Once a company has identified a target line of business and mapped out a potential IoT solution, the real fun of cost/benefit analysis begins. How long will it take the solution to pay itself off and start returning real bottom-line value? For many companies, that timeframe could be the make-or-break factor in the decision of whether to launch the initiative at all.
At the outset, companies typically examine the most basic costs associated with the targeted area of the business. A company looking to implement IoT across a line of vending machines, for example, might look at the overall costs of servicing machines — the number of visits per month, average labor and equipment cost per visit, travel costs, etc. By talking with a few technicians, they might also determine that an IoT solution could eliminate unneeded maintenance trips and reduce lost revenue by shortening machine downtime, resulting in substantial cost savings.
At this point, most companies will also look at the general costs of implementing the IoT solution itself and calculate that break-even point, considering factors like hiring vendors to connect devices, integrate systems and train employees, and the cost of any hardware or software needed.
These simple calculations will get your business in the ballpark, but they do not tell the complete story. Relying on only basic estimates could cause you to implement a solution with costs you didn’t expect, or reject a proposal and miss out on tremendous opportunities. To predict ROI more accurately, you need to factor in the less obvious costs, and then consider the broader possibilities of a connected solution.
First, the costs. In addition to your own business projections, your company should also factor in these expenses:
- Implementation downtime. Retooling a plant floor or installing smart meters may involve outages and revenue loss as machines are taken offline for upgrades and installation. Plan ahead to rotate out machines for service to minimize lost revenue while machines are offline.
- Retrofitting. Not all machines can be directly connected to an IoT solution, and retrofitting existing machines can generate extensive costs. It may even be more cost effective to replace the machines with new ones instead of retrofitting them.
- Consulting. Unless your workforce has the capabilities to plan, implement, and manage IoT solutions, you may want third parties to perform these tasks. It may require more than one provider, and each of them will charge for implementation and ongoing consulting.
- Platform fees. Any IoT solution will incur ongoing costs for data storage, processing, and analytics. Each vendor may use a different pricing model, with some offering a fixed-price subscription while others charge a metered price.
- Ongoing operational costs. IoT solutions often reduce overall operating expenses, but they also add operating expenses of their own. Regardless of industry, devices and sensors all require a power supply and Wi-Fi, cellular, or other forms of connection. There are also ongoing costs for operating, maintaining, and updating the solution itself.
- Security. Connected devices need security measures in place to ensure the integrity of the data and prevent unauthorized access. Even on the most secure platform, devices, connections and users may create vulnerabilities. Besides general security best practices, each unique solution may have its own specific requirements, such as securing video feeds or setting up safeguards to defend against digital attacks.
- The hidden cost of platform lock-in. Not all IoT solutions are built equally, and ones that are limited in scope and not built to scale can require a major overhaul down the road. If a turn-key fleet management solution may be cheaper to implement initially but can’t scale to include new scenarios like predictive maintenance or inventory management, the low up-front costs will not offset the costs of reworking the solution later.
Determining the actual costs of all these factors will generally push the solution’s break-even point farther into the future. However, an accurate assessment of costs is only the first half of the equation — you also need to look at the potential benefits your business could gain from the solution that may not be apparent on the surface.
In my next post, I’ll cover some of the broad categories where we see companies uncovering a ton of — often unexpected — value with IoT. For a deeper dive into ROI, check out our latest whitepaper “Addressing ROI in Internet of Things Solutions”, and then take a look at www.InternetofYourThings.com for more about how companies are realizing new value and taking their business to the next level with IoT.
Tags: ROI whitepaper series