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An IoT Business Case Starts with a Cost Model — Part 1

by Drue Reeves  |  March 13, 2016  |  10 Comments

What’s the ROI? Is the reward worth the effort? Is the juice worth the squeeze? Pick your favorite idiom, but they all say the same thing — is what you’re striving for worth the required expenditures to achieve your goal?  THAT, my dear friends, is the name-of-the-game when it comes to IoT. Before organizations will invest the capital and human resources to deploy thousands or millions of devices all over the globe, collect and analyze floods of sensor/device data, and automate a business process, the business will want to know the ROI. In it’s simplest terms, the case can be written as a mathematical statement: IoT Business Case Formula OK, it may seem a bit obvious, but that equation MUST be true when architecting IoT solutions. Otherwise, what’s the point? If the cost of building and maintaining the solution exceeds any potential business value, then why build it? OK, if you buy that, then let’s try to break this down even further. But before I do, let me make one caveat. Any time you build a cost model, you must make some assumptions. Whether its employee overhead, taxes, cost of a physical part, or whatever, — at some point — you’re going to take an average… or make an educated guess about some of the numbers in the model. Hence, your cost model is never going to be 100% accurate. Never. Building a precise cost model is not only impractical (in terms of time/effort) it’s nearly impossible. There are too many unknowns. So always bear in mind — the point of a cost model is to get a reasonable idea of any solution’s potential cost. That way, you can compare it to the business value (hence the formula above). In this blog post series, I too, will make some assumptions. My hope is that you can use this methodology to build your own cost model….not to use my exact example. Make sense? OK, let’s get started. I’d like to start with the CAPEX part (because I think it’s the easiest). The CAPEX for an IoT Solution (at the edge) starts to look something like this:
  1. Cost of every device at a specific location, or [N*DevCost]Location1 , where N is the number of devices
  2. Plus the cost of power, networking, housing/physical security at that location, or [N*DevCost + Pwr + Network + Housing]Location1
  3. Now, if every location has different devices, the formula could expand to , [ (N*DevCost + Pwr + Network + Housing)device1 +..+ (N*DevCost + Pwr + Network + Housing)deviceX ]Location1, Where X is the number of disparate devices in each location.
  4. Plus that same formula for all locations, [ (N*DevCost + Pwr + Network + Housing)device1 +..+ (N*DevCost + Pwr + Network + Housing)deviceX ]Location1 + …+ [(N*DevCost + Pwr + Network + Housing)device1 +..+ (N*DevCost + Pwr + Network + Housing)deviceX ]LocationY, Where Y is the number of locations
Or.. Iot Device Cost Model   Follow me? In other words, you have to add up the cost of every type of device, plus the power, networking, housing/physical security for that device, at every location.   Now, here’s where it gets tricky. You’re probably wondering, well, how much power, networking, housing, is required for each device? Well, that’s device dependent, right? For example, if the device has 802.11 capabilities, then the device might be able to leverage an existing wireless network. Or if the device can be powered by a lithium battery, then AC power isn’t required, which alters the model.   And, btw, this is just the capital costs for the device, we haven’t even talked about the costs for the platform. I’ll get into more with my next post, but this is food for thought. And, I need your help. If you can think of other variables that add/subtract to the device cost, then please let me know. For more information on IoT, please see Gartner’s document Preparing, Planning and Architecting for the Internet of Things

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Category: cost-optimization  internet-of-things  

Tags: cost-model  internet-of-things  iot  

Drue Reeves
Research VP
4 years at Gartner
19 years IT industry

Drue Reeves is vice president and research director, Cloud Computing and Data Center Strategies. Mr. Reeves sets the agenda, direction and strategy for research on the cloud and data center, ensures quality research, presents on important topics, speaks to customers to solve real issues, and interfaces with executive management. Read Full Bio


Thoughts on An IoT Business Case Starts with a Cost Model — Part 1


  1. Drue,

    One item to consider is R&D taxable benefits you could get through development of IoT as its in a early stage of adoption and growth. There are a lot of things that have not been done yet and this would help balance out the costs should there be a case for R&D within the business case.

    A hidden cost will be around security and any additional protection you need to bring on as a result of introducing IoT at this time.

    Max.

  2. Drue Reeves says:

    Hi Max,

    Thank you for the comment.

    You’re right about security and additional protection. I tried to encapsulate that in “housing and physical security”, but that number has yet to be fleshed out yet. If you have a suggestion or example, I’d love to hear it.

    As for the taxable benefits, could you please expound? Are these tax credits from the federal or state government? Are these write downs on capital assets?

    Thanks again!

  3. Mayur Gundecha says:

    Drue,
    Great model to start thinking about costs and returns. In these early stages companies should also consider the “business value” of building the IoT capabilities as a lever for future competetive advantage. Likely that the first IoT project may not have a good ROI by itself.

  4. Drue Reeves says:

    Hi Mayur, Interesting point. One IoT project might not — in and of itself — deliver enough business value to overcome the cost of the IoT Solution. But multiple IoT Solutions might create enough business value to justify the cost of all solutions.

    Any ideas on how to measure that?

  5. […] Source: An IoT Business Case Starts with a Cost Model – Part 1 – Drue Reeves […]

  6. Chris Hopf says:

    A subtle change to terminology has been repeatedly shown to benefit (better frame) these conversations with prospects / customers.

    Often, ROI is used but then accompanied with the use of “cost” … recommend replacing “cost” and instead use “investment”. This stays true to the “I” in ROI and then contrast life with and without the solution in a simple, well-designed, not overly texty/wordy end-to-end timeline of the customer experience.

    Much more I could say, but leaving it at that for now.

    What you are discussing in this post, is having many spin their wheels for weeks or months and delaying real-world insights / learnings to best inform decision making / fine-tuning.

  7. Hi Drue,

    Great post and great discussion.

    To yours and Mayur’s comments above, have you explored assessing the future revenue streams at risk from not making an investment, when your competitors are moving ahead with similar investments?

  8. Drue Reeves says:

    Hi Derry,

    It’s another good point. There are always opportunity cost/lost risks. There are risks in not doing something…which we tend to forget.

    IDK how to quantify that, but would love to hear ideas.

  9. Mayur Gundecha says:

    Hi Drue,
    Depending on the rigor used by an organization, one could consider using real options based valuation and calculate the value of “growth options”. Check out this paper by Robert Fichman for additional details.
    https://www2.bc.edu/~fichman/Fichman_Options_Thinking.doc



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