The Paradox in the Industrial IoT Outcome Economy: Collaborating with Partners, Mistrusting Customers | Sherpas in Blue Shirts

Posted On August 20, 2018

The fundamental principle of the Industrial IoT (IIoT) outcome economy is that the customer pays for outcomes, not assets. One example is that a mining company would pay an equipment vendor for the amount of coal it mines, instead of buying the capital expensive equipment itself. Another example is a car tire company getting compensated for the fuel efficiency its tires deliver – the outcome – instead of selling the tires themselves. Both of these are already a reality in the world of IIoT.

We’re seeing an increasing number of these aspirational outcome economy examples in our IoT research. Out of 150 IIoT adoption use cases, 20 percent had some element of outcome-led engagement.

But we also see a major paradoxical challenge. In such engagements, the seller needs to strongly collaborate with its partners to deliver a product in an outcome model. At the same time, however, the seller needs to have a watertight contract with its customers to eliminate any type of legal liability. And yes, this, to a certain extent, equates to mistrusting customers.

For example, think about a company that provides drilling-as-a-service. Under the agreement, the customer pays, say, $10 per five holes drilled. In this scenario, the drilling-as-a-service company must meticulously define in a legal contract the size and depth of the hole, the type of surface, when a hole is considered “to pay” versus “not to pay,” maintenance charges, etc. This is an extremely complex contractual engagement, as compared to the general practice of a customer buying a drill and the seller booking the revenue in its books.

Four Key Issues to Address for Success

  1. Strong seller balance sheet: The cost of developing the asset itself – the drill, the tire – needs to be funded. As the seller is not selling the asset anymore, it needs to put this cost in its own balance sheet. This essentially implies that the seller must have a strong balance sheet depth; otherwise, the arrangement won’t work or will push the seller out of business. This depth of balance sheet requirement also holds true in cases in which the seller pays its partners – e.g., the company that supplies the rubber used in tires – in the “traditional” manner yet only gets paid by its customers based on outcomes
  2. Simple catalogue contracting: The customer must have a simple contract to go through, clear T&Cs, and a catalogue of offerings that are, and are not, available in an outcome model. Sellers should not try to customize their offerings or create innovative contracts, at least initially, as they won’t be scalable or sustainable
  3. Definition of outcome: Unless the seller clearly defines, in the contract, the outcome the customer is buying – and includes guardrails for scenarios that fall into gray areas –legal and financial issues will absolutely, without question, arise. And that would spell potential disaster not only for the given seller, but also for the promises of the outcome economy
  4. Use case identification: Some industrial assets are better sold under a traditional model – and some are well-capable of being delivered via an outcome-based model. Sellers must carefully examine which of their assets are appropriate for an as-a-service delivery model. Once they decide, they must educate their customers on what it is, how it works, and what its upsides and downsides are.

The IIoT outcome economy holds great promise. And if the above four issues are sufficiently addressed, it can succeed. But if sellers fail to do so, and, instead, treat their customers as just consumers instead of partners in the journey, they will be doing this once in a generation opportunity a great disservice.

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