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IoT value even greater than the hype, says McKinsey

Any business that fails to invest heavily in the internet of things in the next 10 years is unlikely to be able to remain competitive, according to McKinsey researcher Dan Aharon

The value of the internet of things (IoT) may exceed the hype, according to research by the McKinsey Global Institute.

“We estimate that the total potential value of IoT will be between $3.9tn and $11.1tn a year by 2025,” said Dan Aharon, senior engagement manager at McKinsey & Company.

“Most of this value will come from operations and equipment optimisation in factories, chore automation and security in the home, automation in the retail sector, and improvements in public health and transportation services,” he told journalists at PTC LiveWorx Europe 2015 in Stuttgart, Germany.

Aharon believes that any business that fails to invest heavily in IoT in the next 10 years will be unlikely to be able to remain competitive.

According to a McKinsey report co-authored by Aharon and  published in June 2015, other key areas where IoT will drive value include autonomous vehicles and condition-based vehicle maintenance, security and energy improvements in offices, operations and safety optimisation in work sites, human health and fitness, and logistics and navigation.

McKinsey expects twice as much value to come from business-to-business (B2B) applications than from business-to-consumer (B2C) applications, and expects advanced economies to get more value from IoT than developing economies. 

These two markets will also benefit in different ways. For example, developed markets will benefit from improved health treatments through remote heart monitors, while developing markets will be able to leapfrog the development of medical centres through telemedicine services.

The main types of opportunities enabled by IoT are the transformation of business processes through things like predictive maintenance, better asset utilitsation and higher productivity, and enabling new business models such as services based on remote monitoring capabilities.

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However, capturing the maximum benefits, the report said, will require an understanding of where real value can be created, and successfully addressing various system issues.

Chief among these issues is interoperability, which McKinsey believes will be required to capture 40% of the total value.

“Interoperabiltiy will enable huge incremental value, but it is not happening in any major way yet and is a big barrier that needs to be overcome,” said Aharon.

“Allied to interoperability, organisations need to overcome the barrier of trust and concerns about security and privacy to enable them to share data more freely,” he said.

At present, McKinsey estimates that less than 1% of data generated is used for things such as anomaly detection and real-time control. More can be used for optimisation and prediction, which provide the greatest value, the report said.

“Like interoperability, data analytics is key to unlocking value,” said Aharon.

Other barriers to be overcome, he said, include the need for cheaper sensors and stronger batteries, the need for business structure and cultures to be better aligned to horizontal and vertical integration, and public policy to ensure regulation does not hinder digital transformation.

According to the report, advanced economies are likely to lead the deployment of IoT technologies, while Europe is expected to get the biggest benefit in terms of improved logistics, Australia and Canada are expected to benefit most from improvements in the mining and the oil and gas industry, and China is expected to get the most value from factory optimisation.

A dynamic industry is evolving around IoT technology, the report said, and like other technology waves there are opportunities for both incumbents and new players.

“Digitisation blurs the lines between technology companies and other types of companies, so makers of industrial machinery for example, are creating new business models, but using IoT links and data to offer their products as a service,” the report said.

However, to realise the full potential from IoT applications, the report said technology will need to continue to evolve, providing lower costs and more robust data analytics.

“In almost all settings, IoT systems raise questions about data security and privacy. And in most organisations, taking advantage of the IoT opportunity will require leaders to truly embrace data-driven decision making,” the report concludes.

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