IIoT: The Search for Equitable Business Models
Posted by: Varun Nagaraj | Posted on: Monday, April 14, 2014
Over the last few years, many of us in the controls industry have been using the phrase “Industrial Internet of Things” or IIoT to describe the evolution of control networking in industrial environments. The IIoT is a truly compelling vision of how the industrial world will look in the interconnected future. Some companies with foresight like GE are starting to implement this IIoT vision in a few target industries like aircraft engine maintenance. However, in my conversations with the vast majority of our OEM customers who use our FieldServer brand of gateway products to interface their products to other systems, or in discussions with our end customers who use our Sentry IT line of fire and gas products to increase the safety of their facilities, I keep hearing the same question: “So what does the IIoT mean for me and what should I do differently?”
In November 2014, Professor Michael Porter and Jim Heppelmann attempted to answer the above question by introducing a framework around “Smart Connected Products” in the Harvard Business Review. They noted that each industrial device now has an unprecedented amount of sensing, processing and communications capability built into the product itself. As a result, these products can produce a lot of useful data which can be fed in near real time for analysis, which in turn opens up many strategic possibilities for players in the value chain.
Consider an example highlighted by Accenture in their recent report on the IIoT. By adding sensors to their tires, Michelin now has the opportunity to sell “tires-as-a-service” by charging their customers for actual kilometers driven. Also, Michelin has created a fuel consumption reduction service for its customers. Data on fuel consumption, tire pressure, temperature, speed and location is brought from each vehicle to the cloud, where fuel efficiency experts analyze the data and make recommendations to the fleet manager on how to use less diesel for driving. Also, the data is available to Michelin product engineers so that they can continuously improve tire performance and reduce tire cost.
In an interview with McKinsey Quarterly, Jim Heppelmann, CEO of software company PTC, outlined how product manufacturers (OEMs) and users (the OEM’s customers) could develop their IIoT strategy by asking:
- How can I (the OEM, the user, or an intermediary) operate the products better?
- How can I (the OEM, the user, or an intermediary) service the products better?
- How can I (the OEM) make the product better?
Assessing how the (smart connected) product can be made, sold, operated, or serviced differently is critical and necessary for articulating a response to the IIoT, and in fact, as I workshop with my customers, these are exactly the questions I would use to frame the workshop. But the real issue on the table that we in the industrial controls business (OEMs, end users, intermediaries, and technology suppliers to OEMs) need to address is the lack of clarity around business models. Yes, there are legitimate technology questions around security or reliability of communications or local versus remote decision making, and I will tackle them in subsequent blog posts. But in my opinion, it is the lack of business model definition that is the primary inhibitor to the adoption of IIoT. Open questions linger such as:
- How do you put a value on the fact that the product can be operated better or serviced better?
- What is the value of insight into product usage that helps an OEM design a better product?
- Who incurs the cost and who gains the benefit?
- What is every extra byte of information worth (because the cost of transmitting and storing data in the cloud is not free)?
- How should the cost of the incremental technology be recovered?
- What % of the value captured by the end user should be shared with the OEM, by an intermediary, or by the OEM’s technology supplier that makes the smart connected model possible?
- What activities should be performed by the various players?
Bluntly put: who does what, and who pays what?
At Sierra Monitor, we are in a somewhat unique position as we grapple with these questions. We get to see this problem from two distinct vantage points along the value chain: One, we provide our FieldServer protocol gateways to OEMs to turn their devices into smart connected devices. Two, we offer our Sentry IT fire and gas detection system – which is a smart connected product – to our facility manager / safety manager customers. As a result, we are in constant conversations with different constituents in the value chain.
During the course of the year, we will be exploring use cases and equitable business models with our OEM customers, our facility manager end customers, and our peers at industry forums like the MCAA. We will be developing and demonstrating cloud based applications to our customers because a conversation around a business model is easier to have while looking at and manipulating real screens. We will be in workshop / exploration mode rather than sell mode because there is still much to learn collaboratively. I hope to use this blog to share those learnings and to speed up our industry’s collective adoption of the IIoT vision.