Servitizing Things Accelerates the IoT Tipping Point

Part 4 of 4

IoT needs to be servitized to cross the adoption chasm, close gaps in Product and Service Lifecycles, and optimize Prosumer experiences.

The year of IoT kicked off with a bang at the Consumer Electronics Show when BK Yoon, CEO Samsung, spent every minute of his conference opening keynote presentation talking about all things IoT.

If you didn't attend #CES2015, I'd suggest investing an hour watching the video below on how Samsung, SmartThings, Jawbone, Cisco and the rest of the IoT wikisphere intend to change how everyone works, plays and lives.

After #CES2015 came the North American International Auto Show #NAIAS2015 with even more examples of the #ConnectedCar and #SmartCar. No surprise when techies and marketing gurus are spinning their best future visions.

What was a bit of a surprise was the level of IoT discussion at the World Economic Forum #WEF2015 in Davos the third week in January. Between discussions on global terrorism, income inequality, environmental sustainability and monetary economic reforms, the growth of IoT and its economic impact was discussed by bankers, politicians, as well as technology CEOs.

So 2015 is ramping up to be the IoT year of fear for CxOs: what to do, what not to do, and what are the un-intending risks and consequences of both?

When I started this four part series last year, I said that the Internet of Things isn't about the internet nor about things or edge devices - rather - it was about creating knowledge to enable "better / reduced risk" decision making and physical outcomes within ecosystems. Actually my definition was a bit more verbose than that in What is the Internet of Things, but this is the outcome focus for home, health, industrial, farming, government, "fill in the blank" ecosystem.

If one stops their understanding of IoT at connecting devices to other devices (M2M) or devices to humans (M2H) or making devices smarter, then one will miss understanding why Google Nest teamed with ConEdison as one element of step two in their IoT roll out strategy.

Steven Skinner recently recommended I read Code Halos, How the Digital Lives of People, Things and Organizations are Changing the Rules of Business, by Malcolm Frank, Paul Roehrig and Ben Pring. Malcolm et. al, lead the Cognizant Center for the Future of Work, and thus the focus of the book is mainly on the digital transformation of businesses.

Code Halos includes many of the topics that are commonly mentioned in the same breath as smart connected devices, such as big data, analytics, SMAC stack but on the other hand doesn't discuss core IoT topics like M2M, decision sciences, diagnostics, prognostics and autonomics.

What I liked, and what I am borrowing from them, is the construct of "halos" - IoT halos to be more specific.

IoT Halos

IoT Halos are environment and intent or purpose oriented - and - marry producers and consumer (prosumers) within a sharing ecosystem.

Don Tapscott coined the term "prosumers" in bis book Wikinomics, How mass Collaboration Changes Everything, a decade ago.

ZipCar and the "Uberization" of the taxi industry are two commonly cited examples of the Sharing Economy which will greatly benefit from IoT in the form of remote sensed metering. (note: you know you've made a dent in the universe when the name of your company is turned into a verb ;-)

Examples of IoT Halos are:

• #SmartHome
• #SmartCar / #ConnectedCar
• #SmartHealth
• #SmartOffice
• #SmartFactory
• #SmartRetail
• #SmartFarm
• #SmartCity

I mentioned David @StartupMan Hirsch's TechCrunch article, "A second act for the Internet of Things," in part 2, What's the Value of Autonomic Things in #IoT, where he discusses the M2M adaptive learning and M2H knowledge creation aspects of IoT focused on individual ecosystems or what I'm now terming halos.

Hirsch put "automation", "remote control" and "sensing" in act one and "knowledge creation" and "decision enablement" in act two. This was more throughly discussed in part 3, Frameworks for IoT and Networks of Ecosystems.

So how about some examples, you might ask.

#SmartHome: environment = physical dwelling and intent = simple affordable comfort.

The intent of a smart connected thermostat isn't remote control of the HVAC from some distant location (act 1), it is to more efficiently (gas and electrical cost) manage and over time machine learn, forecast and adapt the combination of consumer preferences throughout the physical space / throughout time / throughout seasons and combine this with the providers ability to deliver more affordable energy (act 2).

IoT is distinguished from traditional information technologies through its direct interaction with operational technologies and physical outcomes.

Being an early adopter, I went down to my local Home Depot to look at the array of dumb, programmable and "smart" thermostats. (note that here in Atlanta we only drink Coca-Cola and only shop at THE Home Depot)

At the point of purchase moment of truth, I balked. I just couldn't cough up $250 for the IoT connected device when a top of the line seven day programmable thermostat from Honeywell cost $70.

And this value proposition challenge is most IoT vendors barrier to entry. Relatively high CapEx for the consumer to front followed by a long and relatively low ROIC.

But the value proposition is not limited to the consumer, it also extends to other stakeholders and the provider. So if the three prosumers in this equation could come to a better shared risk deal, adoption would accelerate.

Research finds individual smart energy features typically appeal to only one-third of U.S. broadband households at best, but nearly 70% of U.S. broadband households are willing to pay a monthly fee for a bundle of smart energy services. (source: Parks Associates)

And this is why Google Nest is partnering with ConEdison to expand the value proposition to all of the stakeholders involved.

Having said this, Nest and ConEdison's current offering does not fully servitize the product nor fully and transparently share the value over the service life of the product. Basically, it is not a prosumer value proposition, merely a marketing discount, and this lack of transparency is a deal killer, especially with millennials.

Trust is a currency in the Halo Economy (source: Malcolm Frank on Code Halos)

PayPal co-founder Max Levchin recently discussed the trust factor and IoT at the World Economic Forum in Davos, Why Millennials Distrust Banks.

What is Servitization

Is a car a product or service? Most people would say a car is a product.

Is a taxi ride a product or service? In this case, most people would say it was a service.

How about a one week car rental or a three year car lease or Uber? At what point and by what combination of financing, time, support, contractual agreements did the car transform from a product to a service?

Servitization is a transformational process of bundling products, financing, services, support, technology, data, knowledge, etc... into a "total solution" bundle that addresses customer needs in a more efficient manner.

The term "servitization" was coined by Sandra Vandermerwe and Juan Rada in their 1988 research article, "Servitization of Business: Adding Value by Adding Services", in the European Management Journal.

Dr. Andy Neely, Director, Cambridge Service Alliance, has a good short blog covering the topic, "What is Servitization", that I recommend.

Servitization is the innovation of an organisation’s capabilities and processes to better create mutual value through a shift from selling product to selling Product-Service Systems. source: Andy Neely

In case you missed part one of this series, Rolls-Royce and GE Aviation don't sell aircraft engines (for the most part). They servitized their "physical product", gas turbine engines, into a bundled package of services and sell them on a subscription consumption basis = Power by the Hour ($/lbs-thrust/hr).

A simple yet incorrect analogy is that servitization is a more complex version of the Gillette razor and blades or HP printer and ink business model. These are marketing and sales strategies and methods, they are not servitization, per se. The analogy exists because of the high total profit margins of the marketing approach.

A recent financial analysis of a French engine OEM showed that 28% of their revenue from aftermarket service management activities was delivering 67% of their bottom line profits.

While the term servitization may not be commonplace within the information technology industry, the innovation is very well known and embraced. Software as a Service (SaaS), Infrastructure as a Service (IaaS), Platform as a Service (PaaS), Cloud Computing are all examples of servitizing physical products.

The service economy is transforming to the sharing economy through servitization and it is possibly the largest driver of producer and consumer (prosumer) value add.

IoT needs Servitization

One of the biggest smart home product categories is security, with a plethora of vendors on the market: SmartThings, InsteON, wemo, Lowes Iris, Nest, SimpliSafe, AT&T Digital Life, ... again, the environment is a dwelling and the intent is physical security.

Currently none of these product and service providers have fully servitized their solution nor have they partnered with the other stakeholder in the equation, namely P&C insurance companies.

SmartLighting may be the best example of the poor value proposition barrier to adoption. In case you haven't done the math on smart connected LED lights that cost from $30 to $3000, I'm personally shocked that there is even a market.

So here's the SmartLighting pitch:

• pay a relatively high CapEx up front and get an ROIC over the next 5-10 years.
• Oh, and by the way, the warranty only covers the first five years from the date of purchase - if you save your receipts.
• So if you don't use the 20,000 hrs within the first five years of use - which few people will leave their lights on for 12 hrs a day - the business case fails.

Note that the value proposition is not usage or consumption based. Sort of like not having "roll over minutes" on your phone voice or data plan.

But this is a perfect problem for an IoT solution, Lighting as a Service (LaaS) business model, since the device should be able to track usage.

The smart #SmartHome total solution vendor will emerge with a LaaS + HVACaaS subscription model having teamed with local energy wheeling companies (who will bring in a reduced $/kWhr price). In this model, all of the stakeholders share in the risk reward, and as we've seen in aerospace, the provider's financial upside if the physical product outlasts the projected amortized life is considerably higher.

IoT enables usage and consumption based subscription models. Software as a Service (SaaS), Infrastructure as a Service (IaaS), Platform as a Service (PaaS) have revolutionized IT, and similar business models will revolutionize operations and OT.

A #SmartHealth startup here in Atlanta is on a path to change physical therapy. They have developed an app and dongle that senses, measures and tracks the reps and force a patient exerts during exercises, capturing the data for later analysis by the therapist or her doctor. In this case we're talking about traditional medical diagnostics and prognostics. Sold on a usage subscription model, all of the prosumers, including the health insurance company, have a value add.

Speaking of insurance companies, of which there are several in Atlanta, some are in the aftermarket warranty and service lifecycle management business.

One of these insurers is moving into the #SmartHome / #ConnectedHome business. This is an obvious extension of what Progressive has already been doing in the automobile insurance industry - Usage Based Insurance (#UBI).

As I said at the beginning, IoT includes increasing knowledge to enable better "risk reduced" decision making and physical outcomes, and if there is one thing the insurance industry understands it is risk managed financial arbitrage.

IoT needs Service Lifecycle Management (SLM)

Since we started out with the Samsung CEO's vision of IoT, I thought it might be worth while telling a short story of my customer experience with them.

My wife and daughters are bonded to Apple, while my son and I prefer the Samsung world. Ashley, my oldest daughter, was moving to Chicago last May and needed a television. So we went to Costco where they had such a wonderful deal on Samsung HD Smart TVs that I bought two, one for her and one for myself.

About four months later, my smart connected (cable and internet) HDTV's picture went out.

Now this was a serious issue, as it was September and the beginning of college football season.

Since I didn't have the receipt, I called Costco Concierge service who had all of my information except the serial number. After some preliminary trouble shooting, the Costco Concierge placed me on hold to call Samsung to schedule an on site service visit.

A week later, the field service representative showed up in a cute little van with a beautiful Samsung wrap (they don't paint vehicles anymore) and in his bright blue Samsung pullover. He did a bit of physical trouble shooting and told me he needed to order a part.

Another week later, we repeated this event, but the new part didn't fix the problem - audio but still no picture. So he wrote up a report and said he was recommending the replacement of the TV.

Another week passes and I've heard nothing from Samsung, so I call Costco Concierge service who places me on hold and calls Samsung and in turn tells me the warranty claim had not been received.

Come to find out, just because you have a Samsung van and a Samsung pull over, doesn't make you a Samsung employee. Samsung USA had outsourced maintenance, repair and overhaul to regional providers, and the written form had not been received by Samsung's warranty department.

Another week passes, I'm into week five of the college football season, and still nothing from Samsung. More calls to Costco Concierge and more mis-routed paperwork between "departments" within Samsung, which turned out to also be outsourced to a third party, and finally after almost three months, I get my replacement TV.

My apologies for the drawn out story, but trust me, it was much more frustrating to experience, and it definitely lowered my brand bonds to Samsung.

If ever there were a reason for a TV to be smart and connected, this is it.

I assume BK Yoon's vision goes something like aircraft health management:

• TV components sensed and monitored for indications of degradation
• Connected to WiFi or Ethernet, TV proactively reports health and faults
• Remote diagnostics using fault codes, isolates probable causes
• Remote actions taken, prognostics indicate probable failure in 2 weeks
• Autonomic logistics system, having optimized the multi-echelon service parts distribution, schedules replacement component and field service representative
• Samsung calls and emails customer to schedule the service call
• TV fixed or replaced (given the Bayesian probability of success)
• No college football missed

And, of course the other elements of Service Lifecycle Management (SLM) such as Application Lifecycle Management / Firmware changes, Warranty Management, Service Parts Optimization, Technical Documentation, and feedback to the continuous improvement design and manufacturing loops in Product Lifecycle Management, are also enabled without paper forms and phone calls - even if select processes are outsourced.

Act 2 of IoT in each IoT Halo requires development of integrated SLM capabilities to close gaps in prosumers experiences.

Before you say, well this may be valid for consumer and industrial IoT but not wearables and SmartHealth IoT - I'll remind you there's a reason engineers adopted medical terms - diagnostics, prognostics, autonomics, health management , ... while the objects and science may be different (physics vs biological) the capabilities and processes are very similar.

To move from sickness management to health management, prosumers will combine wearables and XML records and trend analysis with data provided by 23andMe (a DNA profiling company) to provide your physician with the unique knowledge to take actions before an ailment becomes intrusive, all of which should be gladly paid for by insurers as it would reduces their risks and costs significantly.

To learn more about servitization and SLM, go to the Service Lifecycle Management forum on Linkedin.

IoT Discussion Takeaways

So what are the key takeaways from the four part series on IoT? In no particular order:

• The Internet of Things is the biggest game changer since the Internet - if this is the first time you've heard the term IoT, your behind
• IoT is changing how we live, work, consume, play, heal, regulate, ... - focus on the good value add and mindful of the risks
• IoT combines IT and OT - your IT department may not have these skills
• IoT combines IT and OT - data ownership may be an issue
• IoT creates big data - #bigdata solutions are not needed to do IoT
• IoT empowers consumers - providers need to be prepared to assume shared risks
• IoT enables usage based business models and the consumption sharing economy - the metrics of success will change accordingly
• IoT enables servitization of "products" - X as a Service is the standard business model
• IoT enables collaborative product service mixes - this creates some strange bedfellows, so look outside your traditional partner ecosystem
• IoT has very successfully been around in some industries for many years - leverage the human capital talent from these industries

And as always, I invite comments, critique and the global open mass collaboration of the Linkedin community.

Part 1: What is the Internet of Things IoT?

Part 2: What is the Value of Autonomic Things in IoT?

Part 3: Frameworks for IoT and Networks of Ecosystems

Part 6: Moneyball - Cashing the Check in IoT