The US Digital Economy – Reality in Hungary

April 10, 2017

The Fourth Industrial Revolution: Rethinking innovation and businessSteve Hill, Global Head of Innovation & Investments, KPMG LLP

April 10, 2017

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3© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 537977

4© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 537977

5© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 537977

6© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Cognitive technology is the “steam” of the digital age…

Cognitive systems mimic human brain functions

Intelligence augmentationA new partnership between humans and machines

Physician Nurse WealthAdvisor

AcademicAdvisor

SalesAdvisor

LegalAdvisor

TaxAdvisor

Auditor ServiceAdvisor

InsuranceAdvisor

Machine learning

Deep learning

Artificialintelligence

Natural languageprocessing

Predictive analytics

Text analytics

Image recognition

Voice recognition

…and will reshape the workforce of the future

Perceive(interpret sensory input beyond traditional data)

Reason(hypothesize, weigh supporting evidence)

Learn(improve confidence levels with experience)

1 2 3

Part of a new Industrial Revolution?

1800sSteam, water, mechanical production equipment

1900sDivision of labor, electricity, mass production

1960sThe Information Age -Electronics, IT, Mass Communication, Internet

AI, nanotech, biotech, cyber-physical systems, digital labor

Today

The “4th industrial revolution” (cyber-physical systems) is beginning and its impact is profound according to the World Economic Forum founder, Klaus Schwab

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Non-linear adoption will challenge internal clock speed

150 Yrs 35 Yrs 15 Yrs 5 Yrs ?

Cognitivesystems

New leverage model(“Digital Labor”)

Mechanicalsystems

Industrialproductivity

Productionengineering

Informationsystems

Processimprovement

Processre-engineering

Internetsystems

Costarbitrage

Globally integratedenterprise

Cloud andthe internetof things

Big data &analytics

Smarterenterprise

Enterpriseinnovation

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Digital Labor represents a spectrum of intelligent automation capabilities from RPA through Cognitive

Examples:

Data ingestion “bots”

Financial statement closing “bots”

“Bots” that provision new Virtual Machinesin a data-center

Examples:

Schwab’s Intelligent Portfolio (RoboAdvisor)

Amazon Alexa

IPSoft Ameilia

BofA’s Erica virtual assistant

Examples:

Memorial Sloan Kettering’s Watson OncologyAdvisor

Autonomous vehicle decision algorithms \\

Financial services fraud detection

Cyber security

Digital Labor (Intelligent Automation)

Rules Learning Reasoning

Robotic Process Automation (RPA) Cognitive Automation

Automation based on documented process rules

Recognize patterns from unstructured data; automation

based on accuracy ratings

Hypothesis based reasoning; automation based on

confidence ratingsMacro based

Unstructured Data

Natural Language Processing

Knowledge Base

Adaptive Alteration

Predictive Analytics

Machine Learning

Reasoning Large scale Processing

Big Data Analytics

Macro based

Unstructured Data

Natural Language Processing

Knowledge Base

Adaptive Alteration

Predictive Analytics

Machine Learning

Reasoning Large scale Processing

Big Data Analytics

Macro based

Unstructured Data

Natural Language Processing

Knowledge Base

Adaptive Alteration

Predictive Analytics

Machine Learning

Reasoning Large scale Processing

Big Data Analytics

The evolving Digital Labor marketplaceSpectrum of labor automation to knowledge augmentation…

The tools used range from traditional automation software to new cognitive platforms which make automation tools intelligent and help augment and leverage human knowledge

The digital labor marketplace is maturing rapidly

14.9billion

$

1.7billion

$

The global market for robots and artificial intelligence is expected to reach $152.7 billion by 2020. The adoption of these technologies could improve productivity by 30 percent.

Bank of America Merrill Lynch

A recent study by HfS Research and KPMG LLP reports that 55 percent of North American enterprises are looking at new opportunities available with RPA systems.

MarketsandMarkets estimates that the AI, or cognitive computing marketplace, will generate revenue of

According to Quid, from 2010 to 2014, private investment in AI has grown from $1.7 billion to $14.9 billion, and was on track to grow nearly 50 percent year-on-year in 2015 alone.

Gartner predicts that by 2020, smart machines will be a top five investment priority for more than 30% of CIOs.

McKinsey research suggests that smart robots will replace more than 100 million

knowledge workers—or one-third of the world’s jobs—by 2025.

billion152.7

Recent research fromLondon School of Economics suggests a return on investment in robotic technologies of between 600% and 800% for specific tasks.

ROI800and

600%%

billion by 201912.5$

$

55 %

Top

Businessimplications ofdigital labor

Platform Deliveryvs. Human Labor

Depending on business model, ratio of technology investments will change

Geographic Deployment

Location criteria must consider a digital model vs a labor intensive model

Risk Reduction

Expected reduction in mistakes, accidents, regulatory violations and fraud

Security

Misuse of digital labor can extend the reach and capabilities of malicious operators

Innovation

Frees up human talent to innovate and create

Why now?

Frictionless access

Exponential technology

Humanknowledgeshared freely

Globaldemographicshifts

to technology by more than 2 billion people (mobile, cloud)

improvement growing at more meaningful baselines

on the internet is giving context and meaning to digital content

reduction in working age population and need for talent

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Facial recognition software can now surpass humans

0%

5%

10%

15%

20%

25%

2011 2012 2013 2014 2015

Error Rates on ImageNet Visual Recognition Challenge, %

Human LevelSource: KPMG Economics, ImageNet, Stanford Vision Lab

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Demographic changes

There are clear areas of concern in routine cognitive jobs

But the global population is aging and departing the workforce which is causing over-leverage of pensions and benefits regimes

In developing countries, the source of recent growth is subject to automation

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What are the current CEO plans for Labor-Capital substitution?

0%5%

10%15%20%25%

Sales force Technology Marketing Engineering Finance Manuf./ oper. R&D Strategy

Percentage of CEOs who report moderate to significant skills gaps in thesejob functions

CEOs seegrowing skillsgap…

0%25%50%75%

Sales force Technology Marketing Engineering Finance Manuf./ oper. R&D Strategy

Odds that automation/machine learning will replace at least 5% of workforcein each job function in next three years

that couldfilled bydigital labor

Source: 2016 Global CEO Outlook, KPMG International

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Employment growth in the U.S. reflects job polarization

Source: KPMG Economics, Rob Valletta, San Francisco Fed, BLS

-2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

Non-routine Cognitive

Non-routine Manual

Routine Cognitive

Routine Manual

Annual Change in U.S. Employment by Occupation Category

1984-2000 2001-2007 2008-2015

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The traditional wages and salaries chart tells a disturbing story

151005009590858075706560

52

50

48

46

44

42

52

50

48

46

44

42

Wages and Salaries as a % of GDP

Source: KPMG Economics /Haver Analytics

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Where do government revenues come from?

Source: KPMG Economics, Haver Analytics

85.6%

2.6% 11.7%

U.S. Government Revenue by Tax

Individual Income & Estate Taxes Excise Taxes Business Income Taxes

15

0

100

200

300

400

500

600

Republicof Korea

Japan Germany U.S. China

Number of Robots per 10,000 Manufacturing Employees

World Average

Robot density in largest destinations of robot supplies

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Source: KPMG Economics, IFR World Robotics, 2015

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Automation Anxiety Machines would “exclude the labour of thousands of the human race, who are usefully employed . . .” Thomas Mortimer, 1772

“For the moment the very rapidity of these changes is hurting us and bringing difficult problems to solve. . . . We are being afflicted with a new disease of which some readers may not yet have heard the name, but of which they will hear a great deal in the years to come—namely, technological unemployment.” Maynard Keynes, 1930

“The present outlook is for the rate of displacement of labor to exceed the rate of reabsorption...” Ewan Clague, 1945

“The number of jobs lost to more efficient machines is only part of the problem. What worries manyjob experts is that automation may prevent the economy from creating enough new jobs…In the past, new industries hired far more people than those they put out of business. But this is not true of many oftoday’s new industries.” Time Magazine, February 1961

“Digitization is creating new types of economic disruption. In part, this reflects the fact that as computers get more powerful, companies have less need for some kinds of workers. Even as it races ahead, technological progress may leave some people—perhaps even a lot—behind.”

Erik Brynjolfsson, 2014

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Human value will remain unparalleled

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The next 3 yearsmore disruptive than the last 50?

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21st Century EnterpriseMany have pointed to a “perfect storm” of change facing firms around the world driven by a

wide range of economic, social, political and technical disruptors. Given the scope of change, deeper questions must be asked:

Is the enterprise of the past century still fit for purpose in this century?

What does it take to be a frontier firm amidst these changes?

How will today’s leaders transform their business models, organizational structures andoperations to thrive today and in the future?

21st Century EnterpriseInflection point

20st Century Enterprise

Time

Profitable growth

Today

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World’s largest enterprises

Source: Fortune Global 500, 2016

Revenue US $27.6 trillionProfits US $1.5 trillionEmployees 70 million

2016 Fortune Global 500What firms will move to the frontier globally and nationally?

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Problem: Firm productivity gap is growingChanges in labor productivity in manufacturing and services between top “frontier” firms and the rest

Percentage difference in labor productivity levels (Index, 2001 = 0)

Source: Frontier Firms, Technology Diffusion and Public Policy, OECD, 2015

5% per annum

0.3% per annum

3.5% per annum

1.7% per annum

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Pillars of the 21st Century EnterpriseGiven the scope of change occurring across industries and functions, we must help our clients understand and respond to four key pillars of the enterprise…

Customer Engagement

Changing Nature & Value of Assets

Everything asa Service

Workforce of the Future

Personalization, Customization,

Co-creation & Collaboration

A 21st Century Enterprise delivers the best customer

experience, leveraging data collected from

customers to learn & personalize experiences.

Data-as-an-Asset, Intellectual Property, Shared Assets,

Networks & Alliances

A 21st Century Enterprise unlocks value from non-traditional assets - data,

alliances, networks, agility, and other intangibles.

Services vs products, subscribing to what you need, Process-as-a-

Service

A 21st Century Enterprise is more nimble and scales

infinitely faster by accessing services versus growing internal functions and

infrastructure.

Automation & augmentation, Talent gaps, contingent

workforces, collaboration

A 21st Century Enterprise is lean, utilizes digital labor and

accesses skills on demand through platforms and

alternative employment models.

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TimeSame ClientsSame Bus ModelSame WorkforceSame IP/ServicesFaster WorkflowHigher Quality

Effort/ Value

DIGITIZATION PLATFORMIZATIONINDUSTRIALIZATION

The Journey to become a 21st Century Enterprise will be enabled by Digital Transformation

More ClientsSame Bus ModelSame WorkforceNew IP/ServicesReengineered WorkflowHigher Quality

More Clients and MarketsNew Bus Model(s)Evolved Workforce/New SkillsNew IP/Services/Revenue ModelsReduced WorkflowsHigher Quality

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Thank you

The US Digital Economy –Reality in Hungary

April 10, 2017