One of the rationales behind a corporate investment in IoT is that it provides the data needed to understand products and equipment so well that they will never go down. Because once a company can predict the behavior of a product or machine, it can guarantee that product or machine’s performance. And from that point, it can offer that product or machine as a service.
That is a big technological and business shift, however. On the tech side, getting the sensors in place and setting up reliable connectivity is only the first step. After that, a company has to take the data coming from the machines those sensors are embedded into and figure out how to derive insights about product health from it. Which is tougher than it might sound. Companies can go through dozens of algorithms before finding one that works, and sometimes they have to adjust their expectations. For example, maybe they can’t predict exactly when a machine will fail, but they can predict when it will most need a tune-up.
But once the tech is in place — including the sensors, the connectivity, and the appropriate algorithm — there are business challenges to contend with. The biggest one is that many customers aren’t keen to buy a product as a service. Peter Zornio, CTO of Emerson Automation Solutions, explains that Emerson has been offering some of its products as a service for a few years, but only a small percentage of customers have signed up.
“So far our customers are stuck in the model that they’ve been in forever,” Zornio says. “Automation as a service, they struggle with that and this idea of turning their capex into opex.”
Capex refers to capital expenditures, or funds used to make one-time purchases of large pieces of equipment that can be depreciated over time. Opex are operational expenditures that are paid out monthly (or annually) and get a different accounting treatment. Buying a server falls under capex while buying cloud computing falls under opex. So when companies think about buying a piece of factory equipment as a service it moves that equipment from the capex category to opex. Many companies don’t have their budgets set up for that. But that’s not the concern of Zornio’s customers. In fact, it’s something much more basic.
He says his customers’ biggest hesitation is around security. They don’t want to create a connection between their factory operations and Emerson’s equipment-monitoring systems. In many cases, the customers are operational tech folks who have never had to understand cloud computing and are hesitant to open up holes in their network. They’re also concerned about the security of the data in a cloud environment.
Narbeh Derhacobian, CEO of Adesto, which makes semiconductors and gateway devices for the industrial IoT, is also trying to transition his business to sell more products as a service. He calls customer acceptance of the idea “a work in progress.” One business challenge Adesto faces is how different each implementation is.
For things like building automation, there’s an existing network of integrators that effectively customize hardware and software for each client. And integrators are willing to buy a portion of the end solution as a service and then add onto it, but doing so will change their business models as well. In other words, while customers may be wary when it comes to changing the way they buy their gear, there’s also a risk to the companies providing the gear itself.
Companies trying to sell products as a service have to realign everything from pricing models to sales incentives. Deloitte estimates that more than 65% of a typical company’s operational capabilities are affected when they shift to a services model. That’s why Emerson is undertaking this shift slowly and why Adesto will offer customers and integrators a choice of both options.
HPE, on the other hand, is going full throttle. At the end of June it said that it plans to make all of its products available as a service within the next three years. By 2022 it will offer its software, servers, and other products as a service. Maybe by then customers will have embraced the idea.