Digital transformation and the Internet of Things are everywhere
The Diplomatic Council (DC) has brought a DC Global IoT/Industry 4.0 Forum into being and published a white paper on the topic. It is dedicated to the effects of the Internet of Things (IoT) and the fourth industrial revolution – digitization – on business and society. The founding fathers of the new forum include DC Chairman of International Relations Otto Schell and Dr. Michael Fuchs, DC Special Representative CIO.
Digitization as a driver for change
The Diplomatic Council sees the Internet of Things as more than technology – it sees it as a driver for change in humankind’s livelihood.
The Internet of Things forms the bridge between the digitization of the world and everyday reality and therefore represents a fundamental evolution with consequences for the future of civilization that cannot yet be predicted. The Commission on Science and Technology of the United Nations, therefore, adopted key issues such as the Internet of Things and Big Data in its 2030 Agenda.
The IoT allows a different type of cooperation thanks to the transparency and speed of technology. For businesses, real time technologies and their spread, for example via smartphones and open platforms, have made the barrier to market entry lower than ever before. This explains the effect of “digitization” from a market perspective. From a corporate perspective, digitization means the flow of data, for example through sensors in business processes, and into the market, for example for the purpose of customer relations. In other words, digitization means the flow of software in transactions and analysis.
It is against this background that the Diplomatic Council is pushing for a step-up in international debate about the digitization of civilization and its consequences and sees itself in this process as a neutral moderator. By the think tank’s estimation, until now, not nearly enough attention has been paid to the great potential of digitization, not only for business, but for the public sector as well. Governments, the private sector and civil society are all called upon in their respective roles in equal measure to establish common principles, standards, rules and procedures for decision-making in order to decide on the development and utilization of digitization.
The Internet of Things is spreading everywhere
The Internet of Things represents a vision of the internet extending into the real world and many everyday objects becoming part of the internet. Instead of standalone devices, such as a PC, being an object of human attention, the Internet of Things will help people imperceptibly with their everyday activities. The ever-smaller embedded computer will assist people without distracting them or even being noticed. Things can therefore be provided with information or serve as physical internet access points. In his 1992 essay “The Computer for the 21st Century”, Mark Weiser wrote for the first time about this vision and the far-reaching and hitherto unimagined possibilities it presented.
One of the consequences is the direct influence on end-to-end business processes, i.e. the integrated automation of processes facilitated by this technology. In many process chains, there is now a possibility of transparency that, for many market participants, is surprising and not always desirable.
Even before 2020, around 25 billion devices were connected to the internet, according to estimates by the Association of Internet Economy. Approximately 90 per cent of the world’s population is likely to own a mobile device in six years. The total global data volume is estimated to be 44 trillion gigabytes at that time. In this year alone, a third (36 per cent) of this data is stored in the cloud. IoT, mobile, Big Data and the cloud are the drivers of the digital transformation.
With the IoT as the basis for this development, the interconnection of objects is not an end in itself, but forms the basis of intelligent interaction between these objects and with back-end systems. The objects collect data in significant quantities that are constantly analyzed by the back-end systems and will be available in virtually every situation. In the future, systems will be able to act independently, to trigger maintenance, for example, when the milling machine is running hot.
By 2020, so within just a few years, IoT sales (hardware and software together) will climb above 50 billion Euros in Germany alone, predicts TechNavio. Worldwide, the threshold will exceed 2 trillion dollars, forecasts Frost & Sullivan. IoT represents just one component in this process of the digital transformation of business and society.
Smart Factory and 3D Factory
The vocabulary of Industry 4.0 plays a major role in the production of this paradigm; this indicates the computerization of manufacturing technology and logistics in machine-to-machine communication. The term comes from the future project in the field of the German government’s high strategy and industry – “Future Project Industry 4.0 – Federal Ministry of Education and Research” – this is the primary method by which these developments are to be pursued in Germany. DC Chairman Otto Schell was one of the first co-designers of this strategy. The term “4.0” was selected as a “tangible point of entry”. Meanwhile, the Industry 4.0 label has gained a foothold worldwide and is also used by the Diplomatic Council globally.
The goal is the smart factory, characterized by versatility, resource efficiency, ergonomic design and the integration of customers and business partners in value-creation processes. The technological basis is formed by cyber-physical systems and the Internet of Things as a business platform.
At the same time, the smart factory achieves through 3D printing a kind of decentralization that until now has been barely imaginable, almost reversing so-called economies of scale. The possibility of manufacturing three-dimensional functional structures “at your fingertips” all over the world is beginning to fundamentally call traditional methods of manufacturing and production structures into question, the UN Commission on Science and Technology’s current analysis suggests. The United Nations are speaking of a new dimension in the materialization of data, in the most literal sense.
In connection with the most recent developments in computer-aided design, the ubiquity of application functionality because of mobile computing and new manufacturing materials, 3D printing today represents a veritable technology for production technology worldwide. The UN sees the potential of three-dimensional printing processes to free countries with barely any manufacturing capacity, and that consequently depend on imports, from this dependency, at least partly.
Mass production without the immense initial investment that has been required until now – fixed costs – and with significantly lower variable costs than traditional methods of production will gradually change more and more industries. The Diplomatic Council foresees dramatically accelerated development, design and production cycles in large parts of the manufacturing industry and predicts a drastic shortening of the supply chain. Pizzas or cars being made by machines is still unimaginable today – but so was the internet, 100 years ago.
Massive challenges for jobs
However, the UN has also predicted massive challenges associated with this change, not only of a technological nature. For example, this could affect millions of jobs in the traditional manufacturing industry, particularly in countries with high production capacities. Low-wage countries whose populations are especially dependent on manufacturing contracts from international corporations, could lose their international competitiveness. New skills, and the training and study associated with these, will be needed for the transition. Experts and managers will be needed in particular who have the know-how to understand and proactively design the systems.
Trade revolution
Trade will be affected just as much, as physical exchange of goods could be largely replaced by the transmission of data. The World Trade Organization (WTO) demonstrated in specific detail the “exchange of data instead of goods” scenario (“Global Value Chains in a Changing World”) during the 19th session week of the UN Commission for Science and Technology, in which the Diplomatic Council participated actively with a working delegation. Among other issues that were discussed, it asked whether the future exchange of 3D printing models, which would perhaps be free, would lead to a similar development as has been seen in the music sector with the digital exchange of music in recent decades.
Effects in all sectors
The interconnectedness brought through the Internet of Things will gradually begin to affect all sectors of industry, not only those related to production. This goes beyond technological progress – the issue is primarily one of new business models that arise through interconnectedness, the data that accumulates as a result of it and the analysis of this data. There are four levers of digital transformation: digital data, automation, digital customer access and networks. Every company must find out for themselves how to move from rigid value chains to dynamic value creation networks. This is linked to the development of new and innovative business models. And the reverse is also true: companies that stick to their current business model know that their days might be numbered.
“Data is the new currency” is a synonym for the concept of largely or solely data-based business models. Google, Facebook and Twitter have shown how billion-dollar companies can be built using data-based business; AirBnB and Uber have shown how a data-based ‘frontal assault’ can work successfully against traditional business models such as in the hotel sector and taxi industry. The market research company Crips Research estimates the Big Data market at 161 billion Euros in 2016. What branch seriously believes they are immune to the IoT/Big Data trend in the long run? On the contrary, it seems reasonable to look at this development less as a threat and more as an opportunity. The electric toothbrush with an integrated camera and other sensors that scans its user’s teeth twice a day, and thanks to the internet – it is linked to a back-end system – knows better than the dentist what the user needs for his or her dental care or insurance, to name one example.
New requirements for the CIO and other decision makers
The IoT development presents new challenges for the decision makers and drivers of the digital transformation. In particular, the Chief Information Officer (CIO) will have new demands placed on him/her and will have a fundamentally different position in the company. S/he will have to face these new challenges, but also be equipped to face them. Moreover, new roles will appear in the company, particularly those focused on liaising with IT and business.
There will be many new demands of the CIO. As a driving force of digital strategy in the company, s/he must demonstrate what technical opportunities are available to transform the company’s business model, expand it and to reinvent it, so to speak. This goes far beyond this person’s role today as a “business model converter to IT”. Instead, the company’s entire value chain will have to be in focus in future. A comprehensive understanding of the market will be needed for this.
For this strategy, the “new CIO” will have to develop the conception and road map to implementation and do all this as an equal-ranking C-level in business management. Companies looking for success in the digital world must acknowledge that CIOs are going to need this role and these competencies.
A successful digitization strategy also requires a new leadership quality: networked leadership instead of hierarchical management. Leadership in virtual networks is just as important as an understanding of diversity as an incubator. Finally, Generation Y is hitting the labor market – and this generation is used to thinking in networks and does not deal in hierarchies.
It is essential to understand that IT is not the focus per se, but the digital opportunities of the company. IT is no longer an end in itself and does not just support company processes – instead, IT is turning into the key factor for the business model and for the company’s value creation.
This means the CIO will function as a liaison for the four levers of digitization:
• digital data,
• automation,
• digital customer access,
• networks.
There are companies everywhere that no longer call into question the CIO’s role as a fixed, or at least frequent member of the board. Studies have shown that this is the case in more than 40 per cent of companies. For other companies and their CIOs: leadership must be fought for as well.
If yesterday, the most cost-efficient operation of the IT landscape and a high internal service level were the main expectations of the IT management, today, these are a given, and more is needed. CIOs are needed as a driver for the “digital revolution”. Granted, not everyone who carries the title CIO is a born digital business leader. In these cases, perhaps the much-discussed additional role of Chief Digital Officer (CDO) is worth considering. However, keep in mind that this role and the work and responsibility associated with it must be the quintessential entitlement of the CIO. Otherwise, s/he will not “survive” the digital future in his/her company. We can also see this in the fact that many HR departments seem to have become much busier recruiting future IT and digitization professionals at the moment. This is accompanied by the expectation of the CIOs to take on and defend this new leadership role. The new self-understanding involves the opportunity, which itself is almost a thing of the past already, to re-position the role of the CIO. Incidentally, according to the current Gartner study, “CIO Agenda”, the majority of CEOs already expect this, as the “digital revolution” is IT-driven.
Leadership goes beyond teams and networks
In a digitized world, managers are no longer the sole center of power in companies. Instead, more and more frequently, leadership goes beyond global teams and networks. Employees work in the international arena independently and according to their strengths; roles change freely between management and employees.
Four parameters define the leadership of today and tomorrow:
• Generation Y’s entry into the labor market with their networked and less hierarchical thinking.
• The networks that have resulted from Web 2.0, which transport and utilize knowledge beyond teams and company boundaries.
• The multiculturalism and virtual forms of communication that have resulted from globalization.
• The demand for new ways to use the human capital available intelligently and innovatively, under the pressure of demographic trends.
New management methodology
These challenges will necessitate new management techniques in future: network leadership, job crafting, leadership in virtual teams. Positive social interaction and self-management are also a part of this process.
This does not mean that employees and networks will lead themselves. They must still be managed. The different levels of management are shown here:
• Relationship manager: IT ensures partnership and exchange between information technology and business. It translates between the two sides and forms the company goals with regard to technology. In the age of the customer, this primarily means dealing more with data about consumers.
• Architect: The architect is mainly concerned specifically with developing standards for data, applications and mobile devices. This includes keeping an eye on the competition and uncovering new customer groups.
• Project and program manager: More and more projects are beginning from the outset as interdepartmental projects. “Political sensitivity” is often requested for projects like these.
• Vendor manager: The vendor manager has emerged as a consultant. Departments are usually interested only in functionality and barely think about security: this is where the vendor manager comes in.
• User experience experts: IT must be able to see through the eyes of the end user or corporate customer. This requires close cooperation with colleagues who are in direct contact with the customer.
• Data experts: Data is scattered throughout the company. The data expert maintains control nonetheless, and explains to each user group what they can do with what data and what they cannot. This requires expertise in data tools, methods, the status of each individual data source and insight into the business processes.
• Business process designer: Companies buy applications and implement them in all locations. Business process designers ensure the balance between the adaptation of the systems and the adaptation of processes.
• Security expert: Security is not just an issue of rules and supervision; soft skills are needed as well. Security experts inform the workforce why they must not bypass IT.
To sum up, IT needs skills in consulting and interdepartmental cooperation. This requires “political sensitivity” and methodological competencies. They also need to know the customers and the competition.
The contents are more important for this than the new roles, such as Chief Digital Officer (CDO). The titles are not the important parts; the roles are what is crucial.
The IoT: security
The Internet of Things opens virtually all items, equipment and machines to attacks over the network. This means the issue of security plays a key role in nearly all sectors. Therefore, security must be considered in the development of every device, from the draft stage. This requires software expertise above all; however, this is not a core competence for many device manufacturers (yet). Effecting the change necessary in many sectors, from mechanical engineering to software vendors, is proving a challenge.
Of course, intelligent networking also creates dangers of its own. Because every object is connected to the internet, every object can potentially be attacked, manipulated or even destroyed over the network. For example, a coffee machine could be modified to spy on its user via its microphone and camera, a car could take its (co-)driver to a criminal hideout, where s/he is robbed. It is also conceivable that a driver assistance system could be manipulated, from the dynamic speed control to the lane departure assist. The list of risk scenarios is endless. Engineering, medical technology, brown and white goods and, of course, cars, trains and airplanes will experience a new dimension of risk as soon as they are connected to the network. The biggest risk factor is the software in the objects, devices and machines, as well as the back-end systems.
The question is not whether an internet-connected application will be attacked, but when, suggests the National Initiative for Information and Internet Security (NIFIS). It points out that over 70 per cent of all security attacks do not target hardware or the network, but instead go for the application software. NIFIS says that the possible consequences are fraudulent data manipulation, criminal data theft or even costly system downtime.
Security issues should not be misused as a prevention tactic for new business models based on IoT. Instead, a careful balance should be struck between security and data protection on the one hand, and the real opportunities and advantages of the internet on the other. The aim should be to see the opportunities here to set new standards that help to bring the world closer together.
The IoT represents an indispensable solution for fundamental developments in modern civilization, such as the concentration of more and more people in urban areas (smart cities). According to UN estimates, by 2050 approximately two thirds of the world’s population will be living in cities. This is connected to a steady increase in urban demand for water, land, building materials, food, measures to reduce air pollution and waste management. The cities are under constant pressure to provide better services to increase efficiency, reduce costs, increase effectiveness and productivity and to counteract over-burdens on the infrastructure and environment. These challenges can only be dealt with using concepts in which the Internet of Things plays a key role.
Key components for Smart Cities
Smart cities require smart – “intelligent” – infrastructure. This includes buildings, mobility, energy, water, waste disposal, healthcare and digital infrastructure. Five interwoven digital levels are needed to deal with this: a widely distributed network of sensors, connectivity for the “collection” of data, data analysis with predictive functionality, an automation layer and a city network that connects the physical and digital infrastructure. Successful implementation will certainly require a fail-safe broadband network, an efficient ecosystem for the Internet of Things, and real-time analysis of the data that is connected, i.e. Big Data.
A city already consists of various vertical infrastructures today, but these function more or less separately from one another. The challenge of the smart city is to link the individual systems together into an overall system. The Dutch city of Eindhoven is a good example of data integration; there, the data generated by the intelligent traffic management system is used to predict traffic jams and reduce congestion. Singapore provides an excellent example of an open data platform that various smart city initiatives can access, whether to feed in data or to use data from other areas for new services. An urban data bus is considered by many experts to be a possible first step to be used as a basis for a digital ecosystem. In this kind of digital ecosystem, the public and private sectors could work together according to fixed rules in order to provide the different services tailored to the population. Using calculation units for utilization and data access, public-private financing models in the form of public-private-partnerships (PPPs) could be formed in order to provide an economic basis and perspective for the smart city. This would certainly require a re-think for many authorities, to offer subscription models to companies, for example.
How compatible this approach is with the data protection principle in effect across Europe that minimizes the collection of personal data and cross-functional data sharing, which is explicitly discouraged, cannot be estimated at this point.
Fair balance of interests
The Diplomatic Council’s aim is that the opportunities of digitization should reach all people all over the world in equal measure. The DC is aiming for a fair balance of interests as equal as possible in all countries, as well as in civil society, academia and the private sector around the globe. For this purpose, the DC has produced other documents in addition to the present IoT White Paper, in the form of the “Global Software Agenda” and the “Internet of All Nations”.
Contact
Professionals and managers who are interested in an exchange on this topic can contact the DC Chairmen directly:
Dr. Michael Fuchs, michael.fuchs@diplomatic-council.org
Otto Schell, otto.schell@diplomatic-council.org
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