The vast majority of senior business leaders say that their companies will be using the Internet of Things (IoT) in some way in the coming year–but less than 30% of organizations generate service revenue from their connected products, according to a Capgemini report.

Companies undergoing digital transformation projects must figure out how to turn IoT efforts from a cost center into a revenue generator, Terry Hughes, the IoT and manufacturing business lead at AppDirect, said in a Tuesday session at the 2018 LiveWorx conference in Boston, MA.

The path to monetization depends largely on whether or not your organization is digitally transforming versus a digital native, Hughes said. Older companies that are undergoing digital transformation can follow these six steps to get IoT projects on a path to monetization.

SEE: The Power of IoT and Big Data (Tech Pro Research)

1. Devices with potential

Many companies have moved to creating devices that can be reprogrammed, with software that can be updated over the air. This means the devices have the potential to do more than what they were initially intended for, Hughes said.

Hughes offered the example of Landis+Gyr, a multinational corporation that makes meters and related software for electricity and gas utilities. When it launched in 1905, it made meters. Today, it has created a flexible IoT platform for expanding utility applications, with a mission of growth and expanding the scope of their customers’ business.

Biggest takeaway: Architect devices so that value-added software and services can be enabled in the field. Enable software to be purchased with and linked with hardware.

2. Cloud network communication

Companies undergoing IoT projects must connect their devices to some network over Wi-Fi, bluetooth, or other technology. Many companies are evaluating platforms to do this, of which there are many for different services (think Microsoft Azure for cloud, SAP HANA for big data, and Jasper for connectivity).

“Old school companies are trying to choose, ‘Do I need one or more of these, and do I integrate them?'” Hughes said. “It’s a big challenge. But you don’t have to invent your own version of these.”

The shift from hardware-driven business to software-driven outcomes is increasing the demand for digital platforms, Hughes said. By 2020, 60% of the top manufacturers will rely on digital platforms, which should support up to 30% of overall revenue, according to an IDC report.

By this year, more than 50% of large enterprises will create and/or partner with industry platforms, according to Accenture.

Biggest takeaway: Don’t try to build tech that already exists in the many platforms out there now. Harness Software as a Service (SaaS) to rapidly deploy and iterate, so if you make mistakes, you do so quickly, and without a huge monetary investment.

SEE: Hiring kit: IoT developer (Tech Pro Research)

3. Software distribution

Once connected, companies can start distributing software remotely. However, many older companies are still shipping free software on USB drives or CD-ROMs, incurring more costs.

Digitally transforming companies face three major software challenges, Hughes said:

  • Software is found in fragmented silos by product, business unit, and project
  • Distribution channels are messy and complex
  • There is often no linkage between the software and the hardware it relates to

Biggest takeaway: Catalog and centralize all software assets, and automate their purchasing, licensing, and distribution.

4. Parter and provider ecosystem

Many companies can benefit from opening up their ecosystem to third parties to write software, Hughes said.

“Third parties will innovate and add value around a manufacturer’s core products,” Hughes said. He offered the example of BlackBerry, which failed because Apple and Google’s app developer ecosystems were far stronger.

To take advantage of this, companies need a strong developer program, tools for app development and integration, an easy way to build and publish apps, and a path to discovery and revenue for the developer, Hughes said.

Biggest takeaway: Make it easy and compelling for developers to want to innovate on your platform. Show them a path to discovery and revenue.

SEE: Internet of Things (IoT): Cheat sheet (TechRepublic)

5. Marketplace

Companies need a place to put all of these new apps and features where customers can find it. This usually takes the form of a web page or marketplace, Hughes said.

Biggest takeaway: A well-designed integrated marketplace can transform a company from outdated sales practices into an automated and scalable digital business.

6. Monetization of assets

“Making money from these investments is something most companies don’t do on day one, but start to realize they should,” Hughes said.

We often see in the market today the “as is” state, Hughes said: Software is given away, software billing is manual and costly, and fulfillment and licensing is often not automated. In this state, business models are basic, like a one-time purchase, and promotion or showcasing the software is poor or nonexistent, he added.

Ideally, the true value of your product will be in the software, Hughes said. It can open up a range of new business models, and should become a seamless part of the business.

Many manufacturers are moving software and services to the cloud for on-demand consumption, Hughes said. “The value is increasingly in the data that the hardware and software generates,” he added.

Biggest takeaway: Ensure that the software and services make money, and that new billing models are deployed. It’s also key to choose a billing system that’s future-proofed.

Digital natives

The difference for digital native companies when it comes to monetizing IoT projects? They start at step six, and move to step one, Hughes said. Take Uber, for example: It started with a monetized platform, and worked its way back to drivers and their cars. This model makes sense for startups, who are not encumbered by their past mode of operating, Hughes said.

Digital natives always start with the business model and monetization plan, and move backwards from there, Hughes said. There is an immediate focus on the platform and the end-to-end experience, customer lifecycle, always-on connectivity, and large, open ecosystems.

The monetization comes from direct value-added services, as well as indirect services such as the derived data, Hughes said. Devices are seen as a necessary evil–in the end, the device itself is never a source of profit. These companies also generally bypass distribution, and connect directly to the user, he added.

Other examples of digital native companies that have taken advantage of this approach are SiriusXM, Nest, and Amazon with the Echo.

In the end, a company’s ability to create value from IoT depends on its leadership, Hughes said. “It’s all about executive alignment at the top,” he added. “Some projects will fail if they don’t have the right top people.”