Business Model Revolution Ahead for System Integrators

The next time you take a cab, you might reflect on how disruption revolutionized a sleepy $100 billion industry overnight, with repercussions felt all around the world. Why should the system integration industry be shielded from similar disruption?

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Founded as recently as 2009, Uber applied some technology and, importantly, an innovative business model to the taxi industry. By doing so, it created the world’s most valuable startup worth about $70 billion, according to The Economist. With its rapid global expansion, it has collided with protectionist laws along its path. It has also challenged past beliefs held around car ownership, which could be forgone in the future. Members of the younger generation have already been distancing themselves from the car, placing ownership of it well below the smartphone on their list of “must haves.”

We could be reaching a point where terms like the Industrial Internet of Things (IIoT) Industry 4.0 and smart industry might be losing their power through overuse. Putting the buzzword noise aside and keeping the Uber example in mind as a reference, you might hear the calm before the storm.

For some, the new economy looks only like an incremental change from our current one. This is far from the truth. If you reference back to the taxi industry, this was an industry receptive to new technology. Way before mobile phones, taxi operators could communicate with the dispatcher and between themselves via radio. Automatic dispatching systems started to find their ways more than 30 years ago. The transformative power of Uber came through the empowerment of the user and the ability to create an almost infinite supply of drivers that bring their own vehicles with them. The model empowers the user because they can hail the cab, track the location of the taxi on its way, select between different ride options (e.g. shared, luxury limo), pay via the app and rate the driver at the end. On the driver side, Uber has created a vast pool of supply by allowing drivers to determine when and for how long they work, building up a force of part-time drivers. Through its flexibility and acceptance, Uber has, in effect, increased the taxi market.

Taking one step back, we can identify the following characteristics of these transformative business models.

Think big—really big!

Engineers are trained to deal with constraints or, said differently, manage around scarcity. In the early days of programmable logic controllers (PLCs), the memory of the device was expensive and thus limited. Effort was directed to writing code in ways that would maximize the use of the memory and get the job done. When memory became less of a constraint, it allowed the focus to shift toward better programming practices and interfacing. Engineers working on electronics for products manufactured in large volumes were permanently searching for cost-saving opportunities in their designs. A few pennies here and there added to a few dollars per unit and a significant savings when taking the full production volume into account.

Over time, technology has become less of a constraint. The area where value resides is in the understanding of specific customer or market needs first to then craft differentiated solutions with strong associated value propositions and unique business models to deliver them. Engineers should be encouraged to “think big—really big!” and lay out ambitious goals, not different from those projects engineers have set for themselves in the past: national railroad and highway systems, colossal dams, transformative interoceanic canals and even landing a man on the moon! Free reign needs to be given to engineers’ natural inquisitive nature and problem solving mindset.

“Think big—really big!” requires taking a very broad view. In the past, the scope of a solution was limited to its respective silo, such as industrial, commercial or residential. The walls were erected through industry- or silo-specific protocols, systems and organizations. This restricted thinking as well. Instead of viewing the market from the traditional vertical industry perspective, challenge yourself to focus on other potential angles like segmenting by jobs and circumstances rather than by verticals, or pricing outcomes rather than parts. By doing so, you can see unique opportunities. If the thinking is directed toward developing solutions with outcomes in mind, it will generate different perspectives and allow crafting of powerful and differentiated value propositions. New business models can then be generated to deliver these solutions.

Solutions that transcend traditional boundaries and that take the best from each vertical or silo have the potential to become really best-in-class solutions, capable of delivering to a very broad market (industry and geography). This, of course, demands the ability to quickly scale up to their maximum potential. There is another reason why developing broad solutions is key: Speed to market is of the essence and first-mover advantage is of paramount importance.

Making one more reference to Uber: The ambition of this successful startup is unlimited. Not satisfied with their success in the taxi service market, they target the 10x larger $10 trillion personal transport market. Today, Uber has been moving into food delivery and is actively engaged in efforts toward self-driving cars. They see the potential as limitless, with the vision to ultimately eliminate car ownership.

Fast with the solution, faster with refinement

Most system integrators normally deliver custom solutions to solve particular problems of single customers. Some system integrators have also worked to create “productized solutions” that aim to be sold to a set of customers and that can be configured by the user and/or by self-learning. The new opportunities will look more like productized solutions as they allow scalability, a key element.

Custom and productized solutions place very different requirements on the system integrator’s organization. The productized solution most likely requires:

  • A solid understanding of a particular market need for which the solutions are developed.
  • An ability to extrapolate the understanding to a broader set of potential customers.
  • A proactive selling approach. An important set of system integrators don’t manage their sales through dedicated sales resources but base it on repeat business, word of mouth or proactive sales efforts by the owner.
  • An ability to prototype quickly, and also have room to “fail fast”—in other words, the ability to fail, recognize the failure quickly, learn from the mistakes and move on.

Where are the ideas going to come from? Ideation processes are not very common among system integrators, but will become necessary if they want to evolve into the productized solutions space. By working closely with their customers, system integrators can develop an understanding of underserved needs. Developing some internal practices could help them make ideation an ongoing process.

It is important to recognize that getting it right means developing a solution that meets the requirements of the target market on all aspects, not just the technical features. Some companies like to combine “top down” (identification of top megatrends) with “bottoms up” (assessing the impact of megatrends on industries, followed by rapid prototyping, testing and ultimate rollout) approaches to help them in their search of new ideas.

Speed to market is of the essence. It is important to balance the need for speed with the desire for perfection. In the new world, there might be no room for a second player. Facebook might not have been the first in its space, but it is basically alone today.

New approach to risk, funding and revenue

In a traditional project, the risk the system integrator bears is normally centered around the time estimated for the delivery of a project and the ability to deliver on time, not to mention errors and omissions. In the new world, the system integrator could bear a different type of risk—one associated with the development cost of a productized solution, the return of which will be determined by the success of that particular solution in a broader market.

This has important implications:

  • The new world might challenge the notion of risk management for successful system integration company owners. For serial venture capitalists, having one out of four investments work out to be profitable is quite normal. But this translates to a failure rate of 75 percent, something totally unacceptable from the perspective of traditional system integration.
  • The revenue stream in the new world is likely to resemble something closer to a subscription model, as opposed to the project-centric traditional payment approach. This translates into the need for upfront investment with a longer period to recoup the investment, and the potential to lose it.
  • Because of this, system integrators might want to partner up with external investors. System integrators will have to create and defend their business plans in front of potential investors.
  • With the dramatic changes taking place in our industry, the views on investing will change as well. In the past, the only reason to invest was to yield a positive return. The picture has changed to add the scenario of investment as insurance and to avoid a large loss.

A fortunate thing of our time is that private equity has found its way to the system integration market. Creation and delivery of platforms will increase the investment opportunity further.

Embrace collaboration and partnerships

Because solutions are likely to transcend traditional scopes and markets, the need for collaboration is paramount. Speed to market could be another reason to look for partners. Finding good partners does not happen automatically and it requires a proactive effort to find prospects, sell the idea, create a contract and manage the entire partnerships ecosystem. System integrators might need to bring this competence in house.

The involvement of system integrators in the new opportunities can move along a risk/reward continuum, where the system integrator’s role is:

  1. An app developer, leveraging application expertise and commercializing on the platforms of automation vendors.
  2. An IIoT deployment partner, providing system integration work that could include applications, such as manufacturing execution systems (MES), or users outside the traditional industrial automation space. These opportunities might involve risk sharing or financial investment by the system integrator.
  3. An IIoT entrepreneur, developing and commercializing platforms or services, where the system integrator is likely to seek external investment to share risk and enable scaling up.

All these opportunities are available to system integrators today.

Summary

Next time you take a cab, you might want to reflect on what a traditional taxi operator thought of Uber back in 2009. Your thoughts might carry you to the title of the book by Andrew Grove, former CEO of Intel: Only the Paranoid Survive. If you are a system integrator, are you taking a defensive position? Or are you transforming yourself to leverage the emerging opportunities?

In my regular conversations with system integrators, I have started to see the creation of chief technology officer (CTO) positions and even a few cases where the owner has nominated a general manager so that they can dedicate themselves to looking for their space in the evolving market and positioning their company for the future.

In the past, system integrators have risen up to the challenge. There is no reason to believe that the anticipated growth outlook will not translate into a new era of explosive expansion.

José M. Rivera is the CEO of the Control System Integrators Association (CSIA). He has worked to elevate the level of the system integration industry by broadening the adoption of the association’s best practices that help independent system integrators build better companies.

 

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