Jeff Miller is vice president of PTC’s IoT Transformation Advisory Practice. He and his team help companies maximise the value of their investments in IoT technologies and solutions through transformation strategy, business insight, monetisation and programme consulting services. Here, he tells George Malim, the managing editor of IoT Now, how organisations can construct attractive business cases for initial deployments that also position them to benefit from greater second and third wave opportunities as IoT understanding and capability matures
George Malim: One of the barriers to increased adoption of IoT has been that it requires organisations to make a leap of faith in the absence of quantifiable return on investment (ROI). What are the challenges of constructing ROI models across the varied and complex dimensions of an IoT business case?
Jeff Miller: You’re right that for some companies, investing in IoT does take a leap of faith. To reduce risk, we advise our customers to begin with small, well-scoped projects that solve specific problems or provide needed new capabilities, prove the business value of them, and then rapidly scale or expand their uses. We encourage customers to select performance issues or opportunities with identifiable and quantifiable ROI, that also have broader application across the business, and can be launch pads for later expansion of IoT capability.
For example, we know asset connectivity and analytics using sensor data are foundational IoT capabilities, so it’s wise for customers to start their IoT journeys by applying these capabilities toward solving known business issues or creating new business capabilities. Asking companies to identify where their operating performance or customer satisfaction metrics are negatively affected by a lack of asset connectivity and data is a good start. Establishing basic connectivity, asset monitoring and simple analytics – albeit at small scales – to reduce or eliminate those impediments demonstrates value and helps to encourage further adoption.
It’s important for companies to recognise that IoT programmes are fundamentally different from large enterprise solution deployments. Many IoT sponsors and programme leaders find it’s actually easier to define the ROI opportunity of an enterprise SAP implementation based on process cost reduction, because the business process models are so well established. IoT is different because most often one begins with a solution or innovation platform – a technology stack – through which to build purpose-defined applications that solve specific business issues. There is no well-established reference process architecture to emulate. This is why we counsel new IoT adopters to begin with what they know, or strongly suspect is needed to improve their businesses, to develop and deploy IoT apps and solutions towards solving one or two well-defined business issues first, and scale from there.
This doesn’t mean organisations should set low ambitions for the value of IoT solutions. Rather, we believe the value of IoT is often driven by the network effect. For product companies, that means identifying a first pain point opportunity, defining what to measure and why, acquiring data, building analytics and using the resultant insight to improve performance and prove that the new capability delivers value. With that accomplished, we advise customers to consider expansion, scaling and broader integration to second third and even fourth order opportunities along their value chains. The key is identifying the right place to begin and the right foundation capabilities to establish.
GM: ROI isn’t necessarily about generating revenue. For many organisations, the greater value lies in enhanced process efficiency, better customer satisfaction or improved productivity. What are the difficulties of extracting clear values from each these potentially subjective areas?
JM: IoT platforms are fundamentally different from enterprise-scale solutions, and the ROI arithmetic is different, too. Platforms support the creation of new ITenabled business capabilities without the constraints of the process models upon which packaged enterprise solutions are usually based. That means customers have much greater flexibility to develop – or purchase – the precise apps or solutions they need to solve their particular business issues. That flexibility means that ROI models may be driven by much wider sets of factors than just revenue lift, or simple direct cost reduction. In the factory for example, an IoT application for monitoring machine performance beyond basic supervisory control (SCADA) may provide analytical data that improves spare part management for that machine. Less unplanned downtime improves operational equipment effectiveness (OEE). So, an IoT app may affect a measure like OEE much differently than how an enterprise solution would.
We suggest that customers ask themselves where the absence of connectivity and/or access to product operating data has impeded their ability to improve the performance and overall customer value of their products. We use the growing set of validated IoT use cases to help customers then identify areas where they can generate value from well-defined IoT investments. These areas become the starting points for their own use cases.
GM: For IoT and organisations’ attitudes to it to mature, does there always have to be a dollar value attached to IoT investment? Wouldn’t, for instance, something like a 10% reduction in downtime be of obvious business value?
JM: There are always questions about costs and measurable returns on investment. It’s important for company leaders to recognise that the costs of entry into IoT technologies are low compared to enterprise solutions – and what this difference means in operational terms. First and foremost, it means the cost of experimenting is also relatively low for the potential performance improvement returns. It also means the returns on those investments may be narrowly defined to a particular process or function, may not be measured in financial terms, and may be less predictable. This complexity in determining value is being compounded by a new phenomenon we’re beginning to see across companies; IoT fragmentation. Because of the ease with which IoT
experimentation may be conducted, individual departments are creating IoT applications that provide localised capabilities and solve narrowing defined, functional problems. That’s a good thing to do, as long as companies recognise the need for new governance and architectural controls to prevent the inefficiencies that come with the absence of standards. It means the definitions of value and ROI for IoT investments will broaden.
GM: What metrics other than cash generation are being used and accepted by organisations as ROI contributors?
JM: While the lower cost barriers to IoT are democratising performance improvement, and the definitions and measures of value are becoming more varied, there are a few large trends we see coming from broader adoption of IoT. Metrics related to customer experience are increasingly recognised because organisations are focusing on the role of IoT to improve fielded product performance, availability and reliability, all of which are basic requirements for happy customers. And, it is not only product companies that are thinking this way – pure service companies like salesforce.com are taking this approach, too.
An even broader opportunity for ROI from IoT is the movement away from the purchase of assets, and toward the purchase of outcomes – the wellestablished product as a service strategy. The number of successful case examples of such progression is increasing. Large capital equipment companies are leading the way by accelerating their IoT-related investments in areas that improve the customer/owner/operator experience and reduce the respective costs for the outcomes each stakeholder seeks. More companies are placing such investments at the centre of their strategies for market differentiation. A well-designed, IoT-enabled product function or service feature that measurably improves a customer’s performance, cost or satisfaction metric is worth a lot in a competitive market.
GM: Which IoT app areas do you see as having the clearest or most easily identifiable business and ROI cases?
JM: Taken together, the platform technologies and cloud-based infrastructure services that make up today’s conventional definition of the Internet of Things technology stack may be the
most important enabling capability of the everything-as-a-service world toward which we are moving. For the external customer model, applications that improve customer experiences and financial performance will remain the highest priorities across the enterprise. These include apps for, 1) sourcing data and monitoring asset performance, 2) merging and contextualising data to make it more usable in business operations, 3) synthesising operating insights to predict product performance and recommend preventative service actions, 4) orchestrating ecosystem actions and responses to issues, and 5) engaging ecosystem resources to take action. In addition, applications that utilise digital twins, also called software defined products, will expand dramatically. The digital twin is the centrepiece of today’s most powerful and useful IoT solutions, and is a foundational component of the augmented reality strategy that every company needs to create. Apps that utilise digital twins facilitate the design, sale, installation, use and service of complex products, and produce parts through additive manufacturing. Applications in these areas will continue to grow rapidly because of their powerful value propositions. They will drive down costs of product ownership and pay for themselves quickly. For a thorough examination of the role of augmented reality in the industrial enterprise, see the Harvard Business Review article by PTC’s CEO James Heppelmann and Harvard Business School Professor Michael Porter in the November/December, 2017 issue.
PTC has defined the industrial innovation process model in these five stages: source, contextualise, synthesise, orchestrate and engage. This model offers sound guidance for developing an IoT strategy, a capability roadmap, and apps that deliver value quickly.
GM: Please can you share any customer success stories of constructing ROI models?
JM: I’ll offer two examples. The first is Hirotec, a global maker of automotive parts, which sought to invest in IoT technology for improved predictive analytics in its factories. It built a case for the investment around reducing unplanned machine downtime, and through its experience found the value proposition was much stronger than originally thought. As it turned out, the operating performance improvements Hirotec realised were so great that they offset the need to buy additional production machinery to meet a demand for more capacity. Hirotec improved its operating expense performance, and at the same time avoided the capital expense of purchasing additional capacity.
In the coming year, examples of successful IoT deployments in single factories will be eclipsed by examples in which ecosystems of stakeholders across different commercial organisations and functions achieve notable, unique new capabilities
That’s a great template. Selecting an area of factory operation where you can generate meaningful ROI, such as reducing unplanned downtime, while remaining alert to other opportunities. The lesson of cases like Hirotec is to build an ROI model for a well-scoped first use case, and then consider second, third and even fourth order effects and opportunities.
The other example I’ll share is in commercial aircraft manufacturing. The use of remote monitoring and predictive analytics has been wellestablished in commercial aviation for decades. A leading airframe manufacturer sought to expand the concept and use of such data beyond aircraft engines, landing gear and flight control systems into the aircraft’s interior systems. The airframer worked with its air carrier customers to identify problems which might be solved with this kind of IoT. It learned that galley oven failures on longhaul routes were either no-go items – grounding an aircraft until repaired, or a significant customer satisfaction issue.
A solution was defined to monitor galley ovens, and with actual failure data collected over time, future failures based on warm-up time data became predictable. That’s the first order value –knowing when the oven is likely to fail, and reacting appropriately by ordering spare parts ahead of the need. But, the air carrier and third party aircraft maintainer went farther, integrating predictive failure data with aircraft scheduling and routing data, spare oven inventory data – especially, locations of spare ovens, and the availability and locations of skilled labour to remove and replace the oven prior to its predicted failure. The result is a significant reduction in oven failures and resultant AOG (aircraft on ground) time. This example shows the power of the network effect which IoT solutions make possible.
This is what’s going to be the characteristic of IoT in the coming years; the ability to uncover second and third order opportunities through IoT investments to address specific, first-order
GM: To what extent do you see it as the role of a vendor to help you customers calculate the ROI of IoT solutions?
JM: The value propositions and ROIs of IoT investments are determined first by business models and then by the technologies that enable them. PTC is recognised as having the leading industrial innovation platform for IoT, but that is only part of what differentiates us from other vendors. Our focus on helping industrial innovators achieve rapid first value, then expanded and sustained value from the technologies of digital – physical convergence, connectivity, data sharing and analytics sets us apart. The value of a vendor’s technology is measured by the business value realised by its users.
GM: Do you think this challenge will continue to exist as organisations become more mature in their usage and approaches to IoT?
JM: Yes, it will continue to exist but it will transition into a more diffuse and multi-participant challenge. Two years on from the large upturn inIoT interest and activity, we’re at a stage where
first order value of IoT is being achieved by more companies. So many, that basic IoT capability is table stakes for most large industrial competitive markets. The challenges of identifying ROI and
calculating it will become more complex as opportunities expand in scope and organisations seek to prioritise multi-participant deployments with the greatest business value.
In the coming year, examples of successful IoT deployments in single factories will be eclipsed by examples in which ecosystems of stakeholders across different commercial organisations and
functions achieve notable, unique new capabilities and offer new value proposition to their end customers.
CEOs and senior leaders have to think about their ecosystem and trading partners, and how well they have designed and engineered their offerings to fits the needs and expectations of customers. This is the new calculus created by IoT. CEOs know they won’t achieve market differentiation solely because their factories are more efficient. They cannot cost-improve their paths to market leadership. Instead, they increasingly see IoT as a means by which they can fundamentally transform their businesses, with the added benefit that they can fund their experimentation and solution deployments with solid business cases based on demonstrable ROIs.