Collection No 6
The future of the Internet of Things is less certain than it seems.
We understand that the Internet of Things (IoT) is going to be big. As employees and consumers, we will be able to make decisions based on more accurate data. As managers, we will have new tools that reduce waste and inefficiencies in the workplace. But if this highly anticipated future is to happen, we must explore how financial rationalization, strategic partnering, and platform complexity influence the mortal enemy of the IoT: the product owner.
Historically, products have been launched through stage-gate product development, in which ROI and margin calculations have been the guide rails for decisions. Through this traditional lens, IoT devices simply do not appear attractive when compared with other potential investments. IoT device costs skyrocket, and not just because of embedded sensors. Existing products will often require new industrial designs and updated production lines to address power and connectivity requirements. For example, Whirlpool estimates that adding intelligence to a dishwasher might add five dollars to the cost of the unit. Add in software development—both an operating and capital expenditure—and you have a CFO who has never seen such off-the-charts payback periods.
In his Harvard Business Review article “The Capitalist’s Dilemma,” Clay Christensen indicates that common financial ratios used as success metrics can deter investment in growth. In the IoT arena, executives should instead use an ecosystem lens to identify opportunities for value creation. When the Philips corporation was creating its Hue lighting system, it probably did not justify the required investment with sales margin alone. More likely, it anticipated the engaged developer community that has launched 190 applications on the Hue platform to date. The flow of goods, services, dollars, and data must be evaluated over the long term, and projected returns should be expanded to encompass all potential opportunities in the ecosystem. Through these techniques, the true business value of the investment in IoT can be recognized, realized, and measured over time.
Direct revenue from IoT devices is minimal and often subsidized, while partnership opportunities tend to offer more significant revenue based on lead generation and data monetization. It takes an entrepreneurial mentality to establish the right partnerships. Nest is strategically going to market with Mercedes, Jawbone, and Whirlpool. This type of business development requires knocking on doors and navigating serious negotiations. Typical product owners lack the time and expertise to develop these B2B partnerships, but that is no excuse. Product owners need to reinvigorate the role of business development and leverage the same ecosystem lens used for opportunity identification to create key partnerships. They should hire employees from start-ups who know how to be creative when developing relationships. They must risk being transparent and open the factory doors in order to work on products together with go-to-market partners who increase their ability to capture value. Product owners must get out of their comfort zone.
IoT devices require software and cloud platforms. For hardware manufacturers who cringe at the word “software,” the enormity of this development task and the attendant organizational challenges are daunting. Companies that operated originally without core software competencies (like telcos and consumer electronics manufacturers) have had to restructure completely in order to commercialize connected devices. For a company like Honeywell, which has separate business units that manufacture thermostats and security systems, going to market with one seamless smart home solution required both reorganization and product roadmap consolidation.
To combat the platform hurdle, product owners must learn from other industries. They should investigate successful case studies, such as Medtronic’s CareLink platform, a system that enables physicians to check patients’ medical devices via the Internet. Successful companies outsource where possible, invest strategically in organizational design, and do not hesitate to acquire. Nimble start-ups have moved quickly in this space and offer valuable resources; Samsung’s recent acquisition of SmartThings is an example.
Product owners are facing these IoT hurdles—financial justification, strategic partnering, and platform complexity—across all industries. We see it every day in our work at frog. We have witnessed Nike’s digital group needing to justify the difference between its product margins and those brought in by running shoes. We have watched retailers launch an individual connected product without a scalable platform because of organizational issues. Our utility company clients have the capital available, but they lack business development skills, so they keep IoT projects small and experimental.
Take Medela, the breast pump manufacturer. Many geeky moms dream of a day when a breast pump will have embedded sensors and an integrated app that can provide volume details, notifications, and tips. MIT labs conducted a breast pump hackathon recently on just this concept. But other than market rumors, we have not seen innovative progress from Medela. Why? Perhaps because Medela has a profitable business model, solid market share, and partnerships focused primarily on distribution. The incentive is missing and the hurdles are high.
IoT product owners: we empathize, but we do not pardon you. The future of connected devices requires a new and forward-looking mechanism for measuring value. By viewing your business through an ecosystem lens, you can investigate the true potential of IoT. Through strategic partnerships and thoughtful investment in complex platforms, you can fulfill this potential. In order for the network of connected devices to reach critical mass, product owners must rise to the challenge and become the heroes of the future we all eagerly anticipate.
Lisa Jackson is an executive strategy director in the frog Seattle studio. She has extensive experience in business design and product development.