The Internet of Things (IoT) -- the convergence of the digital and physical worlds -- has emerged as one of the main trends fueling the digital transformation of business, industry and the economy. The number of applications is diverse and growing – from the fitness trackers we wear, to the smart thermostats in our homes, to sensors that promote energy efficiency or monitor natural disasters resulting from climate change. Industrial IoT applications – improving efficiencies for factories, work sites and the growth in smart citites and offices – also have seen significant changes.
In a new report, “The Internet of Things: Catching up to an accelerating opportunity,” McKinsey estimates that the IoT could enable $5.5 trillion to $12.6 trillion in value globally by 2030, up from $1.6 trillion in 2020. However, these estimates actually predict slower growth than the author team estimated in a research report in 2015. In offering these revisions, we report on some significant headwinds to the IoT that enterprises have faced, many related to change management, cost, talent, and cybersecurity. The new report also describes our latest research on which parts of the economy the IoT’s value is likely to be centered, along with some tailwinds that will continue accelerating its growth, and some insights for companies on how to break through the headwinds, scale up their own IoT applications, and capture that growth.
Potential economic value of the IoT
The IoT stands at the forefront of our ability to bring together the digital and physical worlds in a manner that could have profound implications for both society and the economy. The benefits could be in the form of improving operations, the management of physical assets, and health and well-being, for example. Against that backdrop, the IoT can be the beating heart of digital transformations.
The research that led to our latest estimates of IoT value began in early 2020, before the COVID-19 pandemic that began in the first quarter of that year. We are, of course, highly cognizant of the pandemic’s impact. COVID represents a threat to both lives and livelihoods, but it also serves as a market-shaping force. It has actually spurred deployment of IoT solutions as the world grapples with managing the disease, enabling a faster and safer return to normalcy.
In looking for where the value is centered, we examined the settings (the types of physical environments where it is deployed) and different clusters of use cases, deployed across settings.
IOT value by setting
The IoT’s economic-value potential is concentrated in nine settings. The two biggest are factories and health care (Exhibit 1).
Factories could generate about 26 percent of the total value, with about one-third of that in improving operations. “A lot of this is related to optimization opportunities, whether those are in production, quality, cost, or energy savings,” said Senior Partner Mark Patel, one of the leaders of the research.
Human health settings could generate about 14 percent of the value, an area of particular interest since 2015. This runs the gamut from telemedicine to installing wearable monitors for glucose, the heart, exercise, or sleep, to innovations as groundbreaking as ingestible cameras. Consumer awareness has grown significantly in this area, as has interest from insurers and governments.
IoT value by use cases
Looking at clusters of use cases allowed us to observe the effects of those that are similar in nature but arise across settings (Exhibit 2).
The highest impact use case is operations optimization (in factories and elsewhere) followed by human productivity and health use cases. B2B use cases are expected to account for 62 to 65 percent of total IoT value in 2030, but that percentage is down from our 2015 estimate of 70 percent, largely because of the rapid acceleration of B2C solutions. These include automating home chores such as cleaning and cooking, managing home energy use, and security and safety, (e.g., monitoring water leaks). One of the fastest growing use cases, although still small, is autonomous vehicles, with an expected CAGR of 37 percent. While autonomous-driving systems steal the headlines, the steady increase in the use of sensors throughout vehicles is set to continue as consumers demand greater safety and reliability.
COVID’s impact on accelerating IoT
The changes in living and doing business brought about by the pandemic accelerated IoT adoption in three main areas: in the home to make life easier, in businesses to keep employees safer and productive and serve customers better, and in improving health care. However, Michael Chui, a Partner with MGI, sees a broader impact. “From my perspective, the biggest impact of COVID has been opening up the aperture in terms of executives’ minds in terms of what’s possible and the speed at which it can be done.”
IoT tailwinds and headwinds
The potential economic value from the IoT is being propelled by tailwinds on the human and technology sides. However, that value is not as big as we estimated in 2015, due to a series of headwinds that are holding back companies and some individuals from adopting it.
Tailwinds
Three main factors are accelerating IoT adoption across geographies.
- Perceived value proposition. Customers see much more value in IoT than they did in 2015. It is now is a core enabler of the digital transformations and sustainability drives under way in companies and public institutions around the world.
- Technology advancement. For the vast majority of IoT use cases, affordable technology now exists that enables deployment at scale. Sensors now cover the entire spectrum, from visual to acoustic, computing is more than fast enough, storage is ubiquitous, and battery power has improved. Progress in hardware has been matched by significant developments in advanced analytics and artificial intelligence that enable faster, more detailed insights and automated decision-making from data provided by sensors.
- Networks. Fourth-generation (4G) networks have spread to cover more people, and 5G networks are rapidly being deployed with higher capacity, reliability and speed.
Headwinds
Five main factors have emerged since our 2015 report to dampen IoT adoption.
- Change management. Organizations often let the IT department lead IoT adoption without required changes in governance processes, talent, and performance management. Capturing value at scale requires collaboration across functions to change people’s behavior, systems, and processes, combined with vigorous performance management.
- Interoperability. The IoT landscape contains numerous proprietary, “walled garden” technology ecosystems. Many organizations are struggling to get to scale without significant IT work to overcome the numerous system barriers.
- Installation. Consumers, enterprise customers, and governments often cite installation as one of the biggest cost issues in deploying IoT solutions at scale. The complexity of seemingly straightforward tasks, such as obtaining secure connectivity, retrofitting old devices, and linking into existing systems, adds difficulty, time, and cost.
- Cybersecurity. The rising number of IoT connections also increases vulnerable points for hackers to exploit.
- Privacy. Companies are grappling with what privacy their customers are willing to give up in return for lower prices, or special offers in a retail setting.
What it takes to scale the IoT
Companies sometimes take for granted that if they generate insight from the data and analysis emerging from IoT that it will turn into something good, said Mark Patel. The research shows this isn’t always true. “Actually what it takes is implementing in a way that’s familiar from a decision-making and workflow perspective, that is easy to integrate…and that becomes second nature or intuitive to the user,” he said. The research shows that successful players have taken seven main steps:
- Decide who owns the IoT. At present, many organizations disperse decisions across functions, business units, and levels. Companies that have successfully deployed IoT at scale assign a clear owner, who could come from a variety of functions and roles.
- Design for scale from the start. Too often, companies get caught up in the technology and focus only on pilot tests, leaving them in “pilot purgatory” without a plan to scale.
- Don’t dip your toe in the water. There is no silver-bullet use case. Deploying multiple use cases at the same time forces organizations to transform operating models, workflows, and processes to ensure value capture.
- Invest in technical talent. To overcome talent shortages, successful companies hire recruiters who speak the technical language and can navigate the landscape. These companies also upskill their current workforces in data sciences.
- Change the entire organization, not just IT. Technology alone will never be enough to unlock the potential of the IoT. Instead, the core operating model and workflow of the business must be redesigned.
- Push for interoperability. To overcome the fragmented nature of IoT technology ecosystems, corporate customers can push their vendors to provide interoperability that enables seamless integration of different use cases, solutions, and providers.
- Proactively shape your environment. Companies must build and control their IoT ecosystem, for example, prioritizing cybersecurity from the beginning, and working only with trustworthy suppliers. Companies also need cybersecurity risk-management that incorporates technical solutions and their business processes and procedures.
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The IoT market is growing fast. That growth may be slower than expected, but it is not for lack of confidence or belief in the technology’s impact. Rather, operational factors are holding back the market. If the IoT is to fulfill its potential, companies and their customers must address these headwinds.
We are planning an IoT webcast in Q1 of 2022. Please watch future alumni newsletters for updates.