While the term ‘algorithmic business’ is relatively new, the practical use of algorithms is already well established in many industries.
According to analyst firm Gartner, enterprise architects and IT leaders must begin designing their algorithmic business models to capitalise on their potential for business differentiation and to mitigate the possible risks involved.
They should examine how competitors – and even other industries – already use algorithms and smart machines, to determine if there is relevance to their own needs, Gartner said.
"The significant development and growth of smart machines is a major factor in the way algorithms have emerged from the shadows, and become more easily accessible to every organisation," said Steve Prentice, VP and Gartner fellow. "We can already see their impact in today's world, but there is much work ahead to harness the opportunities and manage the challenges of algorithmic business.”
The retail sector has long been at the leading edge of using analytics to improve business outcomes, and many analysts believe the algorithms that automate pricing and merchandising will become a retailer’s most valuable asset.
In human resources, algorithms are already transforming talent acquisition as they are able to rapidly evaluate the suitability of candidates for specific roles. But the same technology could easily be applied within an organisation to allocate workloads to the right people.
Advances in technology will expand the scope of what talent recruitment involves, creating a virtual talent industry that enables organisations to recruit smart machines and algorithms to provide the kind of expertise that is currently provided by people.
In healthcare, the open availability of advanced clinical algorithms is transforming the efficiency of healthcare delivery organisations and their ability to deliver care.
The practice of sharing and co-developing algorithms between organisations with mutual interests could be relevant to most organisations. It is also likely to be a development model employed in many vertical industries.
"While digital business is already transforming organisations, we confidently expect that algorithmic business will create even greater levels of disruption," said Prentice. "Open algorithm marketplaces will rapidly create and incentivise an entire ecosystem of algorithm developers in the same way that app stores and mobile devices have changed software development."
To cope with this fluidity and disruption, businesses should explore and deploy multiple business models concurrently.
These business models will be created with the use of algorithms and are a necessary part of coping with the pace of change and exploiting fleeting business opportunities in a digital world.
These advancements will not be without problems, however, and the successful organisations of the future will examine the potential pitfalls with equal diligence.
An extreme point of view is that any beneficial effects of algorithms on humanity may be nullified by algorithmically-driven systems that are antithetical to human interests.
Or, while an algorithmic business model may be deployed with good intentions, it could be manipulated by malicious humans to achieve undesirable outcomes – at least from the point of the view of the person or organisation that owns or controls it.
Algorithms rely on the data they are fed, and their decisions are only as good as the data they are based on.
Moreover, tricky ethical problems that do not necessarily have a ‘correct’ answer will be inevitable, as a greater complexity of decision-making is left in the hands of automated systems.
"The scale of change that is made possible by smart machines and algorithmic business warrants considerable planning and testing," said Prentice. "Organisations that fail to prepare risk being left behind or facing unexpected outcomes with negative implications."