How to Align IoT Solutions with Your Business Needs
To compete effectively in today’s real estate market, companies not only need to adopt technology, they need to adopt the right technology.
But before those details can be addressed, there is a more fundamental question that must be answered: whether a given technology is horizontally or vertically aligned.
For our purposes, the term “vertical” refers to specific building types, such as office, multifamily, industrial, health care, retail, and so on. This is contrasted with the term “horizontal” which refers to technologies, solutions, and services that cut across building types.
If a service provider deploys IoT sensors to optimize space utilization in offices, it is taking a vertical approach. On the other hand, an organization offering an energy management solution to buildings, regardless of industry, is taking a horizontal approach.
Although technology is impacting every aspect of real estate, the reality is that very few problems are universal. The full potential of the IoT will not be realized until the technology is aligned to business needs, and solutions are built for the challenges of specific verticals.
Service providers that are horizontally focused are effectively aligning with the client’s technology (or lack thereof). Because of this, horizontal service providers will be made up of technology-focused generalists who don’t have visibility into their clients’ various industries, strategies, and workflows.
That doesn’t mean a horizontal approach is never effective. Larger service providers that focus on scale and operational efficiency can deliver effective solutions to a wide variety of building types. Yardi is a perfect example of this. Their property and asset management technology can be applied to every vertical, whether it is an apartment building, industrial facility, condo, public housing, or even airport. The company has found problems that are universal in real estate.
In contrast, a service provider taking a vertical focus is aligning with the client’s business, not their technology. In this approach, the focus is on business needs and industry-specific assets, personnel, and processes.
Unfortunately, many service providers look to build widely-applicable (horizontal) solutions that would have huge markets; as a result, many big but vertical-specific pain points remain unmet by technology. Interestingly, vertically-focused companies are more profitable than horizontal peers, by an average of 30 points on an EBITDA margin basis and most vertical players are making money, while most horizontals are losing money. This fact is especially important in real estate, where decisions are based on long time horizons.
When it comes to problems that are not universal, real estate companies should learn to differentiate between narrow, horizontal solutions meant for any building and more comprehensive, vertical solutions built for their portfolio type. Here are the specific reasons for taking this approach when evaluating IoT solutions.
Real Time Alerts & Predictions
The falling cost of sensors for collecting building data and cloud computing for storage and analysis has lowered the barrier to entrance for technology service providers. Accordingly, there has been a proliferation of companies that collect, visualize and/or analyze building operations data.
At the most basic level, these data have been translated into online dashboards that operators can use to get a high-level understanding of what is happening in their portfolio. As operators have demanded more from service providers, a few players have developed sophisticated analytics to automatically catch anomalous behavior in the data.
For example, with some historic equipment performance data, analytics can determine an expected power demand from a specific piece of equipment. If, at any point, the real-time demand does not match the expected result, the software can trigger an alert to notify the building operator.
Then the operator can go and solve the problem.
The reality is that “anomalous” behavior is interesting, but it’s not a game changer for building operators. Without more details around the “how” and “why,” this notification still requires an investigation. At best, it results in a faster resolution of an issue and a marginal improvement in maintenance or energy efficiency. At worst, it is a false positive that wasted the operator’s time and created resistance to the technology.
And yet, this type of solution remains prevalent in real estate today. The thought of applying machine learning algorithms to automatically identify anomalies sounds like it would provide value by itself, but it is a distinctly horizontal approach – you could apply the same algorithms to offices, hospitals, manufacturing, and restaurants.
Instead, a vertically-focused provider would deliver a notification only if it materially affects the business needs of the client. This requires an upfront investment by the service provider to develop a feedback loop with the operator to determine the root cause of specific data anomalies. While this may sound costly and slow, the initial investment compounds greatly over time. Because the provider is vertically aligned, the insights discovered about one piece of equipment in one building can safely be applied to all similar equipment across all clients.
This creates a network effect, where the more feedback a vertically provider collects, the more accurately they can pinpoint the exact cause and solution for an equipment issue, and the more an operator has an incentive to provide feedback. A horizontal provider could not implement this, because equipment operates differently in their various clients’ buildings, and a lesson in one place cannot be applied widely.
An anomaly detected by the horizontal provider may prove valuable, but it’s important to distinguish between value on an ad hoc basis, and strategic alignment that continuously delivers value.
Some horizontal providers have dealt with the “false positive” problem by being extremely selective with projects. Large returns can be guaranteed by making an upfront investment in identifying buildings with large deficiencies. This is especially true with campuses such as schools and hospitals, where the scale of the problem justifies the highly customized approach.
There is nothing inherently wrong with this approach and is another example of how a horizontal service can be effective. However, for a portfolio of hundreds of buildings, it may not be strategically interesting enough to optimize the worst handful. While the high level of customization negates the drawbacks of a horizontal approach, it creates a question of scalability.
The project-based approach also tends to focus solely on energy savings, because those can be quantified accurately. While utilities are usually the largest operating expense, maintenance and equipment replacement costs are generally more strategically important for verticals such as commercial real estate, where ensuring tenant comfort is the priority.
In fact, roughly $2 per square foot is spent each year on energy. Meanwhile overhead costs, salaries, etc. to keep occupants in the building total around $200 per square foot per year. Increasing occupant productivity by just 1% via better indoor air quality or better temperature control can pay for an office building’s energy use for a whole year. Of course, this fact only applies to offices, so it would likely not be acknowledged by horizontal providers.
One of the biggest concerns when adopting new technology in real estate is figuring out who is going to use it, what existing processes it will improve, and what additional workflows it will require.
Horizontal providers tend to believe that with enough features, someone from every vertical will find something useful in the solution. But there is a big enough difference in the personnel between a commercial office portfolio, where the product is the building itself, an industrial facility, where the product is material, and a healthcare facility, where the product is human health to make this untrue.
Every building vertical has different personnel and different priorities when it comes to building operations. Some buildings have a team of dedicated personnel for operating the building and equipment. Others will have personnel that operate the building in addition to other responsibilities. There is simply no way to create a horizontal solution that accounts for all these differences.
On the other hand, vertical providers focus on delivering a tool that fits into the existing processes for the personnel in that building type. Understanding the nuance of these processes requires level of focus that cannot be replicated widely.
One of the largest benefits of a vertical focus is that ancillary solutions can be added to create a more comprehensive solution. Tools that wouldn’t make sense across for other building verticals can be combined to bring in more workflows under one technology. As an industry and technologies evolve, vertical integration helps avoid data silos and redundant solutions.
For example, a tenant billing tool in hospitality or manufacturing wouldn’t make sense to combine with an IoT solution. But in commercial real estate, tenant submetering is an existing workflow that is often heavily reliant on manual processes. It would never make sense for a horizontal provider to add this solution.
Real estate companies should evaluate technologies that can solve the problems of today and are positioned to address the problems of tomorrow. Real estate technology will evolve in unpredictable ways, but vertically-aligned providers are inherently better at applying new innovations in a practical way.
On the surface, it may seem that the market is awash with IoT solutions that are indistinguishable from each other. However, the field can be narrowed significantly by differentiating the companies that are horizontally and vertically aligned.
If the problem being addressed is truly shared across all real estate portfolio types, it makes sense to use a provider with the scale to deliver the solution at a low cost. Likewise, if there are a handful of buildings with known and large-scale deficiencies, it makes sense to go with a provider that specializes in customized projects.
However, in most cases, it makes sense to go with a vertically-focused provider that understands the nuances of your business needs. You will benefit from the network effects that can only be created from analyzing similar situations, the technology will be scalable, usable by your specific personnel, and vertically integrated into your overall strategy.
Enertiv's solutions are built specifically for multifamily apartment and commercial office buildings. If this applies to your portfolio, schedule a quick call today.