The Internet of Things (IoT) is claimed to be the fourth industrial revolution, which will enable a new class of businesses to emerge, delivering products and services to meet customers growing expectations.

Producing the world’s best widget can no longer sustain a company unless it can gather every possible bit of data about its performance, environment and interaction with humans. With these capabilities suppliers can offer add on services as well as gather data about how their products operate and use that to predict future behaviours.

With this data, companies can optimise performance and drive profitable outcomes for themselves through the users experiences.

In the Aeronautics industry, Rolls Royce Gas Turbine Division (as long ago as the 1960’s) introduced the concept of a performance based contract where the customer paid for using the engine by the hour rather than paying for the engine upfront.

This produced a powerful alignment of incentives between the manufacturer and customer including reliability of service, reduced capital expenditure and accurate cost projection for the operator. The benefits for Rolls Royce included mitigation of after-market competition risk, stable revenue projection and reduced risk of product commoditization. The other two world leading manufacturers of gas turbines for large civil aircraft followed suit.

It is interesting to note that Rolls Royce manufacture land based gas turbine engines to generate electricity initially to meet peak load demand and more recently to deliver distributed energy resources but don’t use the same performance based contract model. We suspect the reason for this is that in the case of aero engines they are selling direct to the end user but in the case of land engines there are other parties in the distribution chain who are not so keen to go down this route.

Smart buildings and the contractual procedures to construct them are complex and involve a multitude of contacts that often create a barrier to seamlessly integrate all the different BAS services.

However a pivotal change to normal business models within the building automation business is being bought about by the IoT and the delivery of products as a service are now starting to underpin projects.

But today, whilst the technology is available to deliver a total solution it requires some fundamental changes to these contractual procedures and strong alliances between the IT Communications, Software and BAS services companies. Such alliances can deliver the total performance based contracts which is more likely to meet the building owners and end user needs.

The IoT in buildings could therefore cause massive disruption to the existing supply chain but also open up new business opportunities that will require not just innovative application of the technology but with the rich data, bring new business models that can deliver against building owners expectations.

Our new report Startups and Their Impact on Smart Buildings shows how new companies will make a critical contribution to this process. Major corporations are being obliged to rapidly reinvent themselves, and tap into new reservoirs of talent through StartUps, because incremental improvements will not deliver the core services required to deliver the next multi-billion business.

Whilst Startups can initiate the concept and early stage development they need to partner with corporations to get adequate finance and help to progress quickly through the accelerator and incubation stages and then major assistance in getting the product to market.

The opportunities presented by the IoT are too big and complex for any single company to capture alone and therefore strategic alliances across the technology threads are vital. Whilst at the same time major corporations need to work with StartUps to tap into new reservoirs of talent. Jointly this will deliver pure performance based contracts that building owners want.

This article is based on several of our research reports, including - The Market for Building Performance Software 2016 to 2020 and StartUps and their Impact on Smart Buildings 2017.

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