Three trends driving the $3 trillion urban services industry of the future

Consider an industry that has annual revenue of US$1.8 trillion in the United States alone – and probably multiples of that globally.

It has billions of customers, providing “services” such as education, health, transport and security. This industry is the business of running cities; in other words delivering urban services – a sector many economists believe accounts for more than 60 per cent of global GDP. And it is now ripe for disruption because of a confluence of macroeconomic trends and technological innovations.

This disruption will spawn a new $3tn global urban services industry geared towards transforming cities. It will involve cities, firms and public-private partnerships working together to create new services, making cities more efficient and improving the lives of citizens.

Underpinning this emergence are three trends. The first is continued urbanisation itself and the added complexity it creates.

By 2050, 70 per cent of the world’s people will live in cities, and this vast scale is making many cities as complex as running a country.

Such huge scale requires a new way of building, operating and upgrading cities through replicability of technologies and processes. Even established and successful cities will need transformation in management and operations. Consider London’s transport system – it consists, in part, of 9,000 buses; 270 Tube stations and trains that carry 4 million people daily; 6,000 sets of traffic lights; a cycle-share scheme with more than 185,000 members and thousands of cycles and docking stations; and a fleet of river boats. To manage the staggeringly complex systems that come with size, cities will have to consider new business models and solutions.

The second dynamic driving the creation of urban services is continued budgetary pressures, which show no signs of abating. For example, the 2014 National League of Cities' Report on the State of Urban Finances indicates US cities have not regained pre-recession levels of financial health. Municipal officials are responding conventionally. The report says "the most common action taken to boost city revenues has been to increase the fees charged for services, the same approach for much of the past two decades".

And in China, the juggernaut of urbanisation, local governments are saddled with debts of 10.7tn yuan (Dh6.42tn), according to a 2012 Paulson Institute study on urban finances in the country. Clearly, the need for innovation in the face of budgetary pressure is stark – cities must become smarter about the way they do things.

Lastly, we have the rise of the Internet of Things, cloud, and big data.Over the next few years, everything that can be connected will be. Previously “dumb” products will be embedded with computing, storage and communications abilities. City assets – whether traffic lights or garbage dumpsters – will mutate into vast data collection and transmission mechanisms.

Much as these forces are making the rise of an urban service industry inevitable, they do not in themselves dictate the nature of how such an industry will evolve.

I believe, however, it will develop along three distinct dimensions. The first of these is the sharing of best practices – for a fee. This so-called “sharing economy”, when applied to cities, comes in the form of exporting their best practices to generate advisory revenue. There is nothing to stop cities such as Dubai or Barcelona – renowned for their technology-enabled transformation – from exploring a for-profit urban services consulting model.

There will also be a pressing need to train city officials, particularly in emerging markets, with both traditional city management skills as well as the capabilities to manage the new technology-intensive city operating environment – and this also could provide a new revenue stream for city coffers.

The sharing of best practices may also help to address global skill imbalances – for example, a surplus of skilled forensic specialists in the West could be helpful to address a chronic shortage of them in emerging countries.

A second dimension is the outsourcing of city services globally. The economic rationale and technological ability already exists for cities to outsource management processes – just as the private sector has been leveraging low-cost communication technology and skilled labour for decades. Cities will also move staff to places where work can be done more cheaply and effectively. Some will offer remote management services (for example, security or infrastructure monitoring) and eventually they may become centres of excellence for particular domains.

In fact, the urban services industry may transcend simple outsourcing to more complex arrangements in which certain cities, in partnership with the private sector, offer their expertise via build-own-operate services.

The third dimension is the urban app economy. While there are 2.5 million downloadable apps across the Apple and Android platforms, a very small percentage are city-services apps. These apps – which draw on the data generated by city assets – will create valuable new services and will proliferate. Already, in places such as Seoul, people rely extensively on privately developed apps that give detailed real-time information on subway schedules and conditions.

The rise of urban services will not occur in a straight-line trajectory. Privacy and security concerns may constrain outsourcing within national boundaries.

Still, economics and new technology are compelling the birth of this new urban services industry. The question is only when and how, not if.

The author is the president of Smart+Connected Communities and deputy chief globalisation officer for Cisco Systems (India) and a member of the Global Agenda Council on the Future of Cities

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