarten through college. And today it's life long learning. The reason that it has increased to life-long learning, K through 80, cradle to grave learning, is the speed with which knowledge is changing. The half-life of an engineering degree today is slightly less than four years. So half of what your daughter learned as a freshman in engineering school is going to be obsolete by the time she hits the labor force. The consequence of that is you have to upgrade your education throughout your life cycle. Therefore, you're going to do it with/by/for/in/among the institutions where you're spending the most time, which is namely as an employee in the workforce and as a consumer in the marketplace.

What you expect over the next couple of decades is a complete redefinition of education. When you have a life-long learning model, for example, then students become not the whole pie of the marketplace, but a market segment and a tertiary one at that; they are the declining end of the cycle. The real growth portion is employee learning. It's the kind of thing that goes on in hotel conference rooms throughout America all the time; quite seriously that's a piece of it. The real growth, the biggest segment of all, is going to be consumer-based learning, but it's still in gestation, it hasn't taken off yet. That's going to be more web-based and it's going to be interactive, but business hasn't caught on to that yet.

Okay, now we get to the finale and health care. What I want to do is establish for you how a shift in the foundation of the economy means a fundamental shift in the nature of every sector of the economy. So now let's turn to what it means in health care. The old model, which was called health care, was really "sick care," or if you want to put a positive spin on it, medical treatment. Here, doctors took a sacred vow to keep their patients healthy, but they didn't see them until they got sick. There's a strange anomaly there. In the economic model, the way you made money was to fill the hospital beds. Now we are in a transitional phase called managed care, which will last about two decades. We're in the midst of it right now. In the economic model for managed care, the way you make money is to empty the hospital beds. That's quite a flip.

You ain't seen nothing yet. What is happening is that power migrates and it's migrated from the providers to the payers, from the hospitals and medical community to the insurance people. This is really a transitional phase. Where the future lies is true "health" care because you are one of the four sectors of the economy that are going to be the early adaptors of the paradigm shift to a bio-based economy. Food, agriculture, health care, and pharmaceuticals are going to be the major sectors that are going to really adapt to this early on.

Probably the most important indicator after the scientific breakthrough in the early '50s of Crick and Watson will be the reading of the human genome, which is coming up within a year or less, and that will begin to migrate us out of this long front end tail of gestation in the life cycle. Within probably about a decade you'll see a significant take off in growth in the bio-economy in terms of these four sectors. It will take then about two to three decades more before we understand the impact. It's like asking (too early) in the 1920s and 1960s, respectively, what will be the impact of the automobile and the computer on banking, on health care, on entertainment, on retailing. What's the impact of the biotechnologies and the bio-economy going to be on retailing, on banking, on entertainment, on travel? We have no idea at this point, but it's going to impact all sectors. Yours will be among the first.

You have had a remedial paradigm. As I said, your sacred vow is to keep your patient healthy, but you don't see her or him until they're sick. With the genome project, as you're well aware, you're going to shift to a predictive and preventive paradigm. This is fundamentally different. Let me tell you that with a culture built up over decades that is very resistant to change. The historical record says that 9 out of 10 people or institutions who are leaders in the prior life cycle are unable to migrate and be dominate players into the next life cycle. This is going to be as true for hospitals and health care institutions as for any other sector in the economy.

Now, if the upstream providers, which are you folks, dominated in the previous model, in the medical treatment model, and midstream payers are dominating now, who's going to dominate in that future model? The answer is going to be further downstream: the consumer. That's where the power's migrating. You cannot stop it. It is driven, not ideologically, but technologically.

The old industrial era, and even the first decades in the information era, used a concentrating model, with centralized control. If you want a simple visualization: power is migrating out from the center to the periphery. Power is replicating technology, flowing from the centralized mainframe to the mini, to the desktop, to the PC, to the handheld, to the ubiquitous embedded microchip. It's migrating outward, to the consumer. Draw a circle in your mind's eye, and inside the circle is your institution, your enterprise, while outside is the marketplace. Power is migrating from the center to the periphery, and it's not going to stop at the circle's boundary. It's going to migrate out into the space, externally, and you will not be able to stop it.

Here's an example, a little vignette, that captures this distinction. My niece is an MIT engineering graduate, Wharton MBA, management consultant in her early 30s, and having her first child. She went to the OB/GYN, and she said she'd like an amneocentesis. "Sure, no problem," says the doctor. And then my niece said, "By the way, how many of these procedures have you performed, and what's been your success rate?" And the doctor said, "I will not take you as a patient." What you have in that little vignette is the difference between the ankles down world that's ceasing to exist within a very short period of time, and the ankles up world which represents the future.

I remember when I was a professor, when I started, students never ranked their teachers. Now, all class rankings of professors and their courses are on the web. That's standard. That's what's going to happen with all doctors and all patients. When I started giving this talk, there was an ad. I only saw it on TV once. They must have yanked the ad for some reason. There was this elderly, gray-haired woman with a suitcase walking down the corridor at a nursing home. The nurse said, "Mrs. Smith, where are you going? What's wrong?" Mrs. Smith says, "Well, your staff to resident ratio is the lowest in the state. The protein level of the food served is in the lowest deciles…." She rattles off a few statistics like that, and she walks off, and that's the end of the ad, and on comes the logo of the dot.com company in the health field. Power migrates to the customer. We are fundamentally shifting.

I'd like to tell you a little bit about some of the changes that are going to occur. Many of the rules are flipping to the opposite of what you were used to. Here's one example: measurement. With any measurement you take it and then a period of time goes by and you take it again. If I said to you, how often do you close the books of your institution or how often do you change the prices or how often do you do employee evaluations or the like?, you do them periodically and the periodicity is getting shorter. A decade ago, people would close their books annually and then they got to quarterly. Now, most companies close their books monthly. Last year, Cisco Systems, a major player in the infrastructure of the economy, closed their books daily. This year, Cisco can close their financial books worldwide within one hour. That means they can respond to both threat and opportunities in real time.

The consequence of this kind of shift is that all measurement is shifting from periodic to continual. How often do you take temperature, blood pressure? How often do you take any measurement? The answer is more and more frequently, until you hit a flipping point. And at that flipping point, the rules change, turn on their head and it's, for example, from periodic to continuous.

The same thing is happening with regard to where economic value is coming from in the economy. In the industrial era, it used to come from stuff, tangible product. As we shifted to an information economy, it came more and more from intangibles. This happened in three waves. In the '50s and '60s, you had the shift from manufacturing services. In the '70s and '80s, you had to shift from hardware to software, again, from tangible to intangible, but of a different nature. Today, the shift is to intellectual property, knowledge, information, and the like, and that too is another significant shift that will take another decade or two to play out.

Here's a totally different example. Both General Motors and Ford announced that in the future, all suppliers would have to do business with them directly over the Internet, web-based. Now, the way in which each did it is very telling. General Motors set it up as an internal unit within General Motors Corporation. Ford, on the other hand, partnered with Oracle Corporation and is setting it up as a freestanding business, intending to take it public within the year. The Economist reported on November 2, 1999 when that entity goes public it is expected its market cap will be higher than that of Ford itself. The part would be worth more than the whole! The unit set up by Ford, merely to do business with suppliers over the web, will have a higher market value than Ford itself. Ask yourself what that means in regard to your hospital?

Say you improve the quality of your offer, you make a better product, provide a better service. In the old model what did you do with the price? You raised it. In the new model you have to lower the price because every time you buy a computer, you know the next model out is going to be more powerful, it's going to be better, and it's going to be cheaper. This is part of the new economics, the network economics that's a totally different world. In a world where the better it is the cheaper it gets, what's the ultimate logic for your pricing? Free. How do you make money in that kind of a world? (When I say make money, I'm talking about not-for-profits as well as for-profits; that's only an issue of how you distribute the surplus, but it doesn't change the fundamental economics that are driven by the technological base upon which the economy is founded.) How do you make money in that kind of world? The answer is that you have to innovate faster than you commoditize.

When the life cycle of your business model is in decline, if you are simply focused on improving the productivity and efficiency of your hospital, what you are doing is investing in your weaknesses, trying to do the wrong thing better. Please don't misunderstand me. You have got to do that. But, if that's the only game you play, it's ultimately an end game. You are history, just not yet. That's what has happened to too many hospitals and mainly because they are legacy institutions that can't get out of the way of their own culture they've built up over decades and generations. So, you've got to innovate, to get on to the new model faster than the old one is
commoditizing and going into death throes.

Use the next decade to migrate your culture away from remedial treatment, from "sick" care, and start migrating it toward prediction and prevention. That will be nothing short of revolutionary and take you at least a decade. But, it will position you for what the future of medicine is going to be. More advances have been made by public health and pharmaceuticals than have been made by medicine and hospitals in terms of treatment of disease. That's a historical fact. If you want to survive, you are going to have to fundamentally redefine the model or paradigm that you're operating on.

It will definitely and increasingly be software driven. How many of you are in the software business? I see two, three hands. Now, within 30 seconds let me suggest to you that I can demonstrate why you all have to raise your hand. How many of you would agree with the following statement, "my business is getting more information intensive all the time?" See, you all agree with that one. Well, here's the first big step across the metaphorical river. You're not in the information business, but your business is becoming more information intensive all the time. The more information intensive your business becomes, the more you will behave the way an information intensive business behaves. Well, the most information intensive business, the pure play, is software. And that's how you start to migrate into software.

I've got a good friend whose is a surgeon, and he says, "99 percent of surgery I don't even have to be in the room for because I'm watching the monitor and I could be doing this at a distance." This is, again, a shift from the tangible to the intangible.

We've got a fundamental redefinition of what is going on in the field. It is affecting you, and it is migrating power away from the central control and down to the individual. Here's one last example, in the form of a test. How many of you have lawns, front lawn, back lawn, side lawn? Great. Who decides when the lawn gets watered? You do. You do. Now, I know if you want to be very sophisticated and you say the sprinkling system decides, but who sets the sprinkling system? You do. In the new model, who would decide when the lawn gets watered? The lawn. You passed the test.

My message to you is very simple to grasp, but very difficult to implement. The health care model is going to change. You know it. You are on the bungee jump. From the ankles down, you're still rooted in the old platform. From the ankles up, you know there's no turning back. Some of you deeply in your heart of hearts say, "if only I can get to retirement first."

These are moments where there are dangerous opportunities. Most health care institutions will not survive and will not make the migration. They have to become much more customer-driven, not from the point of view of ideology and philosophy of serving the customer which was a business mantra for decades, but because of the technology. The technology is putting power in the hands of the customer, the consumer, and what we used to call the patient. What the patient is increasingly going to be looking for is predictive and preventative true health care. And this is going to fundamentally redefine your field. Thank you very much.



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