Algorithms are changing business: here's how to leverage them

When Google’s algorithm AlphaGo beat South Korean Go Grandmaster Lee Se-dol by 4-1 last week, it was a significant event in the world of algorithms and artificial intelligence. This is because it represented a new form of artificial intelligence: intuitive artificial intelligence, something which is remarkably more challenging than standard artificial intelligence.

The disruption happening thanks to algorithms is happening all around us. The largest taxi company in the world, Uber, owns no taxis, but uses smart algorithms to connect drivers and passengers. The largest telephone company in the world, WhatsApp, has no telecom infrastructure, but sends over 35 billion message per day. Finally, the world’s second most valuable retailer, Alibaba, owns no inventory but uses algorithms to help others sell products.

Companies like Uber, WhatsApp and Alibaba clearly show that smart algorithms can disrupt an entire industry. But we are just at the start of this disruption and the coming decade will likely see all industries being disrupted thanks to algorithms. Gartner calls this trend the “Algorithmic Business” and it will fundamentally change how we do business.

From data to algorithms

With the advance of technology, companies and consumers are generating more and more data. Some organisations, such as Walmart, create and store dozens of petabytes a day. But collecting and storing massive amounts of data is not enough to gain competitive advantage. In order to beat the competition, organisations must do more than simply analyse the data. It’s now about what actions you can derive from your data in order to add value. Bring in the algorithms.

Algorithms define actions and they are pieces of software that are extremely good at very specific actions, much better than humans are. As a result, the more algorithms are used within organisations; the more people will be out of a job in the future. In fact, 2013 research from Oxford University and Deloitte estimated that in the UK alone, more than 35% of current jobs are at high risk due to computerisation.

And the UK is not alone. The same research estimated that almost 47% of US jobs could be lost due to algorithmic business within one or two decades. A society with nearly half of the workforce without a job does sound frightening, but if we prepare ourselves now it also offers great possibilities to drastically improve our societies.

From financial reports to your dinner; all can be automated

This enhanced use of algorithms is happening at a staggering pace. Already organisations like Associated Press use algorithms to write financial reports at a rate of 2000 stories per minute. Of course, these are not in-depth award-winning articles, but business-related stories, such as quarterly earnings, involving stock market performance and corporate profits. Stories, however, that used to be written by humans. Does that mean robot journalists are putting journalists out of business? No, at least not yet, although the developments in artificial intelligence that can write a readable novel are progressing rapidly.

Another example in the financial world is the Venture Capital firm Deep Knowledge Ventures. In 2014, this Hong Kong VC fund appointed an algorithm to its board of directors that gets to vote on whether an investment in a certain company is made or not. The VC fund focuses on life sciences and age-related disease projects and the algorithm, called VITAL, analyses data from multiple sources including clinical trials, financial details, previous funding rounds, intellectual property and others. Although the algorithm is not yet running the VC fund by itself, it is a giant leap forward in how venture capital firms approach investments.

A third disruptive algorithm is Chef Watson, the supercomputer from IBM that acts as your personal chef. Founded on extensive research and using IBM Watson’s supercomputer, the algorithm is capable of creating unique recipes based on all the ingredients in the world, food chemistry, human taste preferences and thousands of recipes from Bon Appetit. Users can simply enter several ingredients and Chef Watson comes up with a wide range of recipes ranging from very experimental to more traditional.

How to leverage algorithms in your business

The question then of course remains, how can you apply algorithms to gain competitive advantage and ensure your business doesn’t become redundant?

There are five steps you can follow to automate your business:

1) Determine which processes within your business can be automated and think out-of-the-box when you do so. After all, who would have thought that financial reporting could be automated?

2) Secondly, collect and store data. Algorithms require lots of it to make validated decisions. Find relevant data sources that you can use and make your business environment smart by applying the internet of things to tap into new data sources;

3) Ensure that you collect high-quality data because feeding your algorithms low-quality data will provide poor results;

4) Develop your algorithms and test, iterate, train, validate, improve in a continuous cycle to create better algorithms that can add value to your business;

5) Repeat the first four steps to slowly automate more processes within your business.

The move towards algorithms is happening fast, much faster than we expect, let alone policymakers can keep up with. It’s therefore important for us to be aware how algorithms will change how we do business, how we live and how we run our societies because before we know it, algorithms have taken over the world.