Business models

Unleashing the potential of connected products and services

World Economic Forum report traces the emergence of the Industrial Internet of Things and the outcome economy, qualifies opportunities and risks, and offers recommendations for industry stakeholders

RR big pictureThe World Economic Forum’s IT Governors launched its Industrial Internet initiative at the organization’s Annual Meeting 2014 in Davos, Switzerland. Over the course of the following eight months, the project team developed a guiding framework and conducted a series of research activities, including in-person workshops, virtual working group sessions, interviews of key thought leaders, and a survey of innovators and early adopters around the world. The resulting Industry Agenda report, produced in collaboration with Accenture, is entitled “Industrial Internet of Things: Unleashing the Potential of Connected Products and Services.” The 40-page report can be downloaded in its entirety from the World Economic Forum website at http://www.weforum.org/reports/industrial-internet-things.

The report makes our Required Reading on the Industrial IoT list for its concise and comprehensive rendering of the how the Internet of Things revolution that has already reshaped business-to-consumer industries will dramatically alter manufacturing, energy, agriculture, transportation and other industrial sectors of the economy over the next 10 years. These industries account for nearly two-thirds of the global gross domestic product (GDP), the report notes.

This latest wave of technological change will bring unprecedented opportunities, along with new risks, to business and society, the report contends. It will combine the global reach of the Internet with a new ability to directly control the physical world, including the machines, factories and infrastructure that define the modern landscape. However, like the Internet was in the late 1990s, the Industrial Internet is currently in its early stages. Many important questions remain, including how it will impact existing industries, value chains, business models and workforces, and what actions business and government leaders need to take now to ensure long-term success.

The report’s authors argue that the Industrial Internet is indeed transformative. It will change the basis of competition, redraw industry boundaries and create a new wave of disruptive companies, just as the current Internet has given rise to Amazon, Google and Netflix. However, the vast majority of organizations are still struggling to understand the implications of the Industrial Internet on their businesses and industries. For these organizations, the risks of moving too slowly are real. 

Further, disruption will come from new value creation made possible by massive volumes of data from connected products, and the increased ability to make automated decisions and take actions in real time. The key business opportunities will be found in four major areas:

  • Vastly improved operational efficiency (e.g., improved uptime, asset utilization) through predictive maintenance and remote management
  • The emergence of an outcome economy, fueled by software-driven services; innovations in hardware; and the increased visibility into products, processes, customers and partners
  • New connected ecosystems, coalescing around software platforms that blur traditional industry boundaries   
  • Collaboration between humans and machines, which will result in unprecedented levels of productivity and more engaging work experiences

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Rise of the outcome economy

As the Industrial Internet gains broader adoption, businesses will shift from products to outcome-based services, where businesses compete on their ability to deliver measurable results to customers. Such outcomes may range from guaranteed machine uptimes on factory floors, to actual amounts of energy savings in commercial buildings, to guaranteed crop yields from a specific parcel of farmland.

Delivering such outcomes will require new levels of collaboration across an ecosystem of business partners, bringing together players that combine their products and services to meet customer needs. Software platforms will emerge that will better facilitate data capture, aggregation and exchange across the ecosystem. They will help create, distribute and monetize new products and services at unprecedented speed and scale. The big winners will be platform owners and partners who can harness the network effect inherent in these new digital business models to create new kinds of value.

The report’s authors also propose that the Industrial Internet will drive growth in productivity by presenting new opportunities for people to upgrade skills and take on new types of jobs that will be created. An overwhelming majority of executives we surveyed believe that the growing use of “digital labor” in the form of smart sensors, intelligent assistants and robots will transform the skills mix and focus of tomorrow’s workforce.

While lower-skilled jobs, whether physical or cognitive, will be increasingly replaced by machines over time, the Industrial Internet will also create new, high-skilled jobs that did not exist before, such as medical robot designers and grid optimization engineers. Companies will also use Industrial Internet technologies to augment workers, making their jobs safer and more productive, flexible and engaging. As these trends take hold, and new skills are required, people will increasingly rely upon smart machines for job training and skills development.  

To realize the full potential of the Industrial Internet, businesses and governments will need to overcome a number of important hurdles. Chief among them are security and data privacy, which are already rising in importance given increased vulnerabilities to attacks, espionage and data breaches driven by increased connectivity and data sharing. Until recently, cybersecurity has focused on a limited number of end points. With the advent of the Industrial Internet, these measures will no longer be adequate as the physical and virtual worlds combine at a large scale. Organizations will need new security frameworks that span the entire cyber physical stack, from device-level authentication and application security, to system-wide assurance, resiliency and incidence response models.

Another crucial barrier is the lack of interoperability among existing systems, which will significantly increase complexity and cost in Industrial Internet deployments. Today’s operational technology systems work largely in silos. However, in the future, a fully functional digital ecosystem will require seamless data sharing between machines and other physical systems from different manufacturers. The drive towards seamless interoperability will be further complicated by the long life span of typical industrial equipment, which would require costly retrofitting or replacement to work with the latest technologies.

In addition, other notable barriers and risks include uncertain return on investments on new technologies, immature or untested technologies, lack of data governance rules across geographic boundaries and a shortage of digital talent. Overcoming these challenges will require leadership, investment and collaborative actions among key stakeholders.

Recommendations for stakeholders

To seize near-term opportunities, capitalize on the long-term structural shift and accelerate the overall development of the Industrial Internet, the report recommends the following actions: 

  • Technology providers should begin to inventory and share best security practices, perhaps by establishing a global security commons. They should participate in the development of technology test-beds to demonstrate how solutions from different organizations can work together. And they need to focus on brownfield innovation1 to support existing equipment in the field, and raise the market awareness on successful use cases and implementations.
  • Technology adopters should first reorient their overall business strategy to take full advantage of the latest developments in the Industrial Internet. They also need to identify their new ecosystem partners, and determine whether they should join a partner’s platforms or develop their own. Companies that still are new to the Industrial Internet should identify one or two relevant pathfinder applications that can be piloted within the next six months to create necessary momentum and learning.
  • Public policy-makers must re-examine and update their data protection and liability policies to streamline transborder data flow. They also need to revisit the current regulations on such industries as utilities and healthcare to encourage investment and the adoption of new digital processes. In emerging markets, governments will need to increase investment in digital infrastructure (e.g. embedded sensors, broadband connectivity) to take advantage of the leapfrogging potential of the Industrial Internet in accelerating regional economic development. And policy-makers need to learn more about societal and policy implications of the Industrial Internet, and function as role models in advocating and supporting high-potential applications such as smart cities.
  • All stakeholders need to work together in three important areas. Industries, governments and academia need to collaborate on long-term R&D to solve fundamental technology challenges related to security, interoperability and management of systemic risks. They need to conduct joint lighthouse projects to demonstrate the real benefits and raise the profile of the Industrial Internet among the general public. They also need to implement new training programs, and provide policy incentives to employers and workers to encourage reskilling for high-demand job categories.

The World Economic Forum report “Industrial Internet of Things: Unleashing the Potential of Connected Products and Services” can be downloaded in its entirety from the World Economic Forum website at http://www.weforum.org/reports/industrial-internet-things.

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