Well-paid execs with no AI strategy are the ‘definition of nuts’

Smith & Williamson AI fund posts 35% returns in the YTD

Photo by jesse orrico on Unsplash

Big companies which refuse to engage with artificial intelligence may be confronted by an unbridgeable chasm when they finally try and catch up.

They may struggle to stay in business as AI disruption rips through almost every business sector says Chris Ford, manager of the Smith & Williamson Artificial Intelligence fund.

Ford (pictured) was talking to Portfolio Adviser’s sister publication Global Investment Megatrends about the impact of AI throughout the economy.

Ford says: “There are bunch of companies which just don’t engage with AI at all. I’m surprised that there are still businesses, big businesses, with well-paid executive teams who have no strategy for AI. That is the definition of nuts. They’ve had plenty of time to figure out that this really matters.

“There is another group of companies which absolutely do understand AI, that are engaged with it and are using it in their businesses. The gulf between these groups is widening all the time. At some point, a chasm will open. It is going to widen to a point where it becomes unbridgeable. That will happen industry by industry around the economy.”

Ford says there is also a group of companies which may embrace AI, but where it hasn’t been sufficient to move the needle, perhaps because it only forms part of the business. They are falling behind as well and there may be few quick fixes. “The problem for many companies is that their business processes are terrible, and if you have bad business processes and you automate them using AI, you’re going to end up doing bad stuff more quickly.”

“This is what hamstrings this middle group of companies. It might be the case that there are management teams in amongst those companies that desperately do want to engage with the technologies, and do understand some of what they can do, but they haven’t got the businesses processes that are capabale.”

Ford says this legacy position means not everybody is created equal in the artificially intelligent world.

“It is one reason why the creative disruption occurs so quickly,” he says.

On the other hand, there are huge opportunities.

“If you can start with a blank sheet of paper, AI gives you the ability to create very exciting businesses to attack parts of the market that you couldn’t previously. The price of a seat at the table, in many of these industries, has just fallen away completely.

“You don’t have to build your own server farm, you don’t have to buy your own office. Disruption can happen much, much more quickly. And if you have that blank sheet of paper, you’re definitely going to start with an artificially intelligent platform somewhere in your business today, because it would be crazy not to.”

The disruption has already hit some sectors.

“To a greater or lesser extent, the online travel agency business is built on AI. So that includes TripAdvisor, Expedia, Priceline and CTrip. Nobody now goes to Thomas Cook to book their flight to Barcelona. You, go online.  The adoption has happened.”

As a result, he says, many non-AI based travel businesses are in their death throes.

Ford says this ‘S curve’ is now moving into different parts of the economy. “We are asking ourselves where else in the economy are the are obvious opportunities for whole industries to follow on the same kind of journey?”

Ford says that there are absolutely no guarantees that existing incumbents will successfully navigate the transition.

Following vapour trails

“There are long-lived participants which are really moving fast to get with the project. Equally others aren’t.

“Ultimately that is the premise of the of the fund. If I can use the presence or engagement with artificial intelligence platforms to find the vapour trail that I can observe from the outside, to help understand what’s going on inside the business, and how well positioned it is to benefit from what’s coming down the pipe over the next decade, I can draw some very obvious conclusions about where I want to be invested.”

The £205m fund has now been in operation for just over two years and has posted returns in the year to date of around 35% and of about 60% since launch.

Ford says a lot of the performance has been driven by the underlying operational performance of the companies and “not just a huge rise in the multiples with multiple expansion driving stock values up”.

He adds: “The stock value is up, but it’s been going up a result of the ongoing operational performance and the exceeding of expectations. It’s nice to be right. But it’s really nice to be right for the right reasons. This is really substantive change we’re seeing in the world economy, and these companies are significant beneficiaries of economic change driven by their engagement with AI platforms.”

He says that the fund has moved on from what was an initial period of evangelising.

He is now getting much more normal questions for a portfolio manager which stress test his investment processes rather than question the concept.

“It’s emblematic of the way in which the AI investment theme has matured and grown up over the course of the last two years now. It’s not viewed as weird and out there anymore.”

Defining AI

Yet do we have an agreed definition of what is meant by AI?

Ford says: “It’s a really thorny issue. We say that AI looks to synthesise, automate and optimise the process of converting information into useful and actionable knowledge. This is our definition. But it is a synthesis of something that was said by Demis Hassabis, who’s the CEO at DeepMind here in London, and who we huge amount of respect for as a luminary in the AI firmament.”

“It’s sufficiently abstract that it doesn’t define this technology as being artificial intelligence and that technology not being artificially intelligent, but it conveys something about the broad characteristics an AI platform system should exhibit. At the same time, it is intensely practical.”

It is that practical application of the technology that is making the difference.

“What we’re seeing in the in the AI world is that these platforms are becoming useful and actionable whereas previously, because of the early price points, these platforms sat in ivory towers, government research facilities, and weather bureaux and weren’t really accessible to deliver insights and useful knowledge to consumers or businesses.”

That has now changed, and it means the rapid spread of innovation.

Ford adds: “We often say that the ability to engage with artificial intelligence platforms is not so much about the availability of the technology, or the price of the technology, but in having somebody with the wit and creativity within a particular organisation to understand what the technologies are capable of, particularly which business processes might best be addressed by it.”

Yet is it possible that some can buy AI off the shelf?

Ford says it can apply in some areas particularly with robotic process automation, offered by, among others, UK multinational Blue Prism. This will principally help white collar organisations to automate highly repetitive, information-led tasks. The efficiency and accuracy has a big appeal in financial services and industrial services.

Yet Ford says for more transformational and thoroughgoing deployments of artificial intelligence platforms, you have got to have somebody within your organisation who understands which business processes can be addressed by those technologies.

He also suggests that with time people can forget that AI is involved. While many people may regard a computer’s victory over the Go world champion in 2015 as an AI victory, they are much less likely to place a 1950s computer win in noughts and crosses in the same category – yet that is arguably an early application of AI.

“In our collective consciousness, we think artificial intelligence is the thing that we can’t quite do yet, but we can get sufficiently near so we can imagine that it could be done.

“I go to lots of AI conferences and what I hear from people who are working to deliver AI solutions into the corporate world in particular, is there’s a bit of disappointment when the platform is delivered, when they load the app, even if the platform actually delivers all the outcomes that that clients have been expecting.”

A spectrum of intelligence

He says it is perhaps best to view AI as being on a spectrum of intelligence much as the way we look at human intelligence, though even that could be misleading as it may not only be human intelligence we are always seeking to ape.

“A few Swiss teams are working on a kind of drone-based technology – very small drones that go into very tight spaces, in earthquake zones, with very rich sensor equipment on the drone, mirroring a dog’s ability to detect movement or detect smell, and then look for look for survivors.

“We just need to be really careful about not about wanting to be to believe any one particularly tautly drawn definition of AI, emblematic of the whole space.”

For those firms that do want to embrace change Ford cautions against putting one person in charge of it.

“If your management team are really poor at change, then by giving me bringing somebody and calling them head of change, you make it their responsibility and not yours.”

He has an even harsher view on firms’ approach to IT from many UK and other developed market businesses.

“Our boards are male, white, and 60. Those people basically know nothing about technology or nothing about technology that is relevant in any way for managing a leading-edge business in the current world.

“It’s still the case that information technology skills are still regarded as properly residing in the basement of the building with the other dragons and code monkeys. That cannot be the case, in the future. My generation is not going to be tolerant, of management team that do not have limbically possessed information technology and AI skills.”

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