The IOT Wave: Why We Need Smart Buildings and Why We Should Want Them Now

The following is a write up of my presentation at the Smart Building Summit in Sydney. I delivered this presentation on November 28, 2017.

I often wonder — why aren’t there more smart buildings? I’ve been working in the building and energy space for my whole career. I have seen many startups and innovative business models come and go. As a product management professional, I study what has worked and what has not, with a goal to help drive adoption of what I think are very valuable technologies.

• We have electric cars and autonomous cars are not far away.
• My face can unlock my phone.
• A variety of apps will tell me when I need to leave for a meeting based on: my location, the location of the meeting, and real-time traffic conditions.

All of these technologies are recent, introduced within the last ~5 years. They are permeating massive segments of society. They are not thought of as premium features, they are accessible to the mass market.

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Similar technologies have not scaled in buildings and real estate. Even technologies that are more mature than some of these consumer offerings. “Why not?” is a valid question. But I don’t think it is an easy one to answer.

I want to share with you why I think that these technologies have not scaled. I also want to share how I think about the opportunities and outlook for smart building technologies.

First, it’s clear that buildings could be managed better. These are some examples of actual buildings that I have been in or have read about. In one case, a building operator is still using a Commodore 64 to control the HVAC across a small portfolio. The computer has not been replaced because it hasn’t broken beyond repair. We can all agree that there are extra costs due to the fact that systems don’t integrate together, or are hard to use, or have not been updated in years. But these costs may be opaque or not fully understood. The “replace” cost is perhaps more apparent. But, maintaining paper-based processes and old technologies takes more time, causes more errors and does have a cost. Despite the cost to use manual and paper-based processes, only a subset of buildings are procuring technology to fix these issues. In many cases, a “if it’s not broke, don’t fit it” mentality applies, just like the portfolio that uses a Commodore.

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But to be fair, the ‘tech stack’ in buildings is very complex. Below is a simplified view of how Microsoft thinks of the tech stack. It’s actually more than a single tech stack, each box here could be considered its own unique software ecosystem. This makes the integration issues challenging, which are key to smart buildings with multiple value streams. Moreover, the tech stack has to be thought of in light of the building life cycle. Some systems and technologies are installed when the building is first built and others when it is completed and occupied. Additionally, we’re dealing with hardware, software, services.

So, the technology landscape is crowded and fragmented, but it is hardly the only industry with these structural barriers. In my years working in and analyzing this industry, here’s what I have learned: One of the key problems in smart building technology adoption is that vendors have been applying the wrong model to scale their technology.

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Building innovators — technology, software, and the like — have generally taken a second wave approach to scaling their offerings: attempting disruption of existing vendors and models using a full-stack technology product.

This concept of waves of the internet comes from Steve Case, former AOL CEO. He talks about the three waves of the internet:

• First Wave:” The “pipes” that connected people to the internet, which included vendors like AOL and Cisco
• Second Wave: The disruptive companies that took advantage of existing connectivity to upend significant parts of the economy using applications and the mobile and social aspects of the web. Think of Google, Facebook, Salesforce.
• Third Wave: What we approaching, in which the internet of things or internet of everything will connect all the currently unconnected physical things.

Case notes that the third wave requires a different business model: Partnerships between technology firms, innovators, and established businesses. This is crucially important for smart buildings, too. If legacy and innovative building focused firms work together, the smart building technologies we all want will be deployed and realized in more places. In the past, using a second wave approach, many small building startups were trying to disrupt the current market and current vendor landscape without working with those established firms.

The need for partnerships is due to the fact that buildings are physical assets. There are a lot of different vendors and service providers that all have a role to play in building construction and management — technology just can’t disrupt everything, though it can enable better outcomes for many of these existing players within a building.

This is what will bring smart buildings to the mainstream: technology that focuses on enabling better outcomes across all the existing components of a building. Smart building technology vendors that work with the established firms providing these capabilities. Moreover, other elements are required to make buildings “smart”. It’s not just software and technology, but also a team of building operators that use these technologies, system manufacturers that make their products “smart building ready”, and owners/operators who understand the value of a smart building and can quantify it. Innovative smart building technology is part of a system, rather than a stand alone product. Some of that system exists today, in many buildings, and other parts of that system are coming to the market now — the smart building technologies.

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There is another “system” that demonstrated great value through an integrated approach. During the Battle of Britain, the Royal Air Force established the Dowding System, named after Hugh Dowding, who was head of Fighter Command. Some books say that radar won the Battle of Britain, but it was far more than that. The radar did enable England to identify German planes and send their fighters to intercept, but the radar was supported by a complex communication and decision-making network that analyzed incoming data (from radar and other sources) and contacted various airfields to ensure that the right number of planes were sent to the right areas to defend against German attacks. The results were stunning: prior to the Dowding system, the RAF had an intercept rate of 30–50 percent. At least half the time, they did not even find the planes they were trying to shoot down. After implementing the Dowding System, the intercept rate was over 90 percent. England was already building as many planes as it could, but by using this integrated system, they increased the utilization rate of the fighters dramatically. The historic diagram of the Dowding System doesn’t even show radar, as it was classified at the time, but it still shows a fairly sophisticated system. It’s clear that a strong process, while also utilizing existing systems, new technology and a variety of trained professionals, ensured that the Dowding System, and the RAF, was successful. (For more on this, see my write up here.)

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The same concepts apply in smart buildings. It’s not just the technology that will suddenly make the building smart. That’s just a piece of it.

Said another way, technology firms that have entered the building industry in recent years have been focused on enablers. The standard pitch goes something like this: based on a technology product, the user (building operator) will have data that allows him/her to do something beyond what is currently possible, which will have value. But in this scenario, the technology doesn’t guarantee an improved outcome because it just provides data and insight. What if no one uses these insights?

Taking a third wave approach, smart building technology providers also need to consider the real estate business model, which isn’t focused on deploying new technologies simply to gather better data. And, this model is changing with the rise of workplace-as-a-service. The core business model in real estate is to improve profitability by increasing occupancy or investing to raise rents. Any smart building technology needs a value proposition that aligns with this. We also need to be aware of market demands: namely that the office is becoming a differentiator and a talent attractor/retainer.

When thinking about smart buildings in the context of technology enablers, business model innovation, and market drivers, we begin to better understand what value they need to deliver, but also the broader landscape in which they play. It also becomes clear that a network of partners — existing vendors and new innovators — will be required to realize the value of smart buildings.

If you look at the building management system running on a Commodore 64 solely as an “upgrade cost” or “wait until it breaks” issue, then you’ll find that it makes sense to keep it as-is. But, if you think more about all the costs and the missed opportunities to improve the business, the staff time to find new parts, the staff time to run this system, the lower comfort that occupants have, then it makes a lot of sense to replace it. Or, if you think of the old computer in light of a goal to improve the business model (profitability) and addressing emerging real estate market issues, then replacement is the way to go.

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Building owners and operators don’t want to buy technology for technology sake. They want solutions to their problems. They want outcomes. The outcomes have to be significant to the real estate business model. The energy savings benefit from smart building technology is clear. We trust that we will save money. But, it is not compelling when looking at the overall operational budget for a building or real estate firm. Energy is a small cost overall — usually only a percentage or two of the total spend. Smart building technologies that are more integrated to other systems and processes — taking a third wave approach — will drive larger financial benefits, such as higher rent or higher sale prices.

With all this in mind, I’m very hopeful of what smart building technology will provide in the future, because what I am seeing is more than just software and technology, but solutions that can drive improved outcomes. I also see more and more partnerships between industry leaders and innovators. And, I see that those employees working in offices will be beneficiaries of all these technologies and the outcomes they enable. Buildings like The Edge in the Netherlands, which has a lot of technology, but all focused on enabling better outcomes and performance.

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Now I want to walk you through some of the most exciting opportunities for smart buildings. Those that go beyond simply saving energy and employ a third wave approach.

• Space utilization: The fundamental technology here is sensing occupants in a space and even tracking movement. This enables a building operator to identify underutilized and over-utilized spaces. In retail environments, data on foot traffic can be used to determine shopping patterns, much like we can do online by tracking clicks and items put in and taken out of carts.

• HVAC Optimization: HVAC optimization specifically is enabled indoor occupancy sensing plus an integration with the HVAC system. There has been some compelling research that shows occupancy-driven HVAC systems can save 25–40 percent of total HVAC, which itself is about 40 percent of total energy usage in a building.

• Predictive analytics: This is more nebulous than the other opportunities, but at the core, predictive analytics will enable building owners and operators to act on the massive amount of data being collected. In some cases, an overwhelming amount of data is debilitating — it’s hard to separate signal from noise.

• Indoor air quality and healthy buildings: We’re starting to see standardization around healthy buildings, following the model established by the green building movement. Green building certification has allowed researchers to quantify the value of the standard, and as the same happens for healthy buildings, a more compelling value proposition will emerge. The research on indoor air quality, for example, is compelling — increased air quality is a driver of higher productivity and reduced sick days, among other benefits. A variety of systems can be used — from sensors to identify air quality issues, to irrigated plants in wall-mountable fixtures that can clean some toxins out of the air. This is a space I continue to watch closely.

• Personalized office: Building on indoor location and HVAC optimization, I believe in the future, buildings will react to individual preferences and recommend work spaces that align with your preferences. For example, a conference room may tune itself (lighting, temperature, AV equipment accessibility) based on the number of participants and their preferences. As there are more co-working spaces, being able to automatically configure a space will improve the tenant experience, too.