Understanding flow has been critical to the progression and economic development of every country in the world. At a time when understanding and managing data flows has never been more important, Connor Cloughley argues that the Scottish government should push ahead with plans to develop a National Investment Bank. The flow of money and the flow of data have become synonymous, he argues: a new institution could better protect Scotland’s economy and improve growth.
A trend throughout our history is that great leaps forward are made when we master the ability to control, manage, and govern flow. Whether it is the flow of water, oil, electricity, blood, aircraft, or shipping, we trust our everyday management of these flows because our techniques and standards for governing them have evolved over time. There is, however, one flow that businesses and organisations across the globe are struggling to get to grips with, and so far have failed to master: data. Throughout the 20th century, the world was defined by the flows of physical goods and finance. In the 21st century, these flows are underpinned by the flow of data.
The explosion of new and affordable computer systems in the 1980s, and the subsequent rapid evolution of plug-and-play information technology, meant that businesses could easily purchase IT tools and solutions that could automate various manual business tasks. This evolved into server-based computing with Local Area Networks (LANs), then Wide Area Networks (WANs) which enabled large software application deployment. This culminated in the creation of the internet, a paradigm shift, which revolutionised the way individuals and businesses used computers.
There is, however, one flow that businesses and organisations across the globe are struggling to get to grips with, and so far have failed to master: data.
The concept of ‘dataflow’ would not be recognised for many years after the mass adoption of information technology by businesses. It wasn’t until 2013 when the CEO of IBM, Ginny Rometty, addressing the Lisbon Council, said that the flow of data was seen as analogous to the flows of other utilities. Her statement - “Think of the new natural resource in this world as being data” - effectively outlined IBM’s new worldview of how they would regard, and treat, data.
As the flow of all natural resources needs to be understood, controlled, and governed, so the flow of data is no different.
The concept of having to understand, control, and manage flow is a very old one. Approximately 4000 years ago, one of China’s main challenges was the annual flooding of the Yellow River. The floods would devastate the surrounding towns and villages. So the task fell upon a man named Gun, ordered by his village chieftain, to prevent the flood. Failure to do so would cost Gun his life. Gun eventually decided that the best prevention strategy was to build huge earth dams. But these did not hold - he had failed.
The chieftain made good on his warning to Gun. This resulted in the task falling to Gun’s son, Yu. He vowed not to return to his pregnant wife until he had conquered the river and completed the mission set for him by the chieftain. Yu learned from his father’s mistakes and embarked on a journey to survey the entire length of the river, developing a ‘big picture’ of the challenges he would face in completing his task. He quickly discovered that he’d never be able to halt the flow of the river, but that he could instead try to control it.
Liaising with the surrounding villages, Yu devised a plan to build huge channels which would disperse the flow of water. After a momentous feat of engineering, Yu’s plan succeeded in diverting waters away from the villages and he was able to return to his wife and child. One of the first men to control the flow of water, he only succeeded in doing so with a set of schematics.
So runs the tale of the ‘Great Yu’, credited with first taming the Yellow River.
However this story, and Yu’s principles, have not been lost to time. Scotland has a well-established history in the oil and gas industry. One factor the industry is subject to more than any other is the requirement to operate as safely as possible. Any failure to map out and understand the flow of oil, or assess points of vulnerability, would lead to potential lives being at risk, and maybe environmental disaster.
It is mandatory that every refinery has a set of schematic engineering diagrams called Piping and Instrumentation Diagrams (P&IDs). These P&IDs map and model all the assets that support the safe working conditions and operations of the refinery. This forms a ‘big picture’ which allows business decision-makers and engineers to quickly identify the areas at risk, and where control systems have to be implemented. Both technical and non-technical personnel are able to understand this big picture and are thus able to communicate more effectively. This leads to reduced risk and improved efficiency.
Similar to Yu’s assessment of water flow, and Grangemouth’s P&IDs, this idea of a big picture can be applied to all types of industry. Every industry - indeed, every major activity - is now heavily underpinned by understanding and managing data flows. The ability to know how people, processes, and technology perform and interact with each other is absolutely invaluable to a modern business. No company in the world would reject a fully scaleable analysis of their operations.
The same goes for nations. Flows of data and information now generate more global economic value than the ‘traditional’ global goods trade. Individuals and businesses are using global digital platforms to learn, work, showcase talent, build social networks, manage operations, and trade. The importance of connecting - and being connected - should now be regarded as a pressing national interest.
The McKinsey Global Institute produced a document, in March 2016, which analysed how effectively countries participate in global flows. The MGI Connectedness Index took into account the flow of manufactured goods, services, finance, people, and data. The graphic is shown below:
We can see from the index that Singapore - with a similar population size to Scotland - tops the rankings. It begs the question of where Scotland stands when it comes to data flows and connectedness.
On the connectedness front, things seem to be improving. On 14 December 2017, the Scottish government declared its commitment to connect every citizen in Scotland through fibre optic broadband, asserting that 95 percent of the country would be connected by the year’s end. An extra £600 million has been reinvested in achieving a 100 percent figure because the Scottish government has recognised that the flow of data is becoming just as valuable a utility to the people of Scotland as the flow of water, electricity, and gas.
MONEY IS DATA: HOW ARE THE BANKS FARING?
As the world of banking and finance has evolved, the flow of money and the flow of data have become synonymous. The ability to know how a bank’s people, processes, and technology communicate with each other is vital to the effectiveness and well-being of the organisation. The only way to obtain this is by having a clear understanding of the flows of data at a granular level.
After the financial crash of 2008, it became even more important for banks to be able to demonstrate that they understood how all of their systems and structures work. If they failed to be able to map their operations, then regulators would clamp down harshly. Banks were required to submit an annual Resolution Plan to establish their operating structure and thus understand the challenges they would face if they no longer had the capital to continuing operating.
In 2016, two large banks failed the stress test set out by the US Federal Reserve Board (FRB), and the Federal Deposit Insurance Corporation (FDIC). They passed the quantitative aspect of the test. But problems arose when their business processes and data integrity were investigated. Commenting on one of the largest banks in the world, the report stated: “In particular, the Federal Reserve identified deficiencies in the risk management and control infrastructure at DBTC, including risk measurement processes; stress testing processes; and data infrastructure.” Clearly, some banks have not moved on to where they should be.
A SCOTTISH NATIONAL INVESTMENT BANK
Against this backdrop, an announcement made last year by the Scottish government was of great significance. In September 2017, it announced a consultation into the development of a Scottish National Investment Bank. This idea presents Scotland with a unique opportunity when it comes to laying the first foundations for arguably the most important financial institution it will ever create. If such a bank were to be created around the concept of having a clear, big picture of how all the departments and functions of the bank interact with each other, it would no doubt be in a strong position to support national economic growth.
Ask yourself this: do we want a banking institution that is state of the art, ground-breaking, and cyber secure? Or do we want to create a grey, nondescript institution that fits into the existing system of modern banking which many regard as broken?
A new Scottish bank which had a clear picture of its own dataflows would be able to identify, and therefore minimise, the areas most at risk from cyber attacks. It could also set the appropriate standards for businesses and institutions operating in Scotland.
As Craig Dalzell highlighted in a recent report, there are five main responsibilities that a modern central bank needs to fulfil. Mainly the issuing of currency, financial regulation, price stability, balance of payments, and financial clearing. Yet another important responsibility is the collection and consolidation of information in all sectors of the economy. Understanding the flow of data between sectors, and ensuring that each is working from the same data, is an absolute necessity. A new Scottish bank could play a key role in achieving this task.
GO WITH THE FLOW
In the same way that the refinery in Grangemouth uses P&IDs to identify areas at risk, a Scottish National Investment bank must be equipped to do the same. In 2014, it was estimated that cyber-crime cost the global economy over $400 billion. A new Scottish bank which had a clear picture of its own dataflows would be able to identify, and therefore minimise, the areas most at risk from cyber attacks. It could also set the appropriate standards for businesses and institutions operating in Scotland.
Carlota Perez, a renowned economist and Centennial Professor at the London School of Economics, has written several publications on the impact of new technologies on the economy. Commenting in November 2017, she said: “Governments need to engage in massive institutional innovation and self- modernisation, with the boldness and imagination of Roosevelt and Keynes, and as adapted to our times as their ideas were to theirs. Living in the past has never boded well for business or government; what is necessary now is to proactively embrace the future.”
It is time for Scotland to proactively embrace the future - and go with the flow.
Connor Cloughley is currently a student at the University of Edinburgh studying Chinese and Russian. He has previously worked for the Foreign and Commonwealth Office in Beijing and has just finished studying abroad at Moscow State University. He will be studying at Fudan University in Shanghai in 2018. Find him on Twitter at: @CloughleyConnor
Feature image: Data flow graphic. Image: FTI Consulting.