The New Ecosystems, the Business Architecture, and the Foundation

Industry boundaries belonged to the old economy, and the digital revolution has swept them away. Entirely new ecosystems of companies are emerging to meet demand. Who will build the fully connected autonomous cars of tomorrow? Will banks still be needed for the financial transactions of the future? Will the equipment for smart homes come from the heating suppliers of today, or will completely different companies tap the added value? Digitization brings us entirely new economic ecosystems that will create redistribution of market shares. This is the focus of Chapter 4, in which we discuss the most exciting developments.

However, digitization is also changing the internal business architecture of companies—from the way marketing is done to the organization of the value chain. Chapter 5 discusses how the company’s functions need to change. Chapter 6 looks at the new demands that digitization places on the foundations on which companies work, from the IT architecture to the digital culture.

What: Building new ecosystems

The most spectacular developments are in the new ecosystems, where everything is at stake for the traditional market leaders. Industry boundaries are being redrawn, old strengths suddenly count for less, and unexpected symbiotic alliances are being formed. In this chapter, we look at the most exciting ecosystems that are currently emerging. They concern mobility and smart buildings, online retail and digitized utilities, logistics, finance, health, media, and public administration.

Aamer Baig and Gianluca Camplone on the future of motoring.

The headlines for the first mass-produced autonomous (driverless) car to drive on public roads weren’t in celebration of General Motors or Mercedes, or even Toyota or Audi. Instead, the plaudits were for Silicon Valley–based electric car manufacturer Tesla. A few accidents later, and it’s clear this is more about public relations (PR) than a technological breakthrough. The Tesla has a built-in autopilot classified as Level 3, which means autonomous driving is possible in some situations, but continuous monitoring is required. Only at Level 5 can the redundant drivers turn their attention to other distractions. So the race is still on, and even though Silicon Valley giants like Tesla are working hard, it’s a little premature to lower the final curtain on the car industry in the rest of the world.

However, as of April 2018, Tesla’s market capitalization is $51 billion, and it has surpassed Ford, Chrysler, and General Motors to become America’s most valuable carmaker. That despite losing more than $700 million in 2016 and Ford making $11 billion in profits. Investors are expecting Tesla to dominate the new autonomy space, similarly to how Amazon has dominated retailing. Additionally, Tesla is investing in solar and battery technology, and building an ecosystem in the process.

Everyone agrees that the automotive industry will change fundamentally. Experts expect the kind of revolution that the smartphone brought to our day-to-day lives to occur within the automotive industry in the next few years. Soon, the car will be electric and driverless, won’t belong to us anymore, and will be used only as required; we’ll make it available to others when we don’t need it. The revolution raises a lot of unanswered questions: (1) What will happen to the hundreds of thousands of workers who build the internal combustion engines and transmissions of today? Especially when electric powertrains are much simpler to build and do not require a transmission system. (2) In the further future, what will happen to the automotive supply chain? The whole supply chain and manufacturing process is getting digitized, and it is not hard to fathom a future with almost “lights-out factories” that automatically produce cars that are made to order. (3) How will the aftermarket repair and servicing industry be affected? The ecosystem present today will not go away, but demand will lessen significantly, as electric vehicles will not require maintenance as frequently as today’s vehicles. (4) Will we see the end of urbanization? Will we prefer to move back to the country if we can work on the way to the office instead of having to sit at the wheel and steer the car? What will the public transport of tomorrow look like? Will normal buses and rail be replaced by driverless minibuses that pick up passengers who entered similar destinations into an app, and later drop them off at their doorsteps? Additionally, there are other technology questions that remain: for example, how will cyber security risks be addressed—not just loss of data but the threat of actually taking control of the car while driving.

Managers in the executive levels of the auto industry are braced for change. Bill Ford, chairman of Ford Motor Company, referred to the feared disruption as early as 2014, describing the revolution of the business model as happening “from every angle: from the type of powertrain in our cars to the ownership model and sharing.” Dieter Zetsche, CEO of Daimler, expects the reinvention of the automobile in the next few years. Eighty-eight percent of the managers McKinsey surveyed expect some of the established automakers and suppliers of today to have disappeared by 2030. And 75 percent are sure that new competitors like Google and Uber will by then have gained a significant share of total revenues in the industry.

The sense of urgency that is the primary prerequisite in any digital transformation has been well and truly awoken among the traditional car manufacturers. The fight is worth it. According to a McKinsey study, global revenues in the auto industry will grow at an annual rate of 4.4 percent to around $6.7 trillion by 2030. Although classic vehicle sales are stagnating in established markets like Europe and North America, they have grown in Asia to 75 million vehicles annually, 28 million more than in 2015. In addition to sales proceeds and revenues from customer service and repairs, regularly recurring revenues are also experiencing rapid growth: customers pay $1.5 trillion each year for all digital services related to cars.

It’s not just a digital revolution that the industry faces. In the analog world, too, little will remain as is. The study predicts that by 2030, the market share of cars with electric motors could grow from the current 2 percent to 65 percent, driven primarily by the rapidly growing demand for hybrid vehicles.

Automakers need to build an entirely new ecosystem based around the electric powertrain. Who will build the powerful and fast-charging batteries that will be needed in fully electric vehicles? These batteries represent a significant proportion of the car of tomorrow’s added value. Who will deliver the charging infrastructure that electric cars rely on? Tesla already has a network of 5,000-plus charging stations across the United States. And how will sports car manufacturers, whose customers covet the distinctive sound of a powerful engine, react to these almost silent electric motors?

Connectivity Will Define the Fate of the Industry

The fate of the established automakers and many suppliers will be decided on the digital battlefield. Connectivity, where the car constantly measures and sends a range of data, is an increasingly important topic for consumers. In 2014, 20 percent of car buyers indicated they would switch to a new brand if that model had better connectivity. In 2015, this figure rose to 37 percent. While data protection advocates predicted that consumers might worry about the digital trail they leave behind, 76 percent of drivers surveyed said they had no problem with their data being shared.

In the future, then, software will become the differentiating factor between car models. Even today, the control software used in vehicles comprises on average around 100 million lines of code. By 2030, this is expected to rise to 300 million lines, which means the traditional automakers need to establish greater software competence. Manufacturers typically leverage only around 30 percent of the value that the software in a vehicle represents. Competitors like Tesla and newcomer Google, however, handle all the software development in-house. All automakers face the challenge of establishing ecosystems of external developers to create an in-car app store.

The fully connected car of the future will install an entire ecosystem around itself, connecting in-vehicle sensors and microchips directly to the Internet and offering a seamless user experience. Part of the task is to fully integrate this in the digital ecosystems of the buyers and their passengers, which requires a tight integration with Android and iOS.

The system partners then develop a wide range of offerings based on the constant flow of data. Even today, drivers’ assistance systems perform functions such as keeping the car in lane or braking automatically in an emergency. Tomorrow, the driver may be able to take a backseat while the vehicle drives itself autonomously. The system could also highlight free parking spaces nearby, locate the car in the event of theft, offer concierge services, reserve tables in restaurants, or book hotel rooms. Sensors monitor the internal mechanics and notify the driver when parts are worn and servicing is required. Insurers, too, have not wasted this opportunity to develop a tailored risk profile of the driver based on the driving data—from mileage and average speeds to number of interventions of the assistance systems and braking patterns. This data is then used as a basis for pricing the insurance policy.

In the future, drivers will no longer access the digital services via touch screens, but simply via voice commands. And the digital assistant in the car will also be linked to the digital assistant at home. For example, if someone taking a morning bath asks Siri or Alexa—the digital assistants of Apple and Amazon, respectively—to order a table in a favorite Italian restaurant that afternoon, the person will be driven there automatically by the car, because it already knows where to go. Much of this is technically feasible today, but a few things such as handling areas with no Internet connection or addressing data storage issues still need to be addressed.

Truck manufacturers have made the most progress when it comes to connectivity. Many commercial vehicles are already connected to their environment to such an extent that their position and speed can be monitored in real time. A current study predicts that in the future, connectivity will become a crucial starting point for developing new business models. For truck manufacturers, for example, this may take the form of capacity as a service, or the flexible provisioning of transportation capacities and direct management of fleets. Even today, 49 percent of industry decision makers say that this business may become even more attractive than vehicle sales.

One aspect of connected driving has particularly piqued the interest of the industry: autonomous vehicles. Over the coming years, autonomous vehicles are expected to contribute up to $1.3 trillion in annual savings to the U.S. economy alone, according to a Morgan Stanley report, including $645 billion from productivity gains, $488 billion in accident avoidance, and $169 billion from fuel savings. Once again, trucks are leading the way. A McKinsey study predicts that by as early as 2025, one in three commercial vehicles sold in Europe will be able to drive fully autonomously in certain situations, especially on freeways. This pushes down costs: currently, the driver accounts for 30 to 40 percent of the operating costs of a heavy goods vehicle. Self-driving functions can halve these costs, while at the same time ensure lower downtime and greater utilization.

Uber is also experimenting with self-driving vehicles. Again, it’s primarily about costs. If Uber succeeds in deploying its cars without a driver, costs will fall by 30 percent. At the moment, the company is still a job creator: in 2015, Uber welcomed around 1.2 million new drivers into its network.

Autonomous vehicles are certainly expected to have a tremendous impact on the labor market. In the U.S. Midwest alone, several million jobs that deal with transportation, logistics, and distribution will be at risk in the coming years. Thoughtful collaboration with public policy makers is required to ensure that the benefits of automation are achieved while also retraining people who are affected by this trend.

The development of systems that enable safe, autonomous driving is the automotive industry’s most ambitious project. Above all, these systems must be based on precise navigation and mapping services. So as not to lose ground to new rivals like Google in this respect, the German automakers Daimler, BMW, and Audi have jointly acquired the mapping service Here from Nokia for €2.8 billion. With autonomous driving, the data and coordinates that the car measures when on the move are constantly reconciled with the map data, which requires maximum precision down to the centimeter. A typical reading, for example, monitors the distance of the car from the curbside. This means the maps need to be of “automotive grade.” Google does not achieve this classification. When owned by Nokia, Here supplied 80 percent of the global market with its maps, generating revenues of around €3 billion. The new owners, too, will supply the entire industry.

The Here mapping service is a good example of how the old linearity is dissolving in the relationship between customer and supplier. Here supplies the auto industry, and the manufacturers in turn generate huge data volumes every time their cars are used, and then sell this data to Here, which uses it to improve its product.

Daimler Swarming to Digital

If car models of the future are differentiated by their digital abilities in the same way they are differentiated by engine performance or comfort today, automotive companies may benefit from learning a few things from Silicon Valley.

Daimler, for example, has implemented a swarm organization. On particular projects, employees come together in cross-departmental swarms and work autonomously, connected, and without hierarchies. CEO Dieter Zetsche wants around 20 percent of all employees—more than 50,000 people—to work on projects in such swarms. Everything centers around the future of mobility, for which Daimler has coined the acronym CASE: connected, autonomous, shared, and electric.

Toyota recently announced its plans to move from being a carmaker to a platform for mobility services, and to this end founded the Connected Company. Its first product, the Getaround service, enables peer-to-peer car sharing and has been undergoing tests in San Francisco since early 2017. A Smart Key Box and the right software turn Toyotas—including older models—into connected rental cars, which can be booked via a smartphone and started with a digital key. The medium-term goal is more ambitious: Toyota wants to establish its own digital operating system that controls the entire mobility ecosystem, thus enabling the automaker to gain the lion’s share of the value added.

However, a do-it-yourself solution isn’t the only possible strategy: Automakers such as Fiat are taking the opposite course. Since they have tight development budgets, they are working with software giants like Google on the megatrends of connectivity and autonomous driving. Classic auto suppliers, most of which now no longer supply individual parts, just complete systems, are now extending their offerings to entire software control modules. Continental, for example, no longer simply supplies tires, but complete chassis and drive components. Continental also develops products centered around the connected car, such as eHorizon, which offers predictive control of vehicle systems. The system uses positional data captured by the vehicle’s sensors, and sends this to the cloud. Using this data, the onboard computer anticipates the topography of the road ahead, and optimally adjusts the engine and transmission just before a sharp incline, for example.

Another example is ZF Friedrichshafen, which has moved on from being just a supplier of transmission systems that is threatened by the advent of electric cars. The traditional firm now sells complete chassis and powertrain components, driver assistance systems, and braking and steering systems. It is also working on electric powertrains and a solution for autonomous driving.

Suppliers, then, are relieving automakers of much of the development work. A new band of manufacturers may emerge that essentially assemble the components, and see their core competencies as being connecting with end customers.

Times are changing in the mobility industry. Digitization is overturning the old balance of power. However, automakers still have a strong starting base. They have the brands, they have the customers, and they have the marketing and service infrastructure. If they inject a shot of entrepreneurial spirit from Silicon Valley into their businesses and organize intelligent collaborations, they have every chance of surviving the ensuing battle.

Kelly Ungerman on the future of retail.

All business is local, and the managers of the drugstore chain Walgreens are keenly aware of this. Since 2010, Walgreens has gone digital: the retailer now offers customers several apps that are much more than simply a means for collecting loyalty points. With more than 8,000 stores, one may consider the massive brick-and-mortar footprint to be intimidating in an increasingly digital world where transactions are occurring online. Walgreens, however, set a clear digital value proposition of channel integration by driving synergies among web, mobile, and physical store locations.

With this focus on omnichannel integration, Walgreens today enjoys 14 million visits per week across its various digital channels. An astounding 48 percent of digital visitors claim that their next action after the digital visit is to go into a Walgreens store. In addition, Walgreens sees a 3.5-fold increase in spend between store-only customers and customers who shop both online and in-store. Mobile is seen as a store enhancer rather than replacement, with 50 percent of the company’s mobile app usage happening in-store. The strategy is also allowing Walgreens to find revenue where none existed before. One of the apps allows customers to print images from social networks, and either pick up those prints in store or have them delivered.

With the massive data sets Walgreens is now able to collect across its digital and physical channels, the company can dynamically localize its offerings. Existing performance of a planogram is analyzed using data to answer key questions about why a category is behaving in a certain way. Planogram data is shared with all parts of the organization, including the e-commerce, pricing, markdown, and operations teams. They are also able to forecast their labor needs based on store-specific footage, fixtures, and inventory.¹

There’s no question: traditional retail faces radical change. “In ten years, only 10 percent of all retail revenues will still be generated by offline sales,” predicts Oliver Samwer, cofounder of Rocket Internet, to which companies like Delivery Hero and Home24 belong. New online competitors are infiltrating across a broad front. They no longer concentrate just on books, consumer electronics, fashion, or furniture, but are even preparing to take on that last bastion of offline retail: groceries.

At the same time, brick-and-mortar retailers are faced with the increased expectations of their customers, who want service offerings and convenience in customer care, at checkout, and at delivery, just like they experience at the best online stores. Because customers now have greater choice and a better overview of available offers than ever before, they conduct more research before buying. As a result, they often switch channels during the buying process. They might use the local store simply as a showroom and prefer to order online instead. Before visiting a store, they might check whether the item they want is in stock; before making an offline purchase, they might use their smartphones to check recommendations, warnings, and criticisms about an item. For most consumers, the route toward making a purchase has long involved several channels, as the example from the world of fashion demonstrates.

In 2014, a McKinsey survey showed that 94 percent of consumers actively research products and prices before making a purchase. Seventy percent read comments and ratings, and 87 percent stated they wouldn’t buy a product that was consistently rated as poor. Two of the most important trends affecting retail are revealed here: “the empowered consumer,” or consumers who have acquired information sovereignty; and “always-on” consumers who are constantly online with smartphones.

Traditional Retail Strikes Back

The smartest retailers are hitting back at their Internet rivals with their own weapons and using technology that transfers the benefits of the online shopping experience to the physical store. Fashion house Burberry has equipped its store assistants with iPads, which the sales consultants then use to customize items such as its iconic trench coat for the customer, or to order an item directly if the store doesn’t have the right size or color in stock. The customer can choose whether to collect the ordered item from the store the following day or have it delivered. The mirrors in the stores have sensors that read information from radio-frequency identification (RFID) chips attached to the clothes. When a customer holds a Burberry trench coat or another item in front of the mirror, the glass displays various information about the material, cut, and collection.

British luxury department store House of Fraser is experimenting with smaller online-only stores in which customers order items from the House of Fraser online shop on special terminals, and can then choose to collect in-store if preferred. U.S. chain store Hointer also displays its fashion collection in its stores, but if customers want to try something on, they place an order for their particular size via their smartphone and the item is then delivered to the fitting room by a robot that has retrieved it from the warehouse. Robots are also being piloted in a service role in Orchard Supply Hardware stores in California. They can understand human language, and make their way to the shelves to collect items requested by customers. Adidas is also experimenting with digital technology in some of its flagship stores.

The cell phone has also become a weapon in the battle for customers. Some retailers use apps to send customers navigation aids to help them find an item they may have seen in the latest commercial. Clothing chain American Eagle Outfitters uses an app to guide customers to offers chosen by algorithms, based on previous purchases and search history. Some retailers, such as Meat Pack shoe store in Guatemala, use their apps to locate potential customers who are passing nearby or even browsing in a rival store, and then send them special offers or discount coupons that are valid for only a few minutes.

Companies are therefore targeting this deep connection between consumers and their smartphones. In a worldwide survey conducted by Motorola, 60 percent of respondents stated that they take their smartphone into bed with them, and 54 percent indicated they would rescue their smartphone before their cat in the event of a fire. Smartphones are playing a key role in the research and decision-making process of customers, and customers are assiduously using their phones even in the store, comparing prices and searching for product information. In 2015, experts estimated that 70 percent of sales made in brick-and-mortar stores were influenced by digital. This has interesting consequences: According to a study by credit card issuer MasterCard, although the number of customers visiting physical stores has dropped by more than half since 2010, sales in these stores have increased by 17 percent. Customers no longer visit to browse; they come to make a specific purchase.

Customers Want Seamless Switching between Channels

Retailers that don’t want to lose their customers on this journey through the sales channels must offer a seamless shopping experience that encompasses all channels. Targeted investment in multichannel customers is worth it: U.S. department store chain Macy’s, for example, has invested a lot of money in recent years in expanding cross-channel services. The retailer has observed that customers who shop at Macy’s across all channels spend significantly more money than customers who use just one channel, as observed in the case of Walgreens. British retailer John Lewis tells a similar success story: A good 60 percent of customers buying items from John Lewis online use the click-and-collect service to order online and collect the items from the nearest John Lewis branch. More than half of these customers then use their visit to the store to buy additional items. As a result, despite all the competition, John Lewis has for years succeeded in increasing both its online and its in-store sales, negating the worries expressed by so many retailers of a cannibalization of offline sales by online.

Meanwhile, the e-commerce retailers have recognized the importance of physical stores. U.S. online apparel company Bonobos, for example, launched a number of showroom stores where customers can try on items to ensure the size is right. However, the order is still placed online—purchases can’t actually be made in these stores. Even Amazon has recently opened its first physical locations in the United States, selling books, ironically. The customer is king, and because customers are embracing multichannel experiences, retailers that operate only one sales channel will lose ground.

Intermediaries Vie with Retail for Customer Contact

How will digital dynamics change retail in the coming years? Several signs indicate that competition will grow in intensity. And as with Uber in the taxi industry or Airbnb in the hotel industry, new intermediaries are also appearing in retail. They compare the prices and offers of retailers, and provide recommendations to shoppers. By offering customers this convenient bundling of offers, comparison portals like Shop.com and Zulily are vying with traditional retailers for the important direct contact with customers, while at the same time siphoning off some of the added value. One provider, Wish, even goes one step further: its smartphone app connects consumers directly with manufacturers and wholesalers in the fashion and accessories industry in China, thus replacing the retailer completely. Although customers have to wait several weeks before delivery, they are rewarded with prices that are up to 80 percent lower. The app already has more than 150 million users, a worrying sign for classic retail.

However, whether online or offline, retailers must offer their customers added value if they are to remain in business. Only those that continuously develop as customer needs change, that decisively leverage the possibilities of multichannel retail, that expand their data and analytical skills to become more efficient across the entire value chain, and that provide tailored offerings to the customer will survive in the long term in the highly competitive retail environment. How retailers can operate in the complex world of sales channels to deliver profit, the prerequisites they need to set, and the skills they need to build are outlined in Chapter 5.1: Omnichannel: A Presence across All Channels.

Somesh Khanna, Vik Sohoni, and Michael Bender on the digital future of the finance industry.

“We’re sorry to inform you that your business loan application has been rejected.” For business owners who hear these words from Santander, all is not lost. Santander refers rejected customers to its cooperation partner Funding Circle, a financial technology (fintech) company. Funding Circle describes itself as a loan marketplace for small businesses. Fifty-six thousand private investors and institutions have risked some $2.4 billion in this marketplace since 2010, lending to 19,000 companies in five countries. They lend to those that no longer receive credit from the mainstream risk-averse banks bound by strict guidelines.

Funding Circle promises its lenders an attractive risk-return profile and professional credit checks of applicants. The website shows a list of loans recently granted: For a $110,000 loan to a manufacturing company with a term of two years, investors receive interest of approximately 6.5 percent per annum. A $50,000 loan to buy stock returns 10.8 percent interest each year over three years, and a $30,000 loan returns a mammoth 16.6 percent in a year. Attractive returns in times of zero interest rates, these are demonstrating Funding Circle’s ambitious mission statement: “We want to revolutionize the outdated banking system.”

It’s a philosophy shared by most of the 12,000 fintechs worldwide. Investors particularly like financial start-ups: in 2015 alone they lent them around $21 billion in capital. Some, such as Funding Circle, SoFi (student loans, mortgages), and Lending Club, are now valued at more than a billion dollars.

Much Is at Stake

The traditional financial institutions have clear weaknesses compared to the new players. The banks have long neglected digitizing their value chain; overworked and bloated IT systems, old habits, and new regulatory requirements slow their efforts. On top of this, most institutions have still not recovered from the financial crisis of 2007–2009, and the low interest rates put pressure on margins. Cost reduction programs are the order of the day across the board.

Even retail banking offers little to smile about. Deposits have almost become a loss business, while at the same time customers are reluctant to pay fees for checking accounts and online banking. Banking services are regarded by many as a commodity where the main focus is affordability.

It’s against this backdrop that these fintechs are muscling in on the banks. They work more quickly and cheaply, and boast greater innovation. They have young workforces and unburdened IT systems, and they are free of regulatory pressures. They understand what customers want, and deliver simple apps with streamlined digital processes. Opening an account with N26, for example, a fintech with a banking license that specializes in account management via smartphone, takes less than 10 minutes. Users simply enter their personal details, complete verification with a video call, and in no time at all they have access to a fully functioning account with a credit card number. At a brick-and-mortar savings bank, opening an account can take a whole day.

Fintechs are also offering products that never existed before. Lending Club, for example, offers a platform where private individuals can lend money to other private individuals. Another example, Kiva, is a nonprofit whose mission is to connect people through lending to alleviate poverty. Donations of as little as $25 can be made to help an entrepreneur start a business in a developing country, or a child go to school, or a household get access to energy.²

However, these new players will not, and don’t intend to, replace the traditional financial institutions. They always focus on individual elements of the value chain. Primarily, it’s in retail banking where the fintechs are attacking the established banks. They play on people’s changing habits and the new technological possibilities. For example, the majority of consumers now own a smartphone, a key element in mobile transactions. This frees clients from the local bank, with proximity no longer a priority. The fintech start-up Raisin, for example, is a marketplace for investments throughout Europe. The company provides customers the ability to deposit money in countries across Europe so that they can access better fixed deposit rates.³

Financing for business customers, as offered by Funding Circle, is not yet so common. Although the fintechs are cheap, convenient, and user-friendly, and that counts for a lot in this segment, a specific understanding of the needs and restrictions of this target group is also needed—customer advice is essential. Yet the effort is worth it for fintechs: small and midsize enterprises (SMEs) are particularly open to online support in financial matters, according to surveys.

The established banks—also on the lookout for a new business model in these times of low interest rates—are being truly challenged by the fintechs. A McKinsey study extrapolated that if banks don’t respond, up to 35 percent of their profits will be threatened in the next few years. However, the flip side of the digital threat also reveals an opportunity. If the banks succeed in learning from the fintechs and are able to apply this knowledge to their own processes while at the same time entering into joint ventures with the new start-ups, not only can they stave off their decline, but they could even increase their profits well beyond 40 percent.

The Bank of the Future

If banks want to seize their opportunity, they first need to focus on their strengths. Unlike fintechs, banks already have a large customer base and broad product portfolios, and they have built trust in their brands over decades. Even the expensive local branches could be turned into a strength as part of an omnichannel concept where customers freely switch between checking their statements on their smartphones, buying shares on their laptops, and visiting the branch for personal advice.

Above all, the banks have a still unleveraged treasure trove of data concerning a range of areas such as customer transactions and loan default rates, right through to how investors respond to interest rate changes. Conventional data processing lacked the power to analyze these enormous volumes of data due to the sheer size, complexity, and poor structure of the data. However, advanced analytics—powerful computers, efficient logarithms, and intelligent programs—allow these data volumes to be analyzed to predict future developments.

These advanced analytics enable banks to better understand the needs of their customers, and to address specific customer groups more directly with tailored investment products. Big data analyses also help to estimate credit risks, and can form the basis for completely new products and services. Facebook and Google show how this can work. For example, banks can develop software that analyzes existing transaction data, as well as some external sources such as payment behavior with PayPal, to enable an immediate decision on a loan application. Banks that intelligently analyze their wealth of big data have every chance of asserting their dominance as data companies in the heart of a data-based ecosystem. Naturally, the industry will still be about financial transactions in the future, but banks can spread their competencies across a much broader area than they do today and develop into service providers for customers’ day-to-day needs.

The bank of the future will build an ecosystem of its own services and partner offerings around a digital platform. For example, if a customer researches mortgage conditions on the bank’s website, the bank’s insurance partner can offer home insurance products at the same time. Partners may also include, for example, a manufacturer of bathroom fittings, which could offer stylish faucets for the new home. Other bank customers may be pinpointed via their smartphone data while out shopping, and be sent special vouchers to entice them into a nearby store.

Granted, traditional banks still have a long way to go before they become a digital platform offering customers lifestyle choices and making commissions from partner companies rather than just being purely financial institutions. However, at least when it comes to the technical foundations, the banks don’t have to work alone. Collaboration with fintechs is possible, with varying levels of intensity.

The loosest example is an alliance with a fintech: The London-based Metro Bank, for example, has a deal with the fintech Zopa, which benefits both parties. In the era of low interest rates, Metro has a difficult time investing its customer deposits profitably. On the other hand, Zopa, a peer-to-peer lending platform, has more loan applications than private investors, so Metro provides cash and earns higher interest. It’s a win-win situation.

A closer collaboration is a participation: In 2015, for example, Credit Suisse bought a $165 million stake in Prosper, in return for 10 percent of its shares. The peer-to-peer lending platform was valued at $1.9 billion in the financing round. Banco Bilbao has been even more radical in its efforts to buy into the digital future. The 150-year-old Spanish bank has taken over a number of fintechs: In 2016, it took over the Californian fintech Holvi, an online lender focusing on SMEs. In 2015, Banco Bilbao acquired a 30 percent stake in Atom, the United Kingdom’s first online bank, whose customer contact strategy is optimized for mobile devices. Prior to this, Banco Bilbao had already acquired the U.S. online bank Simple, the Spanish big data start-up Madiva Soluciones, and Spring Studio, a Californian design studio.

This highlights another strength of the established banks: despite the much-lamented lack of capital, they clearly have the money to acquire interesting ideas and talent. However, despite fintech acquisitions, their path to a successful digital future still remains uncertain. To ensure success, the financial institutions and all of their employees must shift their mind-sets to adopt a philosophy that all fintechs have in common: to think of each transaction in terms of the customer need and customer experience.

Sri Velamoor and Basel Kayyali on the rocky road to the digitization of health care.

The smartphone counts steps, the Fitbit fitness band records calories burned, heart rates, and training progress, the mySugr app uses movement data and food diaries to predict blood-sugar curves for diabetics, and the app Tinnitracks plays music to sufferers of tinnitus that filters out specific frequencies, thus neutralizing the hearing disorder. Digital solutions for both the ill and the healthy have been around for a long time, and are eagerly downloaded. According to a leading e-health publisher, more than 50 percent of American mobile phone users have downloaded a health-related mobile app.⁴

Health care institutions have been slower to embrace the possibilities of digitization than the patients themselves. And yet they could benefit considerably. Committed digitization of the value chain in Sweden, for example, has meant substantial savings for the health care system. In 10 years, a gross saving of up to 25 percent is possible. Although not enough to reduce expenditures entirely, it would significantly lessen the expected cost increases.

Digitization offers particularly high potentials for the health care sector. Ever-present sensors combined with apps and systems that emphasize human-centered design and smart algorithms (advanced analytics) to analyze the accrued data volumes could collectively revolutionize medicine and wellness, if the system wasn’t beset with its inherent braking mechanisms.

Just consider MyTherapy, for example, an app that helps patients to take their prescription medications—which medication, how much, when, and how often. Older patients with multiple diseases in particular have to take a number of medications at the same time. Numerous studies have shown that very few patients are capable of this. According to a World Health Organization estimate, medication compliance in industrialized countries is only 50 percent in the case of long-term treatment. In the United States, nonadherence accounts for almost $300 billion a year in additional health care spending.⁵

In the digital world, there are mobile solutions that tackle this very problem. With the app MyTherapy, patients can simply scan the bar codes on the packaging using their smartphones, and after entering the prescribed intervals for taking the medicine, they receive alerts at the corresponding times. Game elements in the app help the user to stay on track. Not only does the patient benefit from better compliance, but the health care system also benefits from not having to treat follow-up problems caused by noncompliance.

Who Will Establish a Central and Open Innovation Platform?

To enable digital health, an open innovation platform is required that has access to the highly standardized billing data of the health insurance companies, and also makes this available to the digital development partners. These certified third-party providers in theory then deliver innovations to the health care system. They boost the innovation engine, as demonstrated by the launch of multiple open data initiatives by the Centers for Medicare & Medicaid Services (CMS) in the United States. To receive access to the health data of patients, the third-party providers must in turn make their own data available on the platform—not only to avoid user lock-in, but to measure whether use of the individual digital solutions has led to measurable outcome improvements. And since this is sensitive data, a trustworthy governing body such as the Department of Health and Human Services must ensure that unauthorized access is prevented by using a powerful identity, access, and data release management system.

The British National Health Services (NHS) was an early adopter of digital medicine. After a few stumbles, it has now made £4.7 billion available for a digitization agenda with the aim of saving 8 to 11 percent of overall health costs. The British are targeting improvements in productivity by aiding the optimization of hospitals’ and general practitioners’ practices with services such as online appointment booking, patient reminder services, and online consultations, as well as by addressing the demand side. The NHS promotes digital aids such as step counters and fitness apps that help people remain healthy, apps that help to reduce health risks and to quit smoking, and apps such as mySugr, which helps manage diabetes.

The British have realized that if the health care system does not build a central platform itself, others will. However, this can be done only by companies with very long staying power and plenty of money, which once again leads back to deep-pocketed tech companies such as Apple and Google.

Apple is taking a twin-track approach with its ResearchKit and CareKit platforms. ResearchKit is an open-source software platform that invites physicians and researchers to build apps. Volunteers will download these research apps—which, if permitted, can also access other health apps on the smartphone—to their iPhone, allowing data to be collected for medical research. Apple hopes that, by doing this, its iPhone will become a tool for medical research. ResearchKit enables medical researchers to investigate various conditions like asthma, breast cancer, and Parkinson’s disease. Top U.S. universities and research institutes are on board with this project.

CareKit is aimed at the patients themselves. The platform is designed to help patients manage their conditions better, while also allowing their vital signs to be shared with their treating physician. In early 2016, Apple launched four self-developed modules: Care Card, which reminds users when it’s time to take their medicine or exercise; Insight Dashboard, which records symptoms and relates them to the measures from the Care Card module; an app that keeps track of mental health; and Connect, which sends the data to the physician or a family member. Apple itself is not able to access the individual data, and has committed to respecting and protecting privacy. CareKit is also an open-source platform—partners are invited to develop apps on this platform to extend the range of services. Combined with the acquisition of Gliimpse, a personalized health data collection/dissemination platform in 2016, Apple is well positioned to become a key enabler for patients to more directly influence and redirect health decisions.

Naturally, the established players in health care technology are also attempting to develop a platform and secure a central position in a new medical ecosystem. Philips is bundling its business as Philips Healthcare with a product range from toothbrushes to magnetic resonance imaging (MRI) scanners, and, in addition to the hardware, has also developed software for managing entire hospitals. General Electric operates its Health Cloud, which not only sells server capacity, but also rents software for the health care system (software as a service). IBM acquired Truven, Explorys, and Phytel, companies that have collected vast amounts of health data over the years, and uses this wealth of data as the basis for solutions in population health management. Microsoft has launched its own health cloud boosted by Cortana, its proprietary artificial intelligence (AI) capability, to become the preferred platform for developing digital health solutions. Siemens Healthineers has a clear digitization strategy with Teamplay, a cloud-based platform for digital solutions, which is used in many hospitals.

Predictive Maintenance for People

Although the players in the digital health care industry may still be finding their place, there is no lack of vision. In the United States, pioneers are working on population health management. The idea mirrors what machinery manufacturers have already achieved with digitization: predictive maintenance, where a part is repaired in time before it fails. To transfer this concept to people, volunteers send the health data collected via their health and fitness apps to a central body, which then evaluates it. If worrying deviations from the norm are detected—for example, if the user is increasingly overweight with rising blood pressure—the program responds and recommends targeted exercise regimes and a nutrition plan—all via an app that also records the impact and reminds the user if a unit has been skipped. The tailored program even includes a voice assistant with artificial intelligence that acts as a personal health coach and can answer questions. With this predictive maintenance, the user’s health is improved before he or she actually becomes ill.

The question isn’t so much whether we will use digital health services in the future, but rather when, and who will provide and regulate these services. Existing health care organizations like the large health insurance companies in the United States and the British NHS still have an invaluable lead over Google and Apple with their access to highly standardized and granular patient data. This lead can be defended only by health care systems that are open to innovation and willing to shape it. The window in which this must be done is already open, and waiting is not an option. Otherwise, there is a risk that—just as in other industries—the digital champions won’t be the incumbents.

Hugo Sarrazin, Kabir Ahuja, and Mark Patel on the buildings and smart homes of tomorrow.

A brave new world at home: tomorrow, when the alarm buzzes, the freshly brewed coffee is already prepared. The coffee machine knows when it’s time to start. The hot water tank has also been heated up in time thanks to the self-learning system, which knows that the family starts taking showers at 7:15 a.m. on weekdays. Once everyone has left the house, the robot vacuum cleaner starts its work, having received the signal that everyone has gone and the noise won’t disturb anyone. The washing machine also turns on: electricity costs are currently low and no further hot water consumption is expected, so the cycle starts. From her workplace, a mother performs a quick security check on her PC, and notices that the alarm system is armed but a bathroom window is open. Using a smartphone app, she accesses the home’s command center, which activates the window’s electric motor and closes it.

A pipe dream? Not entirely: astonishing technical solutions like those in the house of the future just described are already possible. All kinds of buildings are becoming smart: residential homes and garages, offices, shopping centers, train stations, factories, universities, schools, and hospitals. Connected buildings offer greater convenience, increased security, reduced energy consumption, and completely new usage models. In the near future all critical systems will be fitted with sensors and connected to the Internet or cloud—the Internet of Things (IoT)—from heating and air-conditioning systems to locks and video monitoring. It will extend even further as all devices learn to communicate with each other, from the media center around the TV screen to the smart oven to the refrigerator to the robot vacuum cleaner and iron. Just as broad is the range of value propositions and business opportunities this opens. The building of the future is smart.

This new ecosystem of the connected building can be described across four dimensions.

The first dimension concerns customers, who are in turn divided into four groups:

1. Consumers in the smart home
2. The public sector with smart buildings such as universities and administrative buildings
3. Industry with smart factories and production halls, or infrastructure-related buildings like train stations and airports
4. The entire commercial sector with smart shops, shopping centers, and warehouses

The second dimension relates to providers that serve these customers. They develop products and services that leverage the Internet of Things to provide infrastructure that transforms “dumb” buildings into smart buildings. Many already have a history of delivering individual products, such as heating systems, and now, with sensors and software, they can deliver complete climate control solutions, for example, that can be controlled via a smartphone or tablet.

The third dimension outlines which customer needs are addressed by these offerings, such as security. There are a number of core value propositions at play: security (including access control, monitoring, and notification), home automation, energy management, and so on.

The fourth dimension describes the technologies on which the offerings are based. New demands are placed on all components, including sensors, hardware, data platforms, IT security, and much more.

Consumers: Comfortable and Safe Living

The first components of the smart home have long been on trial in residential homes. For example, since as early as 2010, ADT has offered a remote-controlled security package under the brand Pulse. The package is used to control alarm systems, lighting, climate control, and appliances. Contact sensors on windows and doors report intruders and are directly connected to a monitored security service.

Now products with machine learning capabilities are embedded in homes—for example, in the kitchen. Whirlpool offers the smart French door refrigerator, which automatically switches to party mode if its doors are opened frequently, and increases its refrigeration power and ice cube production. The company also has a smart washing machine that allows for remote start/pause, gives details of how much time is left in the cycle, and sends alerts when done.⁶ Samsung manufactures a refrigerator with a built-in camera that allows owners to view the contents of their fridge via smartphone when the door is closed. We even see innovations like the Juno oven, which automatically cook a number of different recipes, react to the food inside, and allow video monitoring of your meal.

Neatmo has launched a security camera that can distinguish whether an animal or a human is moving in the bushes, and sounds the alarm only if the situation is deemed to be threatening. The system is so smart that it recognizes people and pets that belong to the household. Other companies, like August Home with its smart locks, have taken the smart home one step further and integrated with digital service providers to offer features like opening your home for package delivery or managed access control for Airbnb guests.

The technical prerequisites are already in place, in part because prices for sensors have fallen dramatically. The market is beginning to show real signs of strength and is growing fast, with penetration at about 30 percent for at least one smart device per home and a compound annual growth rate of 30 percent. A good quarter of new spend will be on security, around 20 percent on energy systems, 16 percent on smart domestic appliances, and around 14 percent each for lighting and home entertainment.

Perhaps most importantly, with technological advances in voice control and artificial intelligence, the intelligent assistant is now a viable control center for the connected home. This new trend has changed the control point for the home and shifted focus from the devices to the experience of interacting with a home. Tech giants and start-up attackers have developed solutions delivered through both existing devices (e.g., smartphones) and new stand-alone products (e.g., Amazon Echo, Google Home).

Industrial: Robots as Workmates

Just as with homes, offices, and shops, in the next few years industrial and logistics buildings, train stations, and even entire public spaces will become increasingly smart.

Robots will take care of more of the work in large warehouses when goods are marked with sensors that free electronic assistants of the need for a storage system or to remember a specific position. Instead, packages can be stacked wherever it is most logical. The robots can always find them easily through the sensor. Amazon is already using such technology in its warehouses with Kiva robots. Factories will see the same transformation. In the age of Industry 4.0, smart machines can communicate and interact with each other, not only optimizing production, but also enabling fully automatic processing of orders and goods.

Airports and train stations will become mobility hubs and intelligently combine various mobility concepts simultaneously, ensuring that ordered goods currently in transport are delivered to the correct location.

Public: schools, universities, and public administration

The public sector is the country’s largest property owner, with transit hubs, schools, government buildings, and so on. Smart facility management of these buildings is similar to that of residential homes and office buildings. Again, it’s primarily about climate control, energy consumption, and security. Many public buildings stand empty for certain periods, such as school holidays and weekends, while others are not fully occupied.

Intensive research is currently looking at ways to reduce the enormous heating and operating costs. For example, the Massachusetts Institute of Technology (MIT) together with the Fraunhofer Institute and various large companies like Ericsson, Philips, and Volkswagen are working on the “SenseableCity Laboratory” initiative. One of the studies concerns the idea of personalized climate control. Referred to by the researchers as “local warming,” the idea of the concept is to ensure that only those areas in which people are situated are heated or cooled. The system uses measurements to track the movements of people through the building, and fast-acting infrared heaters are activated wherever someone currently stands. Everyone gets their own tailored climate control, with the thermal cloud following individuals to different rooms—greater comfort with greatly reduced heating costs.

Smart digital solutions have also been developed for roads. In Los Angeles, Philips has implemented its CityTouch connected lighting system, which intelligently monitors and manages street lights. This has helped reduce the city’s energy usage for street lighting by more than 60 percent, while also incorporating environmental noise-monitoring systems on light poles that help detect violations and respond in a timely manner.⁷ Smart street lamps have even greater potential: the masts could be used to build a public Wi-Fi network, and even serve as charging points for electric cars. Thus, a fluid transition from the concept of connected buildings to a smart city is possible.

Whose Standard Will Prevail?

There are many players in the market that offer individual solutions for smart buildings. The key questions, however, are these: who will become the system integrator, who will develop a platform, and who will establish a standard that connects and combines isolated solutions in a user-friendly way? For all companies that are targeting only one specific area of this booming market, another question arises: in which of the emerging ecosystems will the other players also flourish? Essentially, there are four options:

1. Look for partners with whom joint standards can be established to ensure the systems are compatible with each other and able to communicate.
2. Connect with an open-source ecosystem that offers interfaces for integrating self-developed apps that control the respective system.
3. Create a self-contained system in a segment that itself promises high revenues, and dispense entirely with the idea of connecting to an ecosystem.
4. Ambitious players can develop their own platform for an ecosystem.

Several competitors are competing to gain the cherished position at the heart of the emerging ecosystems. For example, Telefonica has incubated an entirely new business called Geeny, a consumer IoT platform. It allows consumers to create one hub for all their smart things while controlling for security and privacy. Example use cases include monitoring whether the stove has been left on and turning it off, tracking your dog’s location, activity and sleeping habits, and identifying when an elderly person is in need of help. All of this can be done from one software interface. Geeny also enables companies to create smart IoT products. Its partner network of hardware vendors, developers, design experts, connectivity providers, and system experts allows it to help organizations create an IoT product in 100 days.⁸

In the United States, Comcast has invested in buying the iControl platform that powers its Xfinity home solution and is building a network of compatible connected devices. Vivint has taken a similar approach, but with even more selectivity on integration and more proprietary hardware.

Apple has also launched its own HomeKit with the same aim. This system creates a framework for device manufacturers to plug into, despite the need for proprietary hardware. After they join, their products can be controlled from any Apple device, including Siri, who could be asked to perform commands such as “Turn off the corridor light.” When it comes to Apple’s business model, HomeKit is less about tapping new revenue sources, but rather about reinforcing the value proposition of Apple devices.

Search engine giant Google is also working on a platform. In 2014, Google acquired the start-up Nest, a specialist in remote-controlled home heating and climate control systems, for $3.2 billion. In 2016, Google Home launched—with only moderate success. The centerpiece of the system is a large loudspeaker that also listens and can respond to commands to control domestic electronics. Unlike its competitors, Google has only started integrating with other providers at scale; first it wants the technology to establish itself and prove the value of Google Assistant. In the Google business model, the smart home is very much seen as a key part of the information ecosystem.

Amazon has also developed a platform for smart buildings, and it too uses a voice assistant, Alexa. Alexa acts an interface, not just for Amazon itself but also for a number of third-party devices and services—with a goal of strengthening Amazon’s core business by being the primary conduit for information in the home. Other tech companies are also pursuing this market. Samsung, for example, acquired and is expanding the platform SmartThings to play a central role in smart homes, and has recently launched Bixby to compete with Amazon and Google.

There have also been some initial forays into B2B. Mozaiq, for example, a consortium of companies such as ABB, Cisco, and Bosch, is working on a standard platform for smart buildings. This is an open software platform intended to ensure that all smart devices in the home of the future are able to communicate with each other in a simple and user-friendly way.

However, none of the competitors has yet penetrated the market at scale, and no standard has yet been developed, which is creating hesitation among construction companies that integrate connected home products. The smart security, heating, and lighting systems in homes cannot communicate with each other, leaving customers with isolated solutions. The scarce availability of qualified tradespeople is also slowing down success. Today’s typical electrician or heating installer may not yet have the capability to install a smart system. Another factor slowing down progress is smart customers: as long as the cost savings delivered by smart energy management in connected buildings continues to be offset by the energy consumption of the many sensors and adjustment motors, smart buildings will not be economical. However, the vast number of start-ups clamoring to make their mark in this area shows that there is potential. Companies like Sensibo, Netatmo, LIFX, Ecobee, and others are helping to develop the market.

The smart building market is wide open. We are seeing a young industry in which sectors that previously had no contact with each other are growing together. They are forming new ecosystems that promise significant growth, and are establishing a new normal in-home and outside-the-home living. The growth is chaotic, but it is building from modest beginnings, with real opportunities for accelerators like interoperability and intelligent agents to truly make all buildings smart.

Adrian Booth and Mark Patel on the strategy of the German utilities in response to the digital intruders in their core markets.

For 150 years, it was relatively straightforward to run an electric utility. Customers were unable to choose any company other than the regional monopoly, demand was predictable and growing, and electricity was produced in a small number of large power plants that for a long time ran on coal, and later oil, gas, hydro, or nuclear power. Prices were calculated to allow for profits after costs. In fact, the energy utilities were similar to the public sector—with one small difference: some of them generated profits for shareholders in a predictable, low-risk, and sometimes significant manner.

Those times have gone. Many energy utilities are fighting for their lives. As if the pressures created by the nuclear energy phaseout and the challenges of renewable energy weren’t enough, they are also experiencing a revolution in their customer relationships and the overall technology of the industry.

Since the liberalization of the energy market and the end of regional monopolies, a lively group of energy providers has emerged. These companies—such as Yello—don’t have their own power plants, and instead concentrate fully on the trading of purchased electricity volumes. Online portals like Choose Energy and Verivox show price comparisons of all providers, and can even register customers with their preferred provider and cancel their old service. The big digital providers of Google, Amazon, and Apple are also muscling in between the established energy firms and their customers by further expanding their established or emerging ecosystems. When customers are already controlling their heating and alarm systems with their smartphones, it’s a logical step to control energy consumption via the Apple platform too, putting energy utilities at risk of losing their dominance over the vital interface with the customer and becoming mere commodity suppliers.

Energy Companies Want to Digitize Their Entire Value Chain

So many energy companies now recognize the importance of digital. Many utilities are starting to look at the opportunity to digitize processes.

Digitizing utility processes can free up extensive resources. If it encompasses the entire value chain, the operating profit of an energy utility can be increased by almost a quarter. If sensors can transmit performance data to the servers from all critical points, programs can accurately calculate times for predictive maintenance before a given point fails—which saves on personnel costs and minimizes downtimes. Of course, this also means the digital networking of all field employees and elimination of paperwork that is common today in utility field work.

The greatest potential, however, is in the interface to customers, which is often an area with significant room for improvement. Digitizing all customer contact points doesn’t just save money, but also increases customer satisfaction. Most customers would now prefer to enter their details into a smartphone or laptop themselves rather than wait on hold with a call center. While this in no way means that customers now want to communicate with their energy provider only via digital channels, they do expect the same level of service across all channels. This is why employees in the call centers and in the physical offices of the utility companies must have all the relevant data and customer profiles available. Equally, the utility employee must be able to send information or offers to the customer’s smartphone or home PC immediately.

As a further digitization measure, call centers are already being staffed by digital assistants: speech programs known as chatbots are now so far advanced that they are able to understand customer queries, search through data, and provide information verbally. These programs are based on AI/machine learning systems and are even able to detect the emotions of callers and respond to annoyed customers with particularly calming words.

Customer Loyalty via Digital Contact

The more advanced energy companies foster their customer relationships by using apps to provide their customers with information about energy consumption and costs, and inform them where they can save money. Others keep in contact with regular blogs or online forums, or send text alerts to let customers know when an engineer is about to arrive. Some are working on their product proposition by offering customers the choice of buying “green energy” from renewable sources, or equipping customers with solar panels and batteries to make them almost self-sufficient. Again, digital channels play a key role in customer communication.

Data is collected with each customer interaction, which will become a critical differentiator in the competition for the energy customer of tomorrow. If utilities are able to retain critical data from smart meters and smart grids, they will have the framework for tailored offerings. For example, energy companies could take over the management of climate control systems in buildings, offering significant discounts. The concept can even be scaled up: energy companies could form alliances with property developers and systems manufacturers, and take over energy management for entire residential areas, industrial facilities, or office buildings.

They could even find new sources of revenue in smart, connected buildings if they are able to provide the remote-control systems for the electric appliances in addition to the electricity itself. E.ON has already made inroads into this market, and acquired a 20 percent stake in the start-up Thermondo, a European manufacturer of low-carbon heating systems. Thermondo promises energy efficiency, and offers its customers complete packages for retrofitting homes with condensing boilers, solar power, or fuel cells. Communication is online, and Thermondo takes care of planning with clever algorithms, submits the necessary applications to local authorities, and procures public funding. Following installation, the firm coordinates with the energy supplier, as well as the chimney sweep and service teams. It’s an excellent central position in the home heating ecosystem. E.ON and its competitors would love to have a similar offering in the energy market.

Challenges across Three Dimensions

Energy companies, then, see themselves faced with a three-dimensional challenge: (1) Digitization is destroying the old order. (2) New economic ecosystems are emerging in which they must find their place. (3) Smart grids and meters have created new business models and rivals, while connected buildings open up new markets.

To survive, the energy giants must develop their business architecture. They need to digitize their processes, communicate with their customers across new channels with new messages, and extend their product offerings. This will be possible only if they first reinforce their foundations with strategies ranging from a two-speed IT architecture to new big data analytical capabilities.

The digital transformation of energy utilities is undoubtedly a major project, and the question as to who will be the supplier of the future is a long way from being answered. However, energy producers still have much to gain: greater productivity, greater revenue, more reliable grids, new business fields, and more satisfied customers. They also have a rare opportunity: After 150 years, they can completely reinvent their strategy, structure, and processes. Those that do nothing will most likely be squeezed out by the new competitors. Those that revolutionize their business and go digital will seize the opportunities offered by the markets of the future.

Brendan Gaffey on the distribution battle between hardware manufacturers, content providers, and telecom companies.

The trigger for the revolution is tiny: a surface area measuring just 6 by 5 millimeters, and 1 millimeter thick. These are the dimensions of the eSIM. Just like its larger predecessors, this new storage card ultimately connects mobile devices to the Internet and cellular network. However, it’s not so much its minuscule dimensions that make it revolutionary, but rather that the “e” stands for “embedded.”

Currently, subscriber identity module (SIM) cards are sent out by a wireless provider and inserted manually, usually by the customer. The programmable eSIM is installed by the manufacturer in smartphones, tablets, fitness trackers, smart watches, game consoles, smart glasses, cameras, or home medical equipment—anything that’s always online. The eSIM will also allow users to make calls from their wearable technology. The Samsung Gear S2 classic 3G smart watch, for example, incorporates an eSIM that lets users choose their carrier, and can make phone calls and access the Internet independently of a phone tether.⁹

The prospect excites customers, but worries telecom companies, which played a dominant role in the early days of cell phones back when transmission capacities were low and within their control. Telecom companies sent their customers the SIM cards, and were in a central position with high added value. If future SIM cards can be reassigned to any provider, wireless operators stand to lose their most important customer loyalty lever—the cost of switching. This will lead to profits and revenues being redistributed in the interrelationships among telecom groups, hardware manufacturers, Internet providers, and content providers.

Who Will Win in the Battle for the Center of the New Ecosystems?

New ecosystems are emerging, and all market players want to be at the center where the value added is greatest, rather than at the periphery and feeding off scraps. Will the hardware manufacturers like Apple and Samsung be victorious? With eSIM, in the future these companies will be able to predetermine the wireless providers for their smartphones, and allow customers to change provider with a simple click. It is also a logical step to suggest hardware manufacturers could purchase transmission capacities and infrastructure on the market themselves and squeeze out the wireless providers. Or will “content is king” prevail, a philosophy embraced by content providers like Netflix? The video streaming service relies heavily on self-produced TV series and movies, and has attracted millions of new customers in the process. As a newcomer to the market, Amazon now also produces its own content.

Facebook is also betting on virtual reality (VR). The social media company bought Oculus, the virtual reality headset company, for $2 billion. The Oculus Rift offers all manner of digital experiences, from virtual car chases to complete virtual tours of property for sale. The device is able to trick the brain into believing that the body is experiencing what we see.

A number of players have already moved into this market, the most successful of which is Sony, with its PlayStation. Together with the related area of augmented reality, an attractive growth market has opened up. The new industry—which already generates between $3 billion and $5 billion a year in revenue—is predicted to grow to between $80 billion and $100 billion in revenue by 2025, according to a study by Goldman Sachs. Although almost all revenues are currently generated in gaming, business customers are expected to account for approximately half of the revenues by 2025. VR headsets can help designers by displaying virtual information, help surgeons by showing virtual lines along which to move their scalpels, and even help soldiers aim their rifles.

The telecom giants have much to lose. Their once-lucrative call, messaging, and video services have long been offered for free by aggressive competitors, and they are also on the defensive when it comes to content and platforms. Since 2013, overall revenues of telecom companies in the United States and Europe have been falling by around 0.5 percent a year. And this decline is now threatening to escalate. Various worst-case forecasts predict a fall in industry revenues by as much as 30 percent by 2020.

To halt this trend, some firms are using their still-healthy cash resources to buy into companies that produce content and programs that can be distributed via the telecom infrastructure. In late 2016, U.S. telecom giant AT&T tabled an $85 billion bid for Time Warner, whose portfolio includes film studios and the broadcaster CNN. Prior to this, AT&T had just closed its acquisition of DirecTV for $49 billion. A few years earlier, cable provider Comcast acquired the NBC Universal media group. And in 2015, wireless provider Verizon acquired Internet pioneer America Online (AOL), and later Yahoo! in 2016.

However, takeovers alone will not be enough to save the profitability of the industry. To ensure that telecom groups don’t end up as poorly paid commodity suppliers of a base infrastructure, they need to improve in three areas: first, they need to streamline a core business that has become slow and ponderous through the years; second, they need to identify growth markets and develop strategies for capturing them; finally, they need to manage regulations since industry structure and consolidation will be key drivers.

Streamline Core Business

In slimming down costs, digitization—the very phenomenon that necessitated this need for more streamlined processes—can help. From customer acquisition, registration, payment processes, billing, and customer support through to contract termination, every step of the customer journey now comes under the microscope. Each step of the journey offers the possibility of replacing expensive human labor with digital assistants with the aim of end-to-end digitization of the customer contact process, with greater service levels and lower costs than before. Of course, administration and technology also need to be streamlined. Surprisingly, these new digital processes not only are more cost-effective, but generally also lead to greater customer satisfaction if implemented correctly. Instead of having to wait on hold with a call center, many customers are happy to resolve their queries themselves digitally.

Opportunities in New Service Sectors

Once their processes have been trimmed down, the telecom groups can attack future growth markets. For six important growth markets, the wireless providers are in a very good starting position in the sense that their networks are ready for the data streams. Those markets are:

1. Wearables: Who will connect the fitness bands, VR headsets, smart watches, and running shoes to the Internet? How will revenue be generated from this, and what will the business model be?
2. Smart houses: Which Internet connection will be used to control the heating and climate control systems, roller shutters, elevators, and all the other features of the smart homes of tomorrow?
3. Connected cars: Autonomous driving, lane departure warning systems, emergency braking systems, service data—who will process the enormous stream of data that the vehicles of tomorrow will produce?
4. Internet of Things: All machines fitted with sensors that constantly transmit performance and usage data—who will enable transmission of this vast data pool?
5. Digital health: The connected patient will soon transmit a steady stream of data—will it be via the networks of the telecom companies?
6. Cloud computing: Who will operate the data clouds—the data and software centers where all of the data are transmitted and processed?

The key questions are: What role will the telecom groups play in these growth areas? Will they, as in the past, only supply the transmission technology, which in the future will be a cheap and interchangeable commodity? Or will they succeed in assuming a central role in the emerging ecosystems? Will they be able to get their SIM cards into the devices, or will they be squeezed out by the manufacturers, who will then have control over the choice of wireless provider? Will they simply transmit the data to the data centers of other cloud operators, or will they be able to provide the necessary data centers and software services? And will they be able to build expertise in data analysis and offer their external partners services in areas ranging from customer support to billing and payments? The formula is simple: the more service, the greater the value added, and thus the less interchangeable the provider.

AT&T, for example, is keenly tapping new service sectors, and has established itself as the hub of a new ecosystem in the process. The company is leveraging its huge customer base and the trust that it has established over 100 years to offer security and convenience packages centered around the home. For subscriptions of between $30 and $65 a month, residents’ windows and doors are monitored if they are away, and a local security company is notified and checks the premises if a window or door is opened. An alarm also sounds in the event of smoke, fire, or flooding. In terms of convenience, the packages also include remote control of heating and lighting, as well as monitoring of pets and babysitters via camera. Customers can view the camera on their smartphones or tablets when they’re away, and also control functions of the various systems.

To make all of this possible, sensors, cameras, and adjustment motors must be installed in the home by contract suppliers of AT&T. Together with the subscription fee, this delivers the company one-off payments of $30 to $150, while emphasizing to the customer that the equipment is worth much more. AT&T manages its network of equipment partners, local installers, and local security firms, and—as the provider of the offering and controller of the customer relationship—is able to reclaim the lion’s share of the value added. And in times of minimal fixed-line telephone income, predictable annual revenues of $400 to $800 per customer are estimated. This is why the idea is already being copied: Swiss telecom group Swisscom has a very similar offering called Smartlife.

The other players in the emerging ecosystem are also doing the math. Google and Apple are already fitting their mobile devices with an eSIM, and promising customers a seamless transition from one wireless provider to another. They are also pushing into new business sectors. Google sought a slice of the smart home pie in 2014 when it bought Nest, a connected homes company that had already established itself in the market with its smart thermostats and smoke alarms. The traditional suppliers in this market, manufacturers of heating systems and thermostats all the way through to lawn mowers, also want to get a foothold in these new ecosystems and connect their devices.

Battle of the Business Models

Perhaps even more interesting than the battle of the providers is the battle of the business models. Telecom firms rely on the monetization of communications, with most companies also selling hardware. The manufacturers of home equipment rely on add-on services related to their hardware, whereas the media giants from Silicon Valley rely on data. Nest wants to earn revenues not only from its smart thermostats, but also from the consumption data of customers. This aggregated data is valuable for all industries centered around the home. Even outsiders are entering the market: Amazon, for example, now produces TV series for online streaming. Not only does this generate revenue in the area of online media, but it also opens up entirely new opportunities in the area of personalized and targeted advertising. Why not buy the dress of your favorite actress’s brand in one click during the stream? Access to consumer data is driving some of the mergers and acquisitions (M&A) decisions as well, including Verizon’s acquisition of AOL. With changes in privacy rules in the United States, this is an even more lucrative play.

The battle lines have been drawn, and the distribution war has begun.

David Frank on driverless trucks, fully connected containers, and small drones that deliver packages to our homes.

No more children’s tears on Christmas Day—this was Amazon’s reasoning for leasing a fleet of 40 Boeing 767s in 2016. In 2013, parcel delivery firms in the United States were unable to cope with the demand of Amazon orders in the run-up to Christmas, causing hundreds of thousands of presents to go undelivered in time. Even after the holiday period, Amazon managers continued to complain about their delivery partners’ lack of transport capacity at peak times. It was reason enough to seek to become more independent on long-haul deliveries. In the United States, Amazon now operates several thousand trucks, and has a license for chartering cargo ships; and, for the last mile, the company has for a long time been experimenting with drones and driverless vehicles, as has Alibaba, which founded its own logistics company, called Cainiao.

These developments are doubly painful for the logistics industry. It’s bad enough that their biggest customers are performing some of their deliveries themselves, but what if their customers discover that they could organize their logistics on their own? What if they compete directly against freight carriers, parcel delivery firms, and cargo airlines?

Even without their customers becoming competitors, the cards are already being reshuffled in the logistics industry. The development of digital technology and changing consumer trends are allowing, and in some instances forcing, new business models to develop. Everyone is affected, from truck manufacturers to bicycle couriers: the dividing line runs between long-haul distributors and those specializing in the last mile, or delivery to the customer.

Will Traditional Haulers Become Redundant?

Other far more disruptive changes are also possible. One of these is the imminent mass production of driverless trucks. Ironically, the very technology that haulers currently purport to welcome—enabling a 30 to 40 percent reduction in operating costs for trucks—is a stepping-stone on the road to their own demise.

A traditional hauler’s core business currently consists of acquiring freight for its trucks, something that is much easier to organize via an independent online platform. As these orders are increasingly received digitally, and data about routes, cold chains, diesel consumption, and servicing needs are transmitted by sensors and are trackable online, and if drivers are no longer needed, then the traditional entry barriers into the hauling industry disappear. That will be a particularly enticing scenario for truck manufacturers.

Why shouldn’t Mercedes and the other manufacturers offer the services for which they build their trucks? In the passenger car sector, the automakers are already experimenting with this model with Car2go and DriveNow. In a McKinsey survey of the truck industry’s decision makers, almost one in two respondents said that capacity as a service—providing and managing flexible transport capacities—could be a more attractive option for manufacturers than truck sales. What may have sounded at first like a pipe dream is now not so far away. By as early as 2025, one in three commercial vehicles is expected to be capable of fully autonomous driving in certain environments such as freeway driving.

Even today, the logistics industry is experiencing dramatic change through the Internet of Things. For example, UPS has fitted its trucks, delivery vans, warehouses, and cargo with sensors that constantly transmit data to UPS servers. Using advanced analytics, computers are then able to optimize routes and minimize waiting times. Each year, UPS vehicles now travel approximately 90 million fewer miles on the road and consume almost 8 million fewer gallons of fuel, and driver waiting times have been reduced by around 100 million minutes.

Online connectivity has helped the logistics industry save money in all areas. The shipping industry and ports, for example, can save around $18 billion by digitizing their operations in this way.

Revolution on the Last Mile

For logistics companies, most of the changes will occur on the last mile, where the parcel is delivered to the customer. Worldwide, parcel delivery firms generated over $75 million in revenues in 2015, with growth rates between 7 percent and 10 percent in developed markets such as the United States and Germany. If the firms were able to save on driver costs for the delivery vans, costs would fall even more than for trucks. Drivers account for 60 percent of overall costs. The industry is now looking at ways to reduce this cost. It’s not so easy, because under the current system, delivery vans can’t be dispatched without a driver. Otherwise customers would have to find their parcels themselves in the loading area.

But that, too, is changing. Most likely, we will soon see a small, electric version of the classic delivery van on our roads—known in the trade as an autonomous ground vehicle (AGV). This is the smart version of the delivery van, with lockers on the sides that correspond to parcel sizes. Once the AGV reaches the customer’s address, it sends a text message to the customer, who goes to the AGV and enters a code to retrieve the package from the locker. AGVs will need supervision. Supervisors will be employed in the offices of the parcel firm to watch for emergency signals and error messages, and to monitor the images sent back from the cameras built into the AGVs. However, that supervision is scalable—just one controller can monitor eight to 10 of these vehicles.

Moving further along this continuum, small, electrically powered trolleys or “droids” may well soon be trundling along our sidewalks en route to the customer, at a leisurely pace of 2 to 6 mph. They will carry only one parcel, and park immediately outside the house door; the notification and unlocking process will be the same as with AGVs. Because the droids are small and slow, their operation poses minimal risk, and a supervisor can monitor 50 to 100 of these types of units.

In less accessible areas outside of cities, or for urgent deliveries such as medications, it will soon be feasible to use flying drones. These can carry parcels weighing up to 30 pounds, and can reach their destinations very quickly in a straight line. These, too, will need to be monitored, and one controller should be able to supervise eight drones.

Another real disruption in the form of a completely new business model looms on the horizon, and it relies on crowdsourcing. In this disruption model, the delivery company operates the online platform on which the orders are placed, as well as the distribution hubs. Private drivers or even taxi drivers then register and use an app to check whether there is an opportunity for them to perform a delivery on a journey that is already planned. This creates a flexible network that doesn’t require high investment from the parcel delivery firm, and generates costs only when revenues are generated.

This concept is already a reality in an analogous space, The start-up Postmates, which started as a delivery service for restaurants that don’t have their own delivery service, operates a similar business model. Postmates provides an app that connects restaurants and freelance drivers, taking a commission in return. Now others have also latched onto the idea: UberRush works just like Postmates. When they’re not transporting customers, Uber drivers deliver parcels, again receiving their orders via an app.

And alongside all these new and emerging technologies, one technology from the nineteenth century still holds its own in certain areas: bicycle couriers are hard to beat for city courier work. In terms of volumes, however, they are of very little (and diminishing) significance. In 10 years, the cyclists will hold just barely 2 percent of the overall delivery market, whereas the competition from autonomous vehicles and drones will account for around 80 percent. The rest will continue to be delivered by conventional delivery vans, predominantly for business customers with high parcel volumes.

The autonomous driving systems will appear soonest in countries with the highest wage levels. Logistics companies in Europe and the United States must therefore start developing their strategies now in view of the amount of time required to build the necessary resources in personnel and IT. Moreover, substantial investment will also need to be earmarked and deployed to win in this changing landscape.

Notably, substantial investment is not something that Amazon has ever shied away from. The online retailer and best customer of the parcel delivery industry has for a long time been experimenting with its own service for the last mile, running pilot programs in a number of cities across the globe. In its AmazonFresh groceries business, for example, Amazon uses its own delivery services. In the face of this, the German parcel delivery firm DHL has deftly broken free of its industry boundaries, and now operates AllyouneedFresh, an online supermarket that already had more than 300,000 users by the end of 2016.

While this type of spirited innovation is a good beginning for traditional players, if Amazon really does take control of its entire delivery chain—container shipping, truck transportation to the distribution centers, and final delivery to the customer—the established players in the industry will lose out on significant revenue, limiting their ability to spend and innovate further. This begets the classic death spiral of companies struggling to maintain pace in a changing landscape. No wonder, then, that the parcel firms are looking for new ideas. UPS, for example, is now equipping hundreds of its UPS stores in the United States with 3D printers. Instead of sports shoes being delivered via a container ship from China, the customer can now have them produced according to Nike or Adidas specifications from the print shop around the corner. These could even be personalized with a monogram or pink soles and delivered by express courier. Ships and trucks are no longer needed in this case.

In summary, the landscape is changing rapidly and radically, and the time is now for traditional players in the logistics space to examine their positions within the value chain. They must identify areas for strategic investment in innovation, and create enduring relationships with customers through enhanced value propositions and journeys.

Martin Lundqvist on the digitization of public administration, and what citizens can expect.

It was a revolution in the public sector: “No more printed forms or letters.” That was the directive of the Danish government to public authorities during the recent financial crisis. Today, almost all contact that citizens in Denmark have with their local authorities is via the online portal at www.borger.dk. All registrations and deregistrations, and applications for benefits or permits are entered here. Every citizen and every company receives a secure user ID, which they use to register for online public administration services. The electronic forms are digitally signed, and officials no longer print out the forms in the council offices to process them. Instead the process is all digital, and decisions are made automatically. It’s often astonishingly fast. Danish entrepreneurs generally receive confirmation that their start-up has been registered as a business immediately after they send in the application. There is no waiting at counters, and no frustration over forgotten documentation. Instead of visiting the council offices, it’s a simple online application.

An analysis by McKinsey suggests that capturing the full potential of government digitization could free up to $1 trillion annually in economic value worldwide through improved cost and operational performance. Shared services, greater collaboration and integration, improved fraud management, and productivity enhancements enable systemwide efficiencies. At a time of increasing budgetary pressures, governments at national, regional, and local levels cannot afford to miss out on those savings.

Governments around the world are doing their best to meet citizen demand and capture benefits. More than 130 countries have online services. Estonia’s 1.3 million residents can use electronic identification cards to vote, pay taxes, and access more than 160 services online, from unemployment benefits to property registration. The United Kingdom’s gov.uk site serves as a one-stop information hub for all government departments. Such online services also provide greater access for rural populations, improve quality of life for those with physical infirmities, and offer options for those whose work and lifestyle demands don’t conform to typical daytime office hours. However, despite all the progress made, most governments are far from capturing the full benefits of digitization. To do so, they need to take their digital transformations deeper, beyond the provision of online services through e-government portals into the broader business of government itself. That means looking for opportunities for improving productivity, collaboration, scale, process efficiency, and innovation.

While digital transformation in the public sector is particularly challenging, a number of successful government initiatives show that by translating private-sector best practices into the public context it is possible to achieve broader and deeper public sector digitization. Six levers are described next, each illustrated by success stories.

Establish Government-Wide Coordination of Digital Investments

To better coordinate large-scale digital projects across the government and generate cost efficiencies, Denmark established IT Projektraad, a digitization council reporting to the Ministry of Finance, to function as its central IT steering group. The agency’s goal is to ensure that the benefits and gains targeted in a project’s business case are realized. This has allowed it to apply a test-and-learn approach, using pilot projects to ensure that investments are effective and then bringing lessons learned to other agencies. To that end, the digitization agency requires government institutions to adhere to specific methodologies and guidelines when planning their IT investments. It also develops and shares best practices, conducts risk evaluations for projects over a certain cost threshold, participates in project reviews, and helps oversee the government’s IT project pipeline. Such central oversight has helped the Danish government reduce unnecessary investments, enforce common standards, and build greater project synergies.

Redesign Processes with the End User in Mind

In 2011 the Netherlands released i-NUP, its government-wide implementation agenda for e-government services, to prioritize citizen- or user-centered design by boosting convenience and trimming red tape. One of the implementation rules, for instance, states, “We do not pose superfluous questions. Data included in one of the basic registrations will not be asked for again.”¹² Under the plan, municipalities would serve as “citizens’ desks” and be the first line of contact to field or refer questions, supported by a website, customer contact center, and central phone number. As of 2014, most municipalities are connected to a single access number.

The plan called for a similar overhaul of the country’s government-to-business services. To make that happen, the Dutch launched a comprehensive digital infrastructure project led by the national digital governance agency, Logius. The project steering group included central and local governments and public IT agencies. Together, using world-class standards, they defined the technical specifications for the 13 central databases involved and their interconnections. They also created a government-wide dashboard to highlight project status and risks, and used conferences and social media to disseminate and refine key lessons with public-sector IT managers around the country. As a result of these initiatives, physical visits to municipalities and government offices have decreased significantly. For example, the number of visits to Rotterdam municipality offices decreased by around 50 percent from 2010 to 2013.

Hire and Nurture the Right Talent

Digital transformations call for specialized skills that are in high demand and therefore increasingly hard to come by. Government organizations often struggle to compete for such talent since the private sector frequently can offer higher wages, a more entrepreneurial culture, and more clearly defined career paths.

However, a few governments have found ways to attract or nurture talent for their digital projects. In South Korea, for instance, a significant portion of government IT infrastructure is centralized in a few data centers providing numerous e-government services to citizens. The size and breadth of these centers makes it possible to offer IT staff engaging career paths with the chance, for example, to improve a variety of online services while tackling the challenges of managing a large-scale data center. In the United Kingdom, the government actively seeks to attract talented individuals from the private sector by offering fast-track career opportunities for high performers. For example, the government CIO and the head of digital services spent most of their careers in the private sector. In addition, high-performing graduates are offered fast promotion opportunities in various government service areas, including IT.

Use Big Data and Analytics to Improve Decision Making

The U.S. government has been one of the most active in leveraging data to support government decision making. In 2009, it created a legal and privacy framework that led to the creation of Data.gov, a repository of government tools, resources, and information on anything from energy and science to global development and health. In all, more than 85,000 data sets are available to help businesses and private citizens conduct research, develop web and mobile apps, and create design visualizations. To populate their data troves, government departments were required to identify and share their most valuable data. Competitions, such as Apps for America and Apps for Democracy, have been organized to attract talented developers to build applications that use government data.

Protect Critical Infrastructure and Confidential Data

Data security has become a top national security issue. In 2013, the World Economic Forum identified cyber attacks and critical systems failure as two of the most dangerous global risks. Beyond financial losses, cyber attacks may pose serious reputation risks for companies and governments. Governments can protect critical infrastructures and confidential data through several initiatives. For example, most major developed economies have created a national cyber security strategy in the past five years. They are also developing information-sharing mechanisms to detect and respond to cyber threats more quickly. One example is the UK Fusion Cell, which brings experts from government and the private sector together in an information-sharing and threat-analysis hub.

Regardless of where a public-sector organization is in its digitization journey, these six lessons can help as it starts, scales, or evaluates its program. The stakes are high. When digital public-sector transformations succeed, citizens and businesses will benefit from better access, and governments can operate more nimbly and achieve substantial savings.