Are we at the eye-rolling stage of response to Internet of Things marketing hyperbole?

I think it’s time to move beyond the hyperbole to more rational discussions of what’s really possible.

A recent McKinsey paper “Internet  of Things: Mapping the Value Beyond the Hype” attempts to do just that. The paper is based upon a study of over 100 use cases that exist today or are likely to be implemented within next 10 years. It outlines who’s going to benefit and by how much. More importantly, it covers the factors – both enablers and barriers – that organizations face as they develop their Internet of Things solutions.

McKinsey identifies nine different ‘settings’ or usage categories that will benefit from IoT. Of the nine, McKinsey believes that the B2B categories will generate nearly 70% of the IoT potential value, with B2C generating the other 30% of value. The most valuable B2B domains according to McKinsey are:

• Factories. Of all of the B2B categories, McKinsey cites factories as gaining the most value (between $1.2T and $3.7T WW). Identified areas of benefit so far include; operations productivity, predictive maintenance, inventory optimization and better worker health and safety. Much of this value will come from enhanced orchestration of all elements of a factory’s processes.
• Worksites. Along with factories, McKinsey also cites worksites such as oil & gas wells and infrastructure construction as lead beneficiaries of IoT use. Much like factories, worksites are physical in nature; they involve vehicles, machines, buildings, fields, roads, dams, bridges, etc. All of these physical elements are candidates for IoT instrumentation and control for improved productivity.
• Outside. Transportation and logistics via ships, trucks and trains will gain value from IoT much as Factories and Worksites. McKinsey cites logistic routing, autonomous operation and enhanced navigation as primary benefit areas. Tracking will be more precise with regard to location and item, allowing additional efficiency and customer service.
• Vehicles. Trains, planes and automobiles (including trucks) will benefit from IoT through improved production and maintenance. Semi-autonomous driving safeguards such as automatic braking to avoid an impending collision will reduce supply chain delays and lower operational costs. Condition based maintenance, aided by predictive analytics, will reduce unexpected downtime and lower overall maintenance costs.
• Retail. Brick-and-mortar retail gains through improved shopper experiences and lower operational costs. Specific retail operations to benefit from IoT include automated checkout, layout optimization, CRM, in-store personalized promotions and inventory shrinkage prevention. Consumers gain faster access to desired items and improved purchasing experiences.
• Cities. Cities are the 2nd largest IoT beneficiaries cited by McKinsey. They believe that mash-ups of different IoT systems will provide stacked benefits that improve on government and other city-wide services and will save city dwellers time, improve overall safety and lower environmental impact.

McKinsey concludes that IoT technology customers will receive up to 90% of the IoT value, when considering all of the settings in aggregate.  This means that vendors will capture 10% of the value, or in other words, gross margin could be 10% or thereabouts. This will likely vary depending upon the IoT related offering (product, service, experience). Some offerings could return very high profit margins if few other alternatives exist.

Factors that will affect IoT Value

Attaining the full potential economic value of the IoT won’t be easy. McKinsey cites a list of factors that affect the outcome. Five factor categories are cited: software/hardware, interoperability, security/privacy/IP rights, business culture and public policy.  Of these, Eckerson Group believes that the following factors are most relevant:

• IoT Data  Use Cases.  Most IoT data is not currently used. For example, off shore oil rigs can have 30,000 sensors or more, yet only 1% of that sensor data is monitored. Further it’s used mostly for anomaly detection and control, not optimization and prediction. To maximize value of IoT experiences, IoT systems vendors will likely need to provide new data uses cases to educate customers on value possibilities.
• Interoperability.   McKinsey cites interoperability of IoT systems - essentially to enable IoT system mash-ups – is critical to the attainment of up to 40% of McKinsey’s total identified economic value. Clearly, IoT system mash-ups could serve not only strategic and tactical decision making, but also operational and real-time decision making as well. For example, oil rig experts indicated that equipment maintenance effectiveness would benefit from predictive analysis of data from multiple IoT systems. Across settings, data collection and integration challenges present significant barriers to realizing analytic value, especially for real-time use cases.
• Security.   Security could be one of the most significant factors affecting the long-term viability of the IoT. Because IoT can make control of physical infrastructure such as municipal water resources, power utilities, telecom networks and even vehicles more transparent, with the potential for physical harm, IoT system designers will need to develop even stronger security measures than currently in use for business management systems. These security systems will need to work regardless of the interoperability challenges encountered.
• Privacy, Confidentiality  and IP Rights. Data privacy, confidentiality and IP rights are large looming IoT issues that will need to be resolved. For both B2B and B2C IoT systems, the data gathered will have value and risk for the stakeholders involved. Those people and organizations that the data represents will want control and even ownership of that data to assure appropriate use and minimize risk. Clearly, government regulations will play a huge part in defining rules by which data is retained and used.
• Public  Policy.  IoT public policy will need to be developed for many of the benefiting economic sectors. Not only will the use of IoT-enabled devices (e.g. self-driving cars) need regulation, but also use of data captured from IoT systems. Liability rules will also need to be established.  With appropriate public policies on use of consumer data, B2C IoT experiences are more likely achieve faster consumer adoption.
• IoT  Business Readiness. IoT workforces will require skills in multiple disciplines. Organizations originally skilled in hardware manufacturing will now need to grow or acquire competency in software for devices, middleware, and applications. Skills in defining, validating and deploying new business approaches will also be required to compete successfully.

Takeaways

As with any new technology, there are pros and cons with IoT. For consumers, the win would be lower costs, better experiences, improved health and more available discretionary time, but potentially at the cost of privacy loss and less information security. Similarly, enterprises may gain productivity, lower costs and improve competitiveness, but will need to grow technology competencies, evolve business practices and overcome related risk, especially security risk. Interestingly, just as IoT will likely evolve into a grand system of many technologies, the IoT stakeholder community (mostly everyone?) will also need to engage in a grand partnership.