TASC FUTURES GROUP

NORTHROP GRUMMAN

D E F I N I N G T H E F U T U R E

TASC FUTURES GROUP Approach

Seven Fundamentals• Lay the Foundation• Change the Frame• Challenge the Experts• Tell Stories• Live and Work in the Future• Walk Back to Today• Shape the Future

An application:• Future Economic Impacts of

Investments in Intelligent Machine Technology, 2006-2025

– Methodology– Results & Implications

Anticipation is not widely practiced by decision makers because when things are going well they can manage without it and when things are going badly, it is too late to see beyond the ends of their noses! –Michel Godet

Technology Scouting:Lessons from Future Impact Studies

David Leech

Senior Analyst for

Technology & Industry Evaluation

Futures, Forecasting, & Change Management

Northrop Grumman Information Technology

Intelligence Group (TASC)

Outline

Overarching “Lessons Learned”

Future Economic Impacts of IMT, 2006-2025

Analytical Approaches to Technology Scouting• Building bridges from lab concerns to industry

concerns

Overarching “Lessons Learned” There is a cultural and operational disconnect among scientific institutions,

technology development institutions, and business institutions • Yet, ultimately they act as a whole to create value added

– Increases in national productivity rely on a national innovation system

• If you don’t understand the system you can’t make the pieces fit

At the most basic level, S&T institutions aim to advance technical performance parameters and business institutions aim to advance return on investment (ROI)

• Thinking about the future of S&T in a business context is hard! No easy answers!

Bridging the two (or so) worlds is essential for actionable futures and for technology scouting

• ROI is largely about incremental cost and quality improvements– These are tractable (w/ difficulty)

• Radical change is much harder to assess– To some extent, its more critical to get a bead on these implications (e.g., IMT)

What we try to do in our futures work is walk out to the future and bring it back to today

Sophisticated Understanding of the Private/Public National Innovation SystemSophisticated Understanding of the Private/Public National Innovation System

A important part of our proposed

approach to IMT

A important A important part of our part of our proposed proposed approach to approach to “scouting”“scouting”

Future Economic Impacts of Investments in Intelligent Machine Technology, 2006-2025

Challenge and Methodology

Results

Implications

The Challenge

The Ultimate Challenge of this approach to Futures

What does the future hold for IMT investors?• Private and public

Without some reasoned sense of what the future holds, allocating the right amount of scarce investment dollars to IMT research and development (R&D) is extremely difficult • Most technologists are not futurists

Our purpose: to shine some light onto a path that likely represents the future of machine intelligence and to do so in “business case” language

The Methodological Challenge Forecast the future

• What do we expect from the application of intelligent machine technology?

– Three narrowly defined industries Automotive Aerospace Capital Construction

Quantify future economic impact using conventional impact analysis tools• Disaggregated technology production function• Productivity growth rates• Social rate of return on investment

• Forecasting technology trends is a challenge• Quantifying economic impacts of technology is a challenge

• Quantifying economic impact of future technologies is a real challenge!

Future IMT Scenarios — Conservative & OptimisticFuture IMT Scenarios — Conservative & Optimistic

Future IMT Scenarios — Application-SpecificFuture IMT Scenarios — Application-Specific

State-of-the-Art Survey Population TargetingState-of-the-Art Survey Population Targeting

R&D capital stock model is standard empirical approach• We adapted to focus on a few variables that survey

respondents could estimate

Who possesses IMT R&D capital stock?• “Hidden” knowledge stocks identified through patent filter

construction

“Leading inventors” analyzed and identified• A ready source of interest, motivation, and applied

domain-specific knowledge

Identifying Survey PopulationIdentifying Survey Population

Industry Survey PopulationIndustry Survey Population

Firm-LevelFirm-LevelEstimatesEstimates(Survey)(Survey)

Growth RateModule

Industry-SpecificIndustry-SpecificProcessProcessChangeChange

DescriptionsDescriptions(Workshop)(Workshop)

Future ScenariosModule

αβγ

αα —— Percent of process Percent of process cost affected cost affected( expected to( expected to

)Increase over time )Increase over time

ββ —— Output quality Output quality multiple multiple( expected to( expected to )Increase over time )Increase over time

γγ—— IM capability per IM capability per dollar cost multiple dollar cost multiple

( expected to( expected to )Increase over time )Increase over time

Chronological event comparison

Moore’s Law derivatives

-Industry specific trends

-Firm Level-Firm LevelEstimatesEstimates

&&-Industry Level-Industry Level-Scale up-Scale up

Multiples Multiples( )Survey( )Survey

& IMT R DIntensity Module

Social Rate of Return Estimate

= S RR/ =QR

Future Economic Impacts ModelFuture Economic Impacts Model

Q

RIMT-Induced

TFPGross Growth Rate

Output Elasticitywith Respect toIMT Knowledge

RR

IMT Knowledge

Growth Rate

x=

.

+− )(1 γααβ

+− )(1 γααβ

QR

.

.

.

The Results

IMT R&D Productivity Growth Rates and ROIIMT R&D Productivity Growth Rates and ROI

The Implications

“It Takes a Village” — Disaggregated Production Function

Surveyed firms report that they would invest much more in IMT R&D if they could appropriate all of those social returns

• We asked how much they would invest if they could appropriate all of the returns generated by their IMT R&D investments

– IMT R&D intensities roughly double

• This underlines the importance of government supported IMT-R&D investments to counteract spillovers

Surveyed firms believe that government funding of IMT R&D will be important if the anticipated developments in IMT are to be achieved by 2025

• Respondents believe compliance with industry technical standards is increasingly important for the success of the next generations of IMT-based products

• Some concern about whether the government and industry will fulfill their roles with regard to the level and composition of funding to achieve the 2025 level of advancement

These findings are consistent with the New Innovation Economics thrustNew Innovation Economics thrust being promoted by the Information Technology & Innovation Foundation (ITIF)

Disaggregated Production FunctionDisaggregated Production Function

Short version:

David P. Leech and John T. Scott,“Intelligent Machine Technology and Productivity Growth,” Economics of Innovation and New Technology, September, 2008

• Focuses on economic framework the impact estimates

Long version: Leech, et al, Future Economic Impacts of Investments in

Intelligent Machine Technology, 2006-2025 (Final report to the National Institute of Standards and Technology, 2006.)

• Includes economic framework and impact estimates

• Introductory discussion of the R&D capital stock model and its evolution

• Extensive discussion of national innovation system model

• Extensive discussion of the scenarios

• Extensive discussion of overall methodology

Analytical Approaches to Technology Scouting

— “Bridge Building” —

Technology-to-Product KPP Mapping• A framework for determining where your

technology gets the greatest bang for the buck

Automated Technology Frontiers • Automated (low-cost), quantitative technology

frontiers generator

Innovation Communication Protocols (ICPs)• An infrastructure tool for improving the

effectiveness of technology transfer in general

Underlying Concepts

Products &

Services

Product &

ServiceAttributes

• Wine

• Car

• Computer • Software availability

• Convenience

• MIPS

• Acceleration

• Speed

• Prestige

• Dryness

• Fruitiness

• Alcohol content

Technologies(Disembodied)

Products(Embodied)

Science

Innovation

Market Structure

Technology-to-Product KPP Mapping — Tying Laboratory Advances to Commercially Relevant Market-Drivers

TechnologyUsers

(Manufacturers)

TechnologySuppliers

(Corporate, Government,& University Labs)

Describe Innovation Market Structure1

2

Identify Key Invention Advances

TASCAnalyst

LaboratoryScientist

3Identify Cost- & Quality-

Driving PerformanceAttributes

X

Z

Y

Performance

Cost&Qual

$4X

$2Z

$10Y

Y

4

Y =Cost -Driving Attribute• Pull Cost ?• Future ROI ?

Assess 2 w/Respect to 3

SelectedInterviews

E-mailSurvey

Either

Or

5

Develop& Test

AssessmentMethodology

Y =

Similar to Similar to TFP Model TFP Model used in IMTused in IMT

Automated (Low Cost) Technology FrontiersTechnologyFrontier1996

TechnologyFrontier1986

2X4Y1Z

5Y2X

5ZTechnologyTrajectory

S&TProjectA

S&TProjectB

• A technology frontier is a small set of key performance parameters (KPPs) that define the state of technology and its progress over time

• Unique to a community of practice (CoP) and reflected in a set of technical terms by which technical progress is defined intrinsically

• Optics, for example, define progress in terms of “surface accuracy” measured in “microns RMS”; or IR detectors, define progress in terms of “detectivity,” measured in Watts-1, and “element size”, measured in “mils.”

• Patents categorize technologies in ~110,000 categories (infinitely mixed and matched) to identify horizontally- and vertically-related technology development efforts

• With sophisticated search techniques KPPs can be identified in temporal cohorts of patents and rates of progress modeled

• A low-cost approach to identifying KPPS over time!

Stand-alone or in combination with KPP mapping

Innovation Communication Protocols Science and Technology Estates

• Organizations and individuals have different drivers– Sources place a high value of novelty– Brokers place a high value on profitability– Users place a high value on utility

Members of one estate, type of organization, or subfield do not have an effective and efficient means to communicate the readiness of a scientific or technological innovation to transfer to other estates, organizations, or fields*

Organizations talk and think differently about S&T innovation because they have different goals and incentive structures

Ineffective communication increases technical and commercial risk, while slowing the flow innovation from one estate to another

Solution: “Innovation Communication Protocols” or ICPs

Innovation Communication Protocols (Continued)

Standard tool for effectively and efficiently communicating information among innovation estates• Think in terms of inter-estate TRLs

ICPs are multi-tiered, qualitative heuristic algorithms that grade innovation characteristics along a continuum from theory to product in a format that is readily comprehensible across estates

Initial ICPs • will focus on innovation maturity and innovation scope• will be field or subfield specific • will be developed in close collaboration with all innovation estates

Post-project work will extend ICPs to organizational maturity and financial maturity and look for commonality among field ICPs

Summary

The recognition that the National Innovation System is comprised of multiple estates is essential to effective business and government policy

Bridging the real differences between estates is essential for actionable futures and for technology scouting

Actually building the analytical bridges — KPP Mapping or ICP — is interesting, useful, and hard

Progress depends on it!

Contact Information

David P. LeechDavid P. LeechSenior Analyst for Industry & Technology Senior Analyst for Industry & Technology EvaluationEvaluationIntelligence Group (TASC)Intelligence Group (TASC)Northrop Grumman Corporation Northrop Grumman Corporation 703-907-4075 (Rosslyn office)703-907-4075 (Rosslyn office)410-346-6338 (home office)410-346-6338 (home office)david.leech@ngc.comdavid.leech@ngc.com

Thank You!

Backup

Intelligent Machine TechnologyIntelligent Machine Technology

IMT refers to any computational technology or system that senses its environment and adjusts its behavior based on sophisticated world modeling and value judgment to achieve its goals• Encapsulated in a computer program, intelligent sensor, or a robot

IMT embraces• Computer–aided design technologies• Computer numerically controlled (CNC) machine tools• Computer-controlled inspection systems• Enterprise integration information systems• Just-in-time production scheduling and inventory control technologies • Internet technologies that enable out-sourcing to the most efficient

suppliers• Multi-spectral measurement systems for construction site metrology

What is a “Social Rate of Return (SRR)”? The social rate of return (SRR) is a form of a standard financial metric known as

the internal rate of return (IRR)

The IRR is derived from the calculation of Net Present Value (NPV)

IRR is the discount rate that makes the NPV of an investment equal to zero

NPV=0 is the breakeven condition for an investment• Accept the project if IRR > the discount rate • Reject the project if the IRR < the discount rate

When the IRR is calculated to evaluate the impact of an R&D investment by a single organization it is called the private rate of return (PRR)

When the IRR is calculated to evaluate the impact of R&D across a number of firms, it is called the social rate of return (SRR)

Compared to what? Past econometric studies of R&D impacts employing a total

factor productivity (TFP) approach report industry-level annual social rates of return between 61percent and 162 percent • Annual social rates of return of 72%-77% look modest by comparison

However, past studies plagued with measurement difficulties • Overestimation due to difficulties with holding constant forces

other than R&D spending • Inability to account for launch costs (would tend to reduce RoR)

Our approach• Focuses on R&D productivity impact alone• Directly accounts for launch costs (which are quite substantial)• Reports relatively high productivity increases and social rates of

return that represent a very impressive indicator of future economic impact

IMT R&D Productivity Growth Rates and ROIIMT R&D Productivity Growth Rates and ROI

IMT R&D Productivity Growth Rates and ROIIMT R&D Productivity Growth Rates and ROI