The Internet of Things (IoT) is described in the industrial world as the 4th industrial revolution. Industry 4.0 concept originates from an German government initiative launched in 2011. IoT market is sized at 1,7T$ by 2020 (according to IDC) and can have an economic impact of 4 to 11T$ by 2025 (according to McKinsey). These numbers give vertigo but they covers different industries , and a very long value chain (sensor / chipset to cloud / mobile applications). According to most of the market surveys, the Industrial sector is the biggest potential market for IoT. In this post, I focus on this vertical and on – what I believe is – a transformative part of the Internet of Things, its impact on business models.
LEGACY industrial enterprises are like ONIONS
In order to understand the changes, lets look first at the legacy systems and past conditions. For years, enterprises have been enhancing their business operations by assembling in-house technologies. Over the years, software became more and more strategic and is now at the core of how enterprises run their operations (from the shop-floors to boardrooms).
Most of the legacy entreprises have the following characteristics
- Enterprise data are confined in the company IT network. Field data are collected, filtered, computed, and reported through the different layers of control & IT systems (PLC, DCS, SCADA, MES, BMS, ERP, CRM, etc..).
- Knowledge and competencies are maintained locally or in-house to secure operations.
- Enterprise network acts as primary security mechanism against outside threats.
- Assets suppliers or services providers do not have access to the field data. Access to the equipment involved in mission critical operations is strictly restricted.
- Most of the business operations are related to the manufacturing of the goods and their distribution.
We saw a first major transformation of this system with the introduction of the Cloud technology in 2006. Cloud technology and especially the BPaaS, SaaS, PaaS, and IaaS associated business models are driving a major evolution of the entreprise software world. Most CIO have already integrated cloud based solution in their portfolio and in the next 2 years cloud will become mainstream (will represent the majority of the enterprise software deployments). As a results cloud’s CAGR is 3x faster than on premises. Depending on the targeted cost, security level, and peak performance demand of their application, IT departments will choose between private, hybrid, and public cloud solutions.
Connectivity, as the starting point of the Internet of Things
In 2013, there were already 7B machines connected to the Internet. By 2020, we expect 30B machines to be connected. When talking about Internet of things, people often refer to the adoption of M2M, Cloud, and mobile technology to enhance the enterprise operations. IoT enables the asset supplier and authorised third parties to access a physical device located on the customer’s enterprise premises (a plant for a industrial company, a public space for cities, etc…). Connectivity is achieved by using M2M technology (fixed, cellular, cellular IoT, Lora, Sigfox) with 2 main goals:
- Maintain a secured and reliable communication channel between the physical asset (fixed or movable one) and the IT applications.
- Bypass local enterprise IT networks to ease deployment and maintenance of the asset.
Mobile devices and Apps have been a key driver for the adoption of the Cloud technology in the industrial sector. They will also play an important role in the adoption of the Internet of things by enabling new innovations. Apps are indeed the most powerful way to expose data to different stakeholders and to extract value from the connectivity.
Connectivity is the enabler of the Internet of Things but the major transformation lies in the way IoT changes the nature of the business relationship between the enterprise and its asset suppliers.
IoT applications in the industrial sector
There exists many applications of the IoT concept in the industrial world. We can classified them according to the 3 main categories of the type of assets connected:
- Work forces: The most important asset of any company: operator, technician, supervisor, engineer, manager, etc… They are either employees or contractors but all contribute to the operations.
- Machines: Assets that have their own intelligence and are able to operate autonomously. They perform complex tasks based on the information received from operators and the different control systems.
- Sensors and actuators: Assets with only basic or no computing power, collect information on the field and pass it to the control system, perform basic actions based on central system requests.
Lets look at the most common industrial application of IoT
Often the first use case for connectivity arrives from the after sales operations. After sales market operations are critical for most industrial companies as they represents a very large part of the company profit and they also play a key role in maintaining customer loyalty over time. By connecting their assets, after sales support teams can tackle many of their daily headaches:
- Lack of data when customer reports an incident.
- Lack of manpower as only few people have the required skills-set to solve complex customer issues.
- On-site interventions are too expensive (manpower cost, transportation) and disturb customer operations. Industrial equipment can be located in not-easy to access locations.
- Need to monitor assets on the field over time to analyse issues and identify root causes.
- Deployment of the changes/ corrective actions takes too much time and requires on-site presence.
- Difficult to forecast demand for spare parts due to lack of knowledge of the installed based, customers, and customer applications.
Product teams and sales departments figured out quickly the potential associated with such connectivity. Thanks to the analysis of field data, they are indeed able to gain a deeper understanding of their customer activities and to build product/application knowledge faster than before.
By connecting to large numbers of their products, suppliers are able to build new added value services that enrich their asset:
- Asset tracking, remote monitoring and control
- Preventive maintenance & remote diagnostic tools, remote (re)configuration and update
- Enhance HMI with mobile APP
- Performance analytics, and cross-customers analytics
- Digitalisation & virtualisation of the physical asset
These added value services, often primary developed by the after-sales team, are the building blocks that will enable the supplier to automate its service delivery and by doing so create and scale brand new business models. In this new competition landscape, the players with the largest number of connected devices, the best analytic, and the largest number of customers per asset will enjoy a unique competitive advantage.
Connectivity enables service-oriented business models
IoT is changing the HARDWARE industry in the same way CLOUD technology changed the SOFTWARE industry .
With connectivity, the nature of the customer relationship evolves. The asset supplier enters in a long term and continuous relationship with its customers and by doing so create a more “customer centric” organisation. Armed with data and statistics, it becomes possible for the physical asset provider to move towards service-oriented business models with confidence without expose itself to a major financial risk.
We can list 5 major steps in this evolution of the business model:
- SELL & FORGET: The supplier hands over the asset to its customer. Supplier provides only after-sales services according to warranty.
- SELL & MAINTAIN: The supplier hands over the asset to its customer. The supplier provides additionally maintenance and support services to its customers.
- SELL / LEASE & CO-OPERATE: The supplier hands over the asset to its customer. Supplier and Customer enter in a long term relationship where supplier commits to take required actions to maintain availability and performance of the asset over time according to mutually agreed SLA. This is a joint management of the assets. But here is the catch, many customers still often prefer to buy hardware over a bundle of hardware and software and services. As a results, even if a major part of the supplier asset unique value proposition lies in its software and its services, supplier can still adopt a revenue models that is still mainly hardware (HW) based.
- SELL & OPERATE, PRODUCT AS A SERVICE, or PERFORMANCE BASED CONTRACT: The supplier commits to do the job it has been hired for by its customer. Supplier is measured on the business outcomes (volume, cost, quality, availability) and solely manages its asset in order to maximise business output. The supplier takes accountability for the overall productivity of the asset and also for the potential liability associated with its defaults. Here again, the supplier can adopt an HW based revenue model while most of its business model is service based.
- ASSET MUTUALISATION: With connectivity, asset suppliers are able to extract value from different customers. Indeed the data and the communication channel associated with the assets may be valued by other enterprise than the asset owner. With the agreement of the asset owner, the asset supplier could provide additional digital services to third party customers and so reduce the cost of ownership of the physical asset. Smart Grid / Micro Grid, insurance, environment monitoring, cities, are typical customers of mutualised assets.
Players able to transition to the new business models will win over time over the ones adopting a traditional supply models like SELL & FORGET for the following reasons:
1) Industrial customers in search for productivity (maximise their output, or reduce their fixed cost, increase their agility) will be interested by suppliers able to provide them with not only assets but also commitment on business outputs.
2) By merging hardware and services, suppliers extract more market value from their assets over their product lifecycle and by doing so they will build more profitable businesses. The SELL & FORGET / SELL & MAINTAIN players will end-up squeezed in a commoditised market with lower margins.
3) Industrial customers , interested by delaying their investment or reduce their cash out, will favour OPEX engagement models (Product as a Service, performance based contracting) over CAPEX intensive ones.
As a consequence, every asset manufacturer should investigate how connectivity will enhance their product features and which services they can enable.
With IoT, enterprises become more interconnected
In order to maximise the benefits associated with connectivity while being able to scale their business, IoT players will need to automate their service delivery. Service automation requires the use of advance analytics, and artificial intelligence technologies.
Asset suppliers and their customers will both see value in automating their data exchanges and transactions through the use of APIs (Application Programming Interface) for the following reasons:
- Asset suppliers use APIs in order to: scale the number of connected devices, lower customer support costs, allow channel partners (like digital integrators) to realise customisations and specific integration work for their customers, to create an ecosystem of software developers / digital integrators to extract more value from the already deployed assets, to comply with standards over time.
- Asset customers welcome APIs in order to: reduce cost of managing the suppliers, to have clear and define software interfaces and so to avoid dependency on single supplier, to make possible the creation of enterprise specific logic on top of the supplier solution, to integrate the asset supplier’s data in their own analytics and business processes.
With IoT, modern Industrial companies will present a complete different outlook. There will be as much attention on the operation technology used to run the manufacturing and supply chain operations as on the operation technology used to manage the installed base and to optimise the services delivery. Both will contribute to build a healthy P&L based on a combination of HW, SW, and Services sales. Integration of data flow and transactions with other asset owners or asset suppliers will become mandatory to survive and scale in this hyperconnected world. Current control layers (PLC, DCS, SCADA, MES, ERP, etc…) will continue to process most of the real time data, but a growing parallel flow of data will emerge and the newly virtualised assets will expose their advanced services to all authorised IT systems willing to consume them.
The race is on!
The adoption of the Internet of Things requires profound changes in the way enterprises design their product, manage their assets (hardware and software) , and run their operations. It took nearly 10 years for cloud technology to become mainstream in the enterprise world and the SaaS business model has been a key enabler . It will take time before IoT gains similar traction (targeted by 2020) and here again new business models like Product as a Service will be a key driver of adoption. The next major step of productivity and innovation is on its way and the race is already on!