Key IT metrics: A CIO guide
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The emergence of the Internet of Things (IoT) is reshaping how companies deliver their wares, as they can sell "smart" products and services. Using sensors, analytics and Internet-enabled connections, smart products and services can provide companies and their customers a wealth of data on performance. IoT also allows companies to better predict -- or even guarantee -- what their products and services can deliver. That ability is giving rise to a concept called the "outcome economy," says Allan Alter, a senior research fellow at the Accenture Institute for High Performance with a research focus on IT strategy. Here, Alter explains more about this idea and what it means to corporate technology teams.
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Define the term "outcome economy."
Allan Alter: The outcome economy is a shift from competing by selling products and services to competing by selling measurable results important to the customer. It's an economy where buyers are looking to buy an outcome and the sellers are selling a promise of an outcome.
Can you give an example?
Alter: Here's a fun example: Imagine if you go to a comedy show. Instead of paying for just a ticket to see the show, you pay by the number of laughs, so you pay for each time you laugh. There's a theater in Barcelona doing this. They have facial recognition software and they count how many times you laugh and you're charged by how many times you laugh. The name of the theater company is TeatreNeu in Barcelona, Spain.
Think of the idea of buying an outcome that you really want. Take medicine, for example, when a doctor prescribes a medication. It's not just a pill. The outcome is that the patient will take the medicine, but the patient doesn't always take meds. So, there's a company that has inserted a tiny sensor in its pills. That sensor is part of a system, and it determines when patients take their medications and it can also, if they forget to take the medicine, send a reminder. So, the outcome is that the patient is taking the medication. We're also seeing this in agriculture. Agriculture companies have all this data, so they're not just selling tractors and equipment, they can sell an outcome, a crop yield.
Development of the 'outcome economy'
What's driving this concept?
Alter: Business leaders and thinkers have talked a long time about figuring out what the customer really wants, what's the why behind the buy, and delivering it. [The late] Ted Levitt, who was an editor at the Harvard Business Review and a professor at Harvard Business School, said a long time ago that people don't want to buy drills, they want to buy holes. So, this concept serves an old goal. The Defense Department in the past has done outcomes-based procurement.
The idea of providing what people really want is an idea that's been around, but it's been hard to do; it takes a lot of technology and the technology wasn't really there in the past. You need sensors to know if the outcome is met and to measure the outcome, and you need technology and products that have the ability to deliver those outcomes. Now with the Internet of Things and the various components of that, technology has arrived on the scene. And once companies recognize they can deliver outcomes, we think it's going to drive competition in that direction. I think it's going to be a similar pattern to what we've seen in analytics. Analytics have gone from limited ability to something that can be used anywhere now.
Will every company be part of this new outcome economy, regardless of industry or the product/service it produces?
Alter: We're still exploring it; it's still early on. A lot of this will happen where you need complex equipment, where you need a lot of analytics, and where you have an important outcome. [For example], farmers don't buy tractors because they want to collect them; they're looking for something more they can get to. Healthcare organizations are actively trying to drive better results while reducing costs. So, we'll see it in industry, we'll see it in healthcare, and we'll see it in technology, too. As for the consumer side, healthcare again is a good example. Some of the early examples are something like Fitbit, which is a means to delivering information for people to have a healthier lifestyle.
As to where it's going to hit first or where it will penetrate, that will take a while. This will not be fast, and it will spread as the idea catches on. One thing we can also say is it has happened first in purely digital industries, where you can measure customer behavior and ad response; online advertising has been an early example, where you're not buying an opportunity to place an ad but you're tying the delivering of the ad to someone who shows a real interest. With the Internet of Things, as companies have the ability to create smart equipment and use analytics and sensors, they'll build up enough knowledge so they know how to understand the customer and deliver the outcome customers want.
Pay per Laugh
See just how TeatreNeu counts laughs in this short video. What's your view -- cool or creepy?
Mapping and measuring in the outcome economy
What kind of IT investment/maturity level needs to be in place for a company to move into the outcome economy?
Alter: It's going to need a lot of technology sophistication. I think a starting point is the basic technology of the industrial Internet -- analytics, sensors, sophisticated software. You have to first understand the customers very well, so it begins first with understanding what they're really looking for and what outcomes they really want. Companies then have to put themselves in a position to deliver outcomes, so they're going to have to map the outcomes customer want to what they're offering and look at the hardware they're now selling and how close is it to achieving those outcomes. They're going to have to look for opportunities to add software and sensors to the equipment they have to gather insight and complete the feedback loop that's necessary to deliver outcomes. To deliver outcomes, you have to be able to measure what you're delivering and how close it is to the outcome customers are looking for and how well the equipment is on delivering that outcome. And you have to be able to do mid-course correction. You can't just use historical information. You have to be able to see in real time if you're equipment is doing what needs to be done to deliver the outcome. And if the sensors tell you something has changed, you have to be able to make a mid-course correction.
How will a company know it has arrived at this state?
Alter: They'll know they're getting there when you see a marketplace for outcomes, when people are buying and selling outcomes; you'll know you're there when the business models change. One of the tests will be on the pricing side: Are you selling based on achieving a certain level of performance? For example, is your company beginning to strike deals where you're selling based on some financial goal or key performance indictor metric? If you find you're shifting how you're being paid, that's one way you'll know you're there.
CIO challenge in the outcome economy
What's the leading challenge/responsibility for CIOs as the business world moves in this direction?
Alter: CIOs are going to be involved in exploring the technologies that will be required. They'll need information and data, and that might come from a variety of sources. So, CIOs are going to help identify those technology partners who will help deliver those. And they're going to help build that ecosystem of providers. On the operator side for CIOs, they're going to build and run the systems that will provide outcomes. A lot of technology will have to be pulled together, and to connect with customers and the suppliers and other providers of information you have to make this work. And there's going to be a strategy side. CIOs are going to work with other executives to understand the outcomes that customers seek and how to meet the outcomes they want. To be an outcome-focused company, it's going to involve every part of an organization.
About the author:
Mary K. Pratt, a freelance writer based in Massachusetts, writes frequently about business management and information technology. She can be reached at firstname.lastname@example.org.
Read about how CIO Mike Heim is helping Whirlpool turn laundry day into a field day with the deployment of smart products and services. Then check out how IoT hype is giving rise to a new C-level role -- the CIoTO.