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  • Jayanth Krishnan

Recession and AI

Updated: Jun 29, 2018

The interaction between an economic downturn and technological innovation can produce unpleasant surprises to business. Having a template to think how technology and economy can create a double whammy is worth spending time.

Impact of AI on labor and staffing

There are three generic forms in which AI is being deployed in the industry today – Machine Learning, Natural Language Processing and Robotics. This article is not about the specifics of each generic technology, but we will cover each one in a separate blog in the coming weeks.

AI/Data Science’s impact on labor is likely to be one of the following 3 factors

Substitution - When AI takes away human labor and replaces it with a machine/robot/data center. In other words, the machine takes out human labor, saves costs and increases productivity. An example could be replacing a human factory worker with a robot.

Complementarity – When the technology complements the human and allows him to reach higher productivity as an individual. An example is machine learning algorithms that help traders with trading signals. The machine does not replace the trader but helps the trader to focus on non-systematic strategies.

Additivity – When the technology helps create new jobs and roles where none existed before, we call it additive technologies. An example is Digital client support specialists; a role that did not exist even 2 years ago. These are jobs that are being created because new technologies are coming to market.

As you hear about emerging technologies, its worth classifying them as substitutes, complements or additives. The interaction between the economic forces and each of these types of technologies is actually very different.

How AI is likely to impact your industry during recessions?

Based on years of working closely with industry executives, I am still amazed at how biased people can be in their estimate of the economy’s impact on their business.

Depending on what options they have, I have seen managers choose different drivers for their industry. For instance, the COO of a retail firm picked 3 economic drivers when given a list of 5.

· GDP growth rate ✓

· Unemployment ✓

· Interest Rates

· BBB Credit Spread

· Retail Sales ✓

When the list was expanded to 70, he managed to find 4 more relevant drivers. For brevity sake, I will list only the final

· GDP growth rate ✓

· Unemployment ✓

· Retail Sales ✓

· Inventory levels ✓

· Inflation ✓

· Corporate Profits ✓

· Household Savings ✓

Recessions are particularly notorious for economic drivers flippinig / disappearing. We have seen it all too often that during recessions, a new economic factor hitherto not seen in data ends up torpedoing data science models. In other instances, a factor that was weak ends up acting strongly during recessions. For example, during the mortgage crisis, several industries found that a factor called TEDspread killed their earlier models. The moral of the lesson is to use common sense and not rely entirely on quant jocks.

However, do not trust in that gut feel; it’s the taco from last night not your intuition! Its only because too many people have been trusting their guts instead of their intelligence, that we now need Artificial Intelligence in businesses. Invest in a data science team wisely and gradually.

How should AI and Data Science be inducted?

Here are some common questions we come across and its normal to have these questions initially.

· Should you hire a data scientist or a consulting firm?

· Should you look for AI/ML products?

· Should you choose an offshore provider or in-source it?

Depending on your scale, we can help you figure out the right answer. It does not have to be a root canal; but if you procrastinate long enough everything feels like a root canal.

AI and Data Science can play important roles in hedging some of your strategic bets; more so in a down economy than an ebullient and bullish economy. Its best to build that capability into your business planning today than wait for the bear market to land on you.

What should you do NOW?

1. Understand the economic factors driving your business

2. Hash out economic scenarios for your business particularly down side scenarios

3. Develop strategic hedges using AI and other relevant technologies

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