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Monetising the unknown unknowns in Digital Transformation

MAR 03, 2020 | Jim Morrish
region: ALL sector: ALL technology: ALL

Digital Transformation (DX) solutions are typically sold on the basis of a business case, but this approach can leave a significant amount of value on the table. The issue is that only ‘known’, or expected, savings tend to figure in end-user business cases, whereas there are often unexpected benefits to be had by deploying DX solutions.

Take for example the implementation of a ‘smart’ building control solution. It is relatively easy to identify expected savings from adjusting lighting and HVAC systems given actual (and expected) occupancy levels, the weather, and other considerations. These are all expected benefits that can be secured from the deployment of a smart building management system, and figures for costs savings can be calculated.

But what about the unexpected savings? For example, a smart buildings management system may reveal that an HVAC air duct has become disconnected and a significant volume of heated (or chilled) air is escaping, resulting in reduced efficiency and increased costs. Building occupants may never have noticed this problem without a smart management system – the air ducts may leak, but temperature sensors are set and the HVAC system just works a bit harder to achieve the set temperatures. There is no significant impact to the comfort of building occupants, just inefficiency and waste. A smart buildings management system may quickly identify this kind of problem, resulting in significant savings – but these kinds of savings would never have figured in the business case for deploying the smart buildings management system (unless leaking ductwork is a recognised and known problem with a particular building).

I was reminded of this conundrum when speaking with Delair, a drone manufacturer and provider of associated analytics via a platform. Delair can fly drones to inspect assets such as utility transmission cables, mobile network masts and solar farms. And they can use AI to detect a range of problems with these assets (for example, fraying cables, bird’s nests, and failing solar panel elements, respectively). But, for example, they also have a quarrying customer that has used the digital twin information gathered for their quarry to help deal with accidental flooding of the site, including identifying where to locate pumps and estimating the time needed to make the site operational again. I’m sure that this specific benefit would never have figured in any procurement cost-benefit analysis.

Delair point out that there is another category of benefit that does not typically figure in end user business cases, and that’s the wealth of new application ideas that end users tend to have once a DX solution (in Delair’s case a visual-analytics platform) is in place. This general direction of travel would be well-known to many vendors in the DX space, but potentially not expected by individual end users when they are looking to procure an initial solution.

The question is: how to identify and bank the value associated with these kinds of benefits?

In relatively well-developed markets with multiple alternative providers, the ‘unknown’ benefits would most naturally accrue to the end user purchasing the DX solution in question. End users will run a procurement exercise and select a provider on the basis of cost and value proposition. Any unforeseen value will then be realised by the end user. There is a risk, however, that end users may gravitate towards simpler and less sophisticated solutions that can deliver the potential savings that they have already identified in their business case, rather than those that are more sophisticated and potentially stand a better chance of unlocking the ‘unknown’ benefits.

Providers of more sophisticated solutions can potentially combat this by taking on some of the risks themselves. If a vendor is confident that on average they can secure a certain amount of ‘unknown’ benefit in a certain scenario, then they can price this in to their solution proposal, and include a ‘shared benefit’ clause to extract some of the expected ‘unknown’ value. This kind of approach can make sense for both vendor and end user. The end user benefits from a better and more competitive solution, whilst the vendor can de-risk their shared benefit approach by applying the same technique across a portfolio of clients.

From a vendor perspective, the initial solution then becomes more of a ‘beachhead’ platform from which to realise other opportunities.

There are benefits to the DX marketplace from this kind of approach too. Effectively it would lower the cost for end users to deploy more sophisticated solutions, increasing adoption rates, providing more end user benefit and generating more volumes (and driving the development of more sophisticated solutions) within the vendor communities.

Another benefit (or dis-benefit, depending on your perspective) is that such a pricing approach from vendors would act as a barrier to entry for smaller vendors and new entrants that aren’t able to benefit from the portfolio de-risking that underpins the economics of a shared-value pricing approach. Shared-value could be a pretty effective pricing strategy for an established player looking to consolidate their position in a market niche though.