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IoT is a piece of the larger IT strategy and should not be treated as a unicorn

Let us begin with the bad news: Many IT and operational technology (OT) vendors were disappointed — and some incurred damage or had to scramble to realign — as the IoT opportunity failed to live up to inflated expectations prevalent between 2015 and 2017. Many anticipated far more rapid growth than was reasonable, given that IoT is neither a technology nor a market, but a technique or a class of solutions. Many also thought that version 1.0 of horizontal IoT platforms was a fast and easy sell. An early victim was General Electric (NYSE: GE), but TBR expects other large names to narrow their IoT businesses and investments, if they have not already, and several smaller names to disappear or get eaten by bigger fish as they find themselves spinning their wheels in the mud with nondifferentiated portfolios.

The good news: Starting in late 2018 and continuing into 2019, TBR has observed the IoT opportunity recovering as lessons from the difficult times have led to increased sanity and smarter messaging around IoT. We believe that the pace of IoT project implementation is increasing, but that the mix has shifted to smaller projects. Over time, however, the number of active projects will grow and the amount of data they produce will also grow, leading to an accelerating growth curve.

TBR believes a few significant realizations and realignments are driving acceleration:

  • IoT really is not a market (although that is the easiest way to describe it) nor a technology. It is a technique for applying technology. It is not a very novel technique, but rather an evolution of IT solutioning that includes sensors. More vendors and customers are coming to understand what IoT is and are avoiding the perception of IoT as something that is new, novel and complex, making it easier for vendors to leverage IoT to help customers overcome business challenges. With IoT being treated as one tool in the larger IT solutioning toolbox and the focus turning to solving the end problem, rather than defining the technology needed to get there, vendor-customer relationships are back to business as usual. Vendors do not have to get bogged down in education cycles as much because customers understand IT solutioning, and vendors can focus on delivering solution components instead of getting embroiled in discussions on the perception of IoT as a discrete and transformational technology and the complexity, hesitation and perceived risk that stem from that.
  • IoT is not easy. This is true for two reasons: because customer organizations are complex and have numerous stakeholders with differing priorities, visions and systems, and because IoT is rarely implemented in and of itself. IoT is more often tied with existing or new systems, such as product lifecycle management, supply chain management, enterprise resource planning software, or a multitude of specialized software from ISVs. Adoption is largely from the bottom up in organizations, but customer IoT champions and vendors are realizing that adoption must be supported from the top down to extract maximum value from IoT. Customers are increasingly adding CIO and chief digital officer (CDO) roles to guide holistic, consistent transformation, and vendors are investing in sales strategies targeted at the C-Suite, such as innovation centers and improved messaging. To answer the second challenge, vendors are learning that they cannot address everything alone and must partner to tackle the variety of interconnected systems and build best-in-class solutions.
  • Being the best at a few select components of IoT is better than being OK at everything. Thousands of vendors are attacking the IoT opportunity, culminates in a busy, confusing and hypercompetitive market for customers. Winning vendors are finding their swim lanes and exploiting their niches, such as self-service Amazon Web Services (Nasdaq: AMZN), application-focused Oracle (NYSE: ORCL), embedded-driver Dell Technologies (NYSE: DELL) and things-focused Bosch. These vendors are increasingly known for being the strongest in their chosen niches, and their narrower focuses not only make them prime targets for systems integrators to pull into solutions but also make partnerships easier, with joint go-to-market efforts proving to be a winning strategy for vendors to employ beyond their legacy customer bases. 
  • Packaged solutions are emerging. With customization comes cost and complexity, anathemas to the customer base, especially large customers. As vendors begin packaging components together for shared applications or to address common challenges, costs are beginning to develop boundaries, helping customers understand exactly how IoT can be used and what to expect in terms of ROI. TBR expects packaged solutions to drive steady market growth moving forward. Each solution has its own growth curve, with some being quite rapid—but taken together, these solutions are delivering accelerating but moderate growth.

Atos in the spotlight with digitally enabled vertical use cases

SyntBots allow Atos to differentiate at points of disruption as the company gradually expands revenue share from digital services

A year ago, Atos aimed for Digital Transformation Factory (DTF) revenues to contribute 30% of the company’s total sales in 2018 and 40% in 2019. Atos hit that goal in 2018, and TBR expects Atos will reach its target for 2019 as well. TBR believes the transparency and visibility around Atos’ DTF portfolio make it a more believable use case compared to the offerings of industry peers, many of which fold digital services under a rather broad umbrella that encompasses legacy capabilities. Atos’ realistic outlook around DTF enables the company to provide guidance for digital services to grow at a CAGR of 2% to 3% through 2021, a goal that TBR believes the company will hit, especially as the recently acquired assets from Syntel, such as SyntBots, enhance Atos Codex (one of DTF’s four pillars) capabilities around AI and automation.

With SyntBots in place, Atos has certainly broadened its addressable market to better compete for digital services at scale across both IT and OT. Integrating traditional tools along with AI and machine learning, SyntBots allow Atos to reduce the complexity of clients’ IT architectures, providing the typical benefits of automation including cost reduction. TBR believes the true benefit, however, will stem from Atos’ ability to convince clients to reinvest cost savings in other areas, with Atos remaining the prime IT services vendor. According to TBR’s 4Q18 Digital Transformation Customer Research, extension remains the most natural jumping-off point to DT initiatives, as enterprises can experiment with disruptive technologies within familiar business operations, see their value in generating new business insights, and then use those insights to reimagine processes.

SyntBots’ Automated Operations and Product Engineering capabilities create additional entry points, which are needed to take advantage of with the “extension” phase of DT. Atos can engage with multiple CxOs at a single client to become aware of DT initiatives happening outside the CxOs’ current engagements and to stay top of mind when those initiatives move to the front burner — if not as the primary provider due to lack of a certain specialized capability, then as the conduit to a partner that can address the next initiative. While points of arrival to new technologies, such as AI and cloud, are rather common, we believe points of departure and points of disruption are areas where Atos has an opportunity to differentiate. Using legacy systems to build a repository of knowledge, rather than to just manage clients’ technical debt with the assistance of AI, is one way for Atos to compete at speed for DT-related opportunities.

While rivals such as Accenture (NYSE: ACN) maintain similar platforms, such as myWizard, Atos’ position as a “silent assassin within the North America market,” as Atos North America CEO Simon Walsh termed it, could certainly catch rivals by surprise and enable Atos to overdeliver in its digital services performance.

Atos' organizational position in digital transformation continuum

For the fourth consecutive year, Atos held its annual Global Analyst Conference in Boston, where the company continued to emphasize expansion in North America and the diversification of its global revenue base, as well as its desire to be closer to the U.S.-based IT industry analyst community. The company covered core areas of its three-year plan — codenamed ADVANCE 2021, which stands for “Atos Digital Value Advancing Customer Excellence” — and underscored its strategy to enable customers’ digital businesses by providing secure, data-driven ecosystems of multiple infrastructures, industry-specific services and technologies, and smart data platforms and services.

HCL Technologies (HCLT): IoT NXT Summit

Working with leading technology vendors to develop emerging technology offerings in areas such as Internet of Things (IoT) challenges HCL Technologies (HCLT) to differentiate from peers. However, leveraging its deep engineering expertise integrated with vertical capabilities enables HCLT to be more competitive, driving business transformation for new and existing clients with IoT-based services solutions.

TBR perspective

HCLT’s IoT WoRKS business unit benefits from demand for IoT, primarily among existing customers. The company has some advantages in the IoT business and will continue to expand its IoT practice as it generates IP that will prove useful as IoT becomes an increasingly important part of both build and run services.

HCLT has a long history in electronics and mechanical engineering and continues to provide engineering and R&D services beyond the usual scope of IT-oriented companies. TBR has written extensively about HCLT’s engineering heritage and offerings, noting the company’s engineering and R&D expertise serves as a key differentiator within the broader IT services space. Our white paper HCLT’s Intelligent Sustenance Engineering Service Line Unit delivers data insights to extend the product life cycle discusses the impact of engineering and R&D expertise on the value of HCLT’s data analytics services through differentiation. HCLT’s history and continued use of engineering and R&D help the company navigate customers’ operations technology (OT) areas in both technical and cultural engagements, a necessity in IoT. Nevertheless, in IoT, the company engages primarily with customers’ IT organizations, and HCLT’s advantage in the IoT space enables it to efficiently implement IoT-driven solutions using more complex OT factors. However, as OT is far more diverse than IT, one type of OT expertise does not imply knowledge of another. Although HCLT’s established engineering experiences, combined with its IT services for IoT environments, provide an advantage for the company, adding OT skills would bridge any gaps within OT areas and create a simple but strong advantage. TBR believes that OT organizations will continue to initiate IoT solutions, but will evolve to integrate IT-based practices focused on security, scalability and manageability.

 

On Aug. 22, 2018, TBR attended HCLT’s IoT NXT Summit at the company’s recently opened IoT COLLAB innovation center in Redmond, Wash. The center is located on the same property as HCLT’s Lab 21, which was opened in collaboration with Microsoft (Nasdaq: MSFT) around artificial intelligence (AI) and Cortana Analytics in the Azure Cloud. The analyst event centered on HCLT’s 3-year-old IoT WoRKS business unit and featured demonstrations of HCLT’s IoT solutions and how the company works with its partners to develop IoT portfolio offerings as well as extensive discussions with HCLT’s IoT WoRKS industry leads. During the event, HCLT emphasized its focus on existing assets, enhanced by partners and vertical expertise, which, combined with growing demand for cloud-based infrastructure services, enables HCLT to transform clients’ business operations with IoT solutions, providing scale and speed at the edge.

Increased market clarity drives 16.1% year-to-year growth in commercial IoT revenue

Technology Business Research, Inc.’s (TBR) 2Q18 Commercial IoT Benchmark recorded revenue growth of 16.1% year-to-year, to $10.3 billion, in 2Q18, among the 28 IT and operational technology (OT) vendors we benchmark. The revenue growth is largely a result of continued implementation of Internet of Thing (IoT) and growth of installed IoT solutions.

The dousing of rampant IoT hype, which only served to confuse and overwhelm customers and vendors, is helping drive the growth of installed IoT solutions. As the hype dies out, a wave of increased clarity and maturation is forming with vendors rationalizing their go-to-market strategies and messaging, leading to customers better understanding how to apply IoT and vendors learning how to assemble solutions. Packaged solutions are emerging as vendors cooperate, focusing on their strengths, and assemble components sets that solve verticalwide challenges. TBR believes these factors are driving tactical business-focused IoT projects to supersede overambitious projects stuck in proof-of-concept limbo.

However, while easier than in the past, IoT design and implementation are still a challenge. TBR does not expect a huge explosion of revenue beyond midteen growth going forward.

Total 2Q18 commercial IoT benchmarked gross profit increased 16.6% year-to-year to $5.1 billion. Reduced complexity in IoT due to increased knowledge around building and applying IoT as well as the streamlining of portfolios as a result of increased partnering is improving vendor profitability. Also, vendors are leveraging specialized tools, such as artificial intelligence (AI), to justify higher pricing.

 

TBR’s Commercial IoT Benchmark highlights current commercial IoT revenue and gross profit for vendors. TBR leverages financial models and projections across a diverse set of IT and OT components. Additionally, the benchmark outlines the major vendor drivers and trends shaping the market.

Time to get industrial about healthcare

Internet of Things (IoT) hesitation in the healthcare vertical stems from the industry’s complexity, as it is chained by liability and privacy issues, a general unease about change, legacy equipment, and unevolved processes. These complexities are all rooted in real concerns of customers and vendors in the healthcare space. However, the “Industrial IoT Analytics for the Healthcare Industry” presentation by Glassbeam employees Gopal Sundaramoorthy and Puneet Pandit at PTC’s LiveWorx event highlighted that it is time to shift how vendors go to market within the healthcare industry.

Sundaramoorthy indicated there are not a lot of high-level analytics, or grand-scheme IoT implementations, in healthcare. The challenges mentioned above, especially privacy issues, including healthcare organizations’ desire to keep data internal, prevent it. Instead, Sundaramoorthy explained vendors need to talk to healthcare organizations like they talk to manufacturers, focusing on how healthcare organizations can connect equipment to improve asset utilization, save costs and increase efficiencies. This is the operational technology (OT) discussion instead of the IT discussion.

With asset utilization, for example, how is a medical scanning device being used? How many scans are being done and in how much time, what types of scans are being done, and when are the scans happening? Or, a conversation around operator utilization could include aspects such as determining whether operators are fully trained by measuring what functions they are using and how long they take compared to average or trained users. Likewise, predictive maintenance, such as noting when a bulb needs to be replaced in an MRI machine, helps avoid costly or dangerous downtime. These simpler-to-implement OT-based measurements will help hospitals run more efficiently and save money just through connecting machines and adding straightforward analytics. It also helps medical device manufacturers better understand why things are going wrong and how to best improve diagnostic time, shorten repair time and relieve frustration for medical professionals.

Sundaramoorthy indicated that simple connectivity is healthcare’s biggest problem. To break the hesitation barrier, vendors should focus on solving the first step in IoT: connecting the often woefully out-of-date machinery and building in IoT, in the spirit of OT, to prove ROI to medical organizations. After machines are connected and OT-based IoT is proving consistent ROI, the discussion to move to more transformative IT use cases will be a much easier sell.

Smart city solutions have to think outside the trash bin

The “Connecting Your Business to the Smart Cities We All Live In” panel during PTC’s LiveWorx event included ideas consistent with TBR’s previous views on smart cities. One of the most interesting speakers was Nigel Jacob, the co-founder of the Mayor’s Office of New Urban Mechanics, an R&D organization within Boston’s City Hall. Jacob gave a presentation on the “Boston Smart City Playbook,” compiled by his organization, which lists the following rules for vendor engagement:

  1. Stop sending sales people.
  2. Solve real problems for real people.
  3. Don’t worship efficiency.
  4. Better decisions, not (just) better data
  5. Platforms make us go ¯\_(ツ)_/¯.
  6. Toward a “public” privacy policy

All of these points align well with TBR’s view of how vendors need to improve their go-to-market strategy, but a few stood out. “Stop sending sales people” translates well inside and outside smart city applications. Internet of Things (IoT) is a complex technology, and it is difficult for end users to really understand what IoT can do for them. Public sector officials, just like the CEO, CIO or CTO of any private organization, do not want to listen to a sales pitch about why a technology is great. Instead, in the example of Boston, decision makers desire vendor engineers or consultants to be on-site to explain why IoT is good for their city’s particular challenges, how it can be implemented and how it has worked for others, as well as to provide concrete evidence of what Boston can expect to gain in the long run. Only then will a vendor’s solution be taken seriously.

“Better decisions, not (just) better data” is a point TBR believes vendors should take to heart. Data is a building block to insight, but piles of data with no feasible way to turn the data into actionable insight is little more useful than no data at all. Customers seek insight through data, but if there is not an easy path to achieving insight, its value is significantly reduced. Customers believe that to get value out of IoT, they need to bolster their IT, operational technology (OT) and data scientist staff. TBR believes incorporating artificial intelligence and improving user interfaces to simplify IoT products is a path to unlocking value for business decision makers, enabling them to make better decisions without incurring huge selling, general and administrative expenses.

“Platforms make us go ¯\_(ツ)_/¯” is also parallel to customer concerns recorded by TBR. Platforms are exciting to techies, but they do not mean much to customers. Instead, they generally raise fears of platform lock-in, where customers will be unable to access outside technologies or risk becoming a member of a dying standard. Also, the platform level is often too high for customers to understand how IoT will benefit them. Vendors must continue to boast interoperability and focus on use cases or small deployments. Small deployments that solve immediate problems — not technical and platform-based discussions — will be vendors’ gateways to customers. After a few successful small projects, vendors can introduce customers to the grander view centered on a wide platform.

Bigbelly vice president of North American Distribution and Global Marketing Leila Dillon, another presenter during the panel, explained how Bigbelly solved multiple problems for individual cities by thinking outside the box. The company sells solar-powered waste systems, mostly bins, that automatically compact trash and alert waste management when they need to be picked up. This granted cities substantially increased efficiency not only because automatic compacting eliminated waste buildup but also because the alert system saved wasted time having trucks on routes checking all bins instead of only those that are full. Additionally, Bigbelly observed that by thinking creatively, it could further cities’ smart city goals. It started working with cities to equip waste bins with small-cell technology to enable ubiquitous citizen connectivity. In other cases, the company equipped cameras or sensors to track foot or street traffic to help cities understand congestion. Bigbelly is a great example of a company helping to solve a pointed problem — in this case, making waste collection more efficient — and then working with the cities to build additional IoT use cases one success at a time.