Intangibles will power new ways of delivering services that contribute more than three-quarters of Canada’s GDP. How prepared is Canada for this looming tectonic shift?
Companies like Facebook and Google led the first wave of service disruption by using data about their users. They have carved out large and lucrative businesses selling laser-focused advertising, taking much of the revenue that previously supported media companies.
Recent announcements signal that new competitors are on the horizon for auto insurance. Blackberry, which works closely with Ford, is teaming up with Amazon to create a common platform (IVY) for vehicle information. General Motors will be offering insurance in 2021 for vehicles equipped with GM’s OnStar system (OnStar Insurance Services). In both cases, automakers will collect rich data about how vehicles are driven, giving companies privileged insights into insurance risks, and consequently the ability to better price insurance premiums.
What is common to advertising and insurance? They are high-priced services with low direct costs, and thus have excellent operating margins. Rich margins attract tech companies and entrepreneurs looking to develop new business models.
Which other sectors are ripe for disruption? Real estate transactions, HR staffing, health insurance, and perhaps higher education look like promising targets for companies ready to build big-data platforms that sit between traditional service businesses/organizations and their customers. Since the above sectors represent about 14% of Canada’s GDP, new business models for these services are material to Canada’s economy. And, as these sectors have also not been hotbeds of innovation, changes to business models will upset existing firms.
It is not yet clear what the new business models will be, and how they will leverage big data. However, we can expect that the disruptors will offer a new way of delivering value to customers. For example, a real-estate disruptor might apply a Robinhood-esque approach to sell properties without direct commissions, using big data to price the spread between buyers and sellers; or offer a virtual brokerage with commission rates tuned to expected selling conditions. A disruptor of HR staffing might use large data sets to better match candidates and firms, perhaps offering a money-back guarantee.
Increasingly, firms are exploiting big data to create ways for students to receive benefits outside of traditional post-secondary institutions. Students and their families look to post-secondary institutions to gain technical skills, strengthen personal attributes, and start a network that will benefit their future employment. Graduates also seek credentials for completing their studies.
As you read the scenarios above, you may have silently questioned or criticized them. This is fair, given that there is much uncertainty as to how the changes will play out. Canadians building service sector platforms need support before they are successful, so government policy is needed now. In the absence of government support these services will be disrupted anyway, but likely by foreign platforms who will skim the cream, leaving less activity and wealth in Canada. With support, Canadian firms may be able to build the future platforms used by service sectors, here and in other countries.
Implications for innovation and research policy include:
Canada’s strengths include strong entrepreneurs, good support for startups, our close trade relationship with the US, and the depth of talent coming from our colleges and universities. Let’s take advantage of these strengths to create wealth for Canadians in re-imagined service industries.