Analytics Practice

IoT comes of age

McKinsey research shows that adoption of IoT technologies has increased
exponentially the past five years—but successful implementation still eludes
some. Here’s how to get it right.

© Westend61/Getty Images

March 2022
 In this episode of The McKinsey Podcast, fast forward five years, and homes have over five
McKinsey partners Michael Chui and Mark Collins connected devices on average.
share their thoughts with Roberta Fusaro on the
findings of McKinsey’s latest Internet of Things This shift has been born in part out of real
report, including how to successfully integrate innovation in technology with smart speakers, as
IoT, the situations in which the most value is being well as us being caught in our homes for the last
created, and what companies continue to get wrong. two years because of COVID-19. We’re investing in
the area around us, both to improve and make our
After, it’s expected a piece of space debris hit lives easier.
the moon on March 4, 2022. Hear about the
implications of all the other pieces of space junk Roberta Fusaro: You talked about how five areas
in orbit from McKinsey associate partner Chris accounted for more than half of the value that’s
Daehnick and podcast managing producer Laurel being generated. What are the other four areas
Moglen. The following transcript has been edited where you’re seeing value created?
for clarity.
Mark Collins: Consumer applications is one of the
The McKinsey Podcast is cohosted by Roberta fastest-growing areas, but it’s not the largest as we
Fusaro and Lucia Rahilly. think about it overall. And so when we look at the
largest overall, what stood out to us were use cases
related to human health in hospital, acute-care, and
Defining the Internet of Things residential-care settings.
Roberta Fusaro: How do you define the Internet
of Things? Also, we saw growth in operations and
optimizations. So, how can we really drive greater
Michael Chui: The Internet of Things, or IoT, is efficiency, greater efficacy? And that was across
when you embed digital technologies into the the settings of factories, cities, and work sites.
physical world. For example, we’re seeing digital We also saw a real excitement around human
technologies embedded in cars and in buildings. productivity in the retail setting to really enhance
You connect those physical objects through digital what the experience can be for shoppers while also
network connections back to computers, and that enabling companies to optimize both their revenue
simply is it. That’s the Internet of Things. growth and their cost price.

Roberta Fusaro: Mark, compared with McKinsey’s Michael Chui: One of the remarkable things we’ve
previous research on the technology, what were seen is that companies are deriving value from
some of the most surprising findings from the new using these technologies. Whether it’s in the factory,
IoT research? What were the areas where you found in healthcare, or in the automotive industry, we’re
great uptake or where the use cases were more seeing more and more cases where real value is
prevalent than in others? growing and being created.

Mark Collins: Looking at the settings or physical

locations where IoT is deployed, of 99 individual Getting the integration of IoT right
cases, we found five represented 52 percent of the Roberta Fusaro: Are there examples of companies
value in 2020. So a really big concentration in terms that are truly getting the integration of IoT right?
of where value is created.
Michael Chui: The World Economic Forum has
The second thing that I found surprising is the identified a set of factories around the world that
massive growth of the connected home. Rewind they describe as lighthouses. They are lighthouses
the clock back five years ago, and the average in the sense that they are truly being forward-
American house had one connected device in it. We thinking in terms of the application of IoT within
their factories.

2 IoT comes of age

For instance, they’ve deployed condition-based The impact of IoT on cities
or predictive maintenance: rather than waiting Roberta Fusaro: What impact have you seen IoT
for a tool in a factory to go down and bring down have on cities?
an entire assembly line, they’re continuously
monitoring the performance of that tool so as to Michael Chui: Cities are near and dear to my heart
avoid unplanned downtime. as a former municipal CIO [chief information officer].
One of the challenges that we’ve seen in a number
So that lowers cost in terms of the maintenance of large cities around the world is the amount of
itself, but more importantly, you don’t lose the traffic congestion in the center of cities.
output of that entire line, which can be millions of
dollars per day. And this is true in the chemicals A number of different cities have applied congestion
industry as well. pricing. They are tracking when vehicles are in the
center of the city and charging for the times when
Roberta Fusaro: I’m curious about one aspect of congestion is highest. That doesn’t necessarily
the consumer applications: It feels to me like one of make the driver happy, but we have seen material
the larger impediments to greater adoption is this changes in traffic patterns within those cities that
privacy issue. How did that factor into the results of have invested in congestion pricing. You can think
the research? And how can companies help resolve about a city being like a dynamic, living organism,
that tension? and IoT can help it adjust.

Michael Chui: Privacy is absolutely a factor as we Mark Collins: Taking the example of the living
think about consumer preferences. And it’s one organism, we’re seeing a real trend toward
which has increasingly become top of mind as we’ve environmental, social, and governance [ESG] and
seen very public incidents over the last few years. sustainability right now. As someone who lived
through the days of orange skies in San Francisco
Some companies make their value proposition as a result of the fires a few years ago, I think we’re
based on privacy as they go forward. But what we seeing real focus now on things like air quality
also see is a tension for users because they want monitoring and water quality monitoring.
the convenience that many of these IoT devices can
bring. They’re seeking to balance these trade-offs We’re seeing cities intervene by deploying
between privacy, ease of use, reliability, ease of sensors to detect these things. We’re also seeing
installation, et cetera. democratization of that with private individuals

‘Some companies make their value

proposition based on privacy as they
go forward. But what we also see is a
tension for users because they want the
convenience that many of these IoT
devices can bring.’
—Michael Chui

IoT comes of age 3

 paying for sensors that tell them the levels of Michael Chui: This is an old story. In any business
air pollution in their region. These sensors allow application of technology, you need business
governments to think about their response to leaders to partner closely with the technology
pollution. And that can feed into decisions, such leaders. To ensure smooth integration of IoT—
as what factories are going to be opened, where because the technology has advanced a lot, you
they’re going to be opened, and what their hours are. really need that coleadership.

At the end of the day, you need the business

What companies get wrong about IoT leader also to be able to say what’s being targeted,
Roberta Fusaro: So those are areas that show high for example, “We’re going to target unplanned
promise and high activity. What are companies still downtime. We’re going to target inventory
getting wrong about IoT? management cost. We’re going to target our
employees’ safety.” Whatever it is. That’s the
Mark Collins: I think one of the big findings when business result you’re going for. Hopefully, the
we looked back, relative to the research of five technology people are learning about that at the
years ago, was that now largely we can say the same time that the business people are learning
technology is actually good enough. We’ve had about technology.
huge maturation in things like network connectivity,
battery power, computer advanced analytics, et Mark Collins: To build off that, one of the themes
cetera. What we saw happen all too often was IoT that we heard in our client service is that the
being treated as a technology project, often run by integration of IoT is often easier in greenfield
the CIO or by a small business unit or factory plant settings. It’s easy to build in the technology and
all by themselves. the business icons from the start, or if you’re a new
IoT company being set up from scratch. Where we
And so the technology has changed, but the actual see this being a challenge is when you’re trying to
way of work has not. When we look at some of the integrate it into legacy or brand field environments.
lighthouse factories that Michael referenced earlier
from the World Economic Forum, we see that they And that’s not just the case of where you have a
treat the integration of IoT as a holistic operating factory that’s 50 years old that suddenly needs to
model transformation. be connected to the internet for the first time, but
it’s also in terms of companies that have traditionally
When they look at how systems and processes are sold unconnected products. How do they now
going to change on the factory floor, for example, move to a world which is much more software-
they think about how they may need to motivate driven, where they want to sell connected products
individuals working within that system differently. going forward? In these situations, the connection
And then to support that, they think about what are between business leaders and technology leaders
the KPIs and reporting that you need to be looking can have stunning results.
at on a forward basis. And we find when you bring
these operating-model factors together with some
of the fantastic technology that you have today, you The role of talent in the adoption of IoT
really can produce some pretty magical results. Roberta Fusaro: What role does talent play in the
way that IoT is being adopted? Or is it holding the
Michael Chui: As a former CIO, I feel the technology technology back?
leadership is still important, though. We just need to
make sure we have business leadership, too. Mark Collins: We see talent playing an absolutely
critical role. And it’s not just in terms of core
Roberta Fusaro: That’s a good point, Michael. How academic disciplines, where there’s a huge need
should technology and business leadership be for talent such as data engineers, data scientists,
working differently to enable IoT initiatives? computer scientists, et cetera, who underpin all of
the operations of analytics and IoT.

4 IoT comes of age

We also see it in terms of ways of working. We see I see a real theme around who owns the IoT agenda,
companies doing really well when they’re taking particularly from multinational companies, and how
a design thinking methodology and working being thoughtful about the short term and the long
backward from their customers’ needs all the way term, at a global and a local level, will allow you to
through to how they deliver it. capture value.

As we thought about the implications for We’ve seen lots of examples where people buy a
governments or regulators, one of the key new piece of technology and it’s used for the first
reflections that we had is how do governments week and then sits idle. And it’s through uniting the
and regulators think about turbocharging the business side and the technology side and changing
talent that is needed to unlock this potential going the day-to-day ways of working that you get to real
forward. And that’s going to require a whole raft change for companies.
of interventions all the way from primary and
secondary and tertiary education through to The classic example that Michael and I often talk
thinking about skill development. about are the repairers, who, until recently, were the
heroes of the hour when they fixed the repair. In the
Michael Chui: Folks who know how to implement future, the hero of the hour will be the person who
IoT and capture value from it in a business are in makes sure the repair is never needed in the first
high demand. It is one of the bases of competition. place. And so, you need to think totally differently
And because IoT is not exclusive to the technology about the KPIs, the incentives, and the performance
industry, you see automotive companies vying for management of people on a very practical level.
the same talent as the tech industry.
Michael Chui: Another thing that companies get
wrong is they don’t ensure that the machines
Avoid a fragmented approach to IoT they buy are connected to each other. A lot of
Roberta Fusaro: What’s a typical example of companies that sell connected equipment to
some things that companies get wrong when factories say that they’ll do predictive maintenance,
they try to use IoT or implement IoT into their but unless all of the machines talk to each
corporate strategies? other, you’re often going to underoptimize the
performance of the whole factory.
Mark Collins: What we sometimes see with large
multinational companies that have global footprints When we did the analysis, well over 50 percent
is that there isn’t a clear owner of IoT within the of the value that IoT can unlock requires
organization. And that leads to fragmented and interoperability. Unless the factory manager or the
decentralized decision making when it comes to IoT. procurement manager specifies that connectivity
and interoperability occurs, you’ll have IoT devices
I remember an example: I was speaking with a that don’t talk to each other.
colleague about a company that had multiple
factories across the globe. And almost every factory
had a bespoke application, a bespoke vendor for Business ecosystems are critical
providing one single discrete use case. Roberta Fusaro: What role do business
ecosystems play in the changes you’ve seen? Is
Each of them worked well in terms of their individual there more collaboration? Are these ecosystems
silos, but when it came to looking across the bigger or better?
company as a whole, it was next to impossible to
get an aggregate view across the entirety of the Mark Collins: I think ecosystems are absolutely
company. It meant as you thought about scaling critical as we think about the landscape going
those solutions, you were structurally limited and forward. And to give a very tangible example of this:
almost had to go back to the start and reengineer. One company I work with wants to deploy sensors
within their production environment, and they

IoT comes of age 5

 want to make sure that those sensors are secure. One CEO referred to there being a decade of
Making sure those sensors are secure requires progress in digital transformation in under ten
having security designed in from the start. How is months. And so, I think about how many of my
the network on which those chipsets communicate clients are now achieving things at a speed that they
information secured? In the servers where that data would never have thought possible in equivalent
is stored, how do we ensure that they are secure as time frames before. I also see the ambition levels
well? And so, no single vendor can secure an entire increasing as they think about what they want to do,
IoT value chain. Rather, we need people who work how they want to link the physical and digital worlds
together to integrate almost each layer of the stack together and make concerted investments in things
to bring this together. like digital twins and other technologies that not
only would enable them to be better prepared for
We have seen the emergence of platforms that the future but also enable them to capture value and
are at scale that everyone can integrate with. We serve their customers better.
have not seen that emerge in IoT as of yet. And the
emergence of that through an ecosystem play or
through some other play is an unlock that we would It’s time to go all in
be excited about. Roberta Fusaro: What is one key takeaway you
would offer business leaders to accelerate their
adoption of IoT?
Applying IoT to supply chain and
public-health issues Michael Chui: I’d say, bring all of the innovation
Roberta Fusaro: If we do this research again in that you have in digital to the physical world using
another two to five years, what are some trends that IoT. It turns out that to transform your business, you
you could imagine developing? actually have to do a lot of things. It doesn’t come
down to one thing. That’s what we’ve discovered.
Michael Chui: We need our factories to be better And so you really have to bring the whole playbook if
performing. Look at all the supply chain issues that you’re actually going to transform using IoT.
we’ve had. It has been, in some cases, a setting that
ended up being slower growing than we thought Mark Collins: For me, it would be about thinking
back in 2015. At the same time, it actually is the about how to start to sell and deliver outcomes
largest potential source of value. versus technology.

I’m not saying IoT can solve all of the problems, but Roberta Fusaro: In the research, you say, “Don’t
if you have better visibility in your supply chain, if dip your toe in the water.” What does that look
you have the ability to ramp up and down in volumes like if you’re an executive and you’re maybe a
in your manufacturing, we can have a much more little bit hesitant?
resilient and productive economy.
Mark Collins: Doing more things together means
Hopefully, we will be able to manage the next that you force change. And so, in the research
pandemic, which I hope is a long way away, by better that we’ve done every year, we’ve seen that those
understanding how public health is doing and how companies that deploy more use cases together
we are all individually doing. Hopefully, our homes in parallel consistently capture more value per
will become more energy efficient. individual use case. And that’s because you force
the rethink around your operating model, processes,
Mark Collins: We wrote this report in the middle of incentives, and reporting. And it really serves as an
a pandemic. In many cases, the world is different unlock for the company.
now than when we started writing this report 18
months ago. Roberta Fusaro: What does it look like to deploy
multiple use cases?

6 IoT comes of age

‘Companies that deploy more use cases
together in parallel consistently capture
more value per individual use case.
That’s because you force the rethink
around your operating model, processes,
incentives, and reporting. And it really
serves as an unlock for the company.’
—Mark Collins

Mark Collins: Multiple use cases may be factory floors, where you can trial and test and
occurring, but they may be occurring from different get real-time feedback.
perspectives on different systems in different areas.
And that’s why I think it’s so important to think about Sensors and IoT devices within these environments
who is the IoT champion within your company. Who will provide the information to enable those digital
is the person that’s going to take on this mantle and twins to run in real time and give you the ability
lead forward? Because just by the act of appointing to think about how you can optimize. And these
someone as the lead, you automatically enable deliver benefits not just in terms of cost opportunity
greater coordination and greater visibility, which, as savings optimization but also in terms of situations
we’ve seen in our research, gives you a multiplier in such as telecom networks in the face of mass
terms of the outcomes you get. weather events when cell towers are falling over.

Michael Chui: If you have a digital twin of a factory

IoT and the metaverse and you can go into the factory and simulate what
Roberta Fusaro: What role could IoT play the operators might be able to do, you can start to
in fostering the metaverse or challenging train and you can start to optimize all those sorts
the metaverse? of things.

Michael Chui: First, I want to recognize that

there are a number of different opinions on what What IoT can do for construction and
the metaverse is. So it’s hard to come up with a healthcare
definitive answer that matches everyone’s definition. Roberta Fusaro: Before we sign off, is there
We tend to exclude user interface devices as part anything that you wanted to touch on that
of the IoT, but nevertheless, those things are, from a we’ve missed?
very practical standpoint, metaverse related.
Michael Chui: One of the other settings that I’m
Mark Collins: Think about how you can create excited about in which these technologies could be
almost near-perfect replicas of things like deployed is worksites. Productivity in construction
telecom networks or electricity networks or has actually declined slightly over several years.

IoT comes of age 7

 We badly need to do things such as building more Laurel Moglen: What about the number of pieces
housing. The hope is that IoT and other practices that are not traceable?
can improve the productivity of things like
construction. That would be incredibly beneficial, Chris Daehnick: Several hundred thousand
not only to our economy but also for people. pieces, or at least a large multiple of the 27,000,
are untraceable.
Mark Collins: Michael, with you taking the
efficiency angle, let me take the efficacy angle for Laurel Moglen: What exactly are those thousands
a second. We spoke earlier about the impact of of pieces of junk?
COVID-19 on the deployment of IoT. One area that
has foundationally changed forever is the provision Chris Daehnick: Space junk starts with pieces
of healthcare. of rockets or old satellites that have outlived their
usefulness. Everything from things that have fallen
The pandemic has reset how we interact with our off the International Space Station, or the Space
healthcare providers. We’re now in a world where Shuttle in the past, or other spacecraft. In a few
the default is, “I’ll engage with my primary care over cases where someone has intentionally destroyed
unified communications (UC) or over my phone a satellite with an antisatellite weapon, that creates
through videoconferencing. No longer am I going a huge amount of additional junk. You have things
into a clinic or waiting room.” like paint flecks. There’s even an astronaut’s glove
floating around out there.
If you think about what IoT is enabling off the back
of that, it’s the ability to do diagnostic tests that Laurel Moglen: A paint fleck here on Earth is
were previously only possible in acute-care settings. pretty innocent, but in space, it’s a projectile that
Now, suddenly, I can do these with a wearable on my packs a punch.
wrist and be done in 30 seconds. If I think about the
potential for that not just to improve wellness but Chris Daehnick: Somewhat notoriously, one of the
also for patients with acute and chronic diseases, it space shuttles got a chip in one of its windows. It
can make a real difference in terms of both quality was a noticeable defect in the window when it came
of life and also detecting potential disease or back to Earth. But didn’t cause any greater damage.
deterioration earlier—helping to prolong life as well
as expanding its quality. Laurel Moglen: But greater damage is a possibility
if space pollution increases?

Segment Two: Look out for space junk Chris Daehnick: There is the potential over the
Laurel Moglen: At the time of this recording, a long run that if you have enough pieces of junk in
piece of space debris is expected to hit Earth’s orbit and they begin to collide with each other, you
moon—if it hasn’t already. That piece is not alone. could have almost a chain reaction. This was first
Chris Daehnick, a McKinsey associate partner in theorized by a NASA scientist. It was called the
the Aerospace & Defense Practice, says many Kessler Syndrome. We haven’t quite reached that
thousands more are in orbit. critical level yet.

Chris Daehnick: The US Space Force tracks about Laurel Moglen: To avoid getting to that critical level,
27,000 pieces of debris. Chris says there are a few things we can do.

Laurel Moglen: That’s 27,000 pieces of debris that Chris Daehnick: Don’t create debris intentionally.
are traceable. Chris says those pieces are— Improve the mechanisms for removing satellites
once they’re no longer active and have
Chris Daehnick: Roughly the size of a softball. requirements that enhance the ability to get things
out of orbit when they’re a problem—when they’re
dead, literally.

8 IoT comes of age

Laurel Moglen: A couple of entities are taking an Laurel Moglen: Looking forward, it’s expected
interest in the issue. there will be increased activity in space—from
launching new communication constellations,
Chris Daehnick: The United Nations has taken this greater human exploration, and space tourism. This
on. NASA has proposed some standards. I think it’s heightens the chances of collisions.
safe to say there’s interest from any space-faring
nation. This is a common problem. The question, Chris Daehnick: It’s not going to be enough in
perhaps, is more about who is willing to take any the future to just hope that nothing bad happens.
sort of action. We are going to have to take a more active role in
limiting debris.
Laurel Moglen: For now, that action depends
mostly on the willingness of companies and Laurel Moglen: And, what about that piece of
individual nations. debris hitting Earth’s moon? Chris says the moon
will be okay. But it will spread a bunch of space
Chris Daehnick: About all I can say is that we still debris around the surface and create a small
don’t have any agreement on that because now impact crater.
you’re getting into sovereign rights and what a
country is willing to limit for itself.

Michael Chui and Mark Collins are partners in McKinsey’s Bay Area office. Chris Daehnick is an associate partner in the
Denver office. Roberta Fusaro is an executive editor in the Waltham, Massachusetts, office. Laurel Moglen is a managing
producer/editor in the Southern California office. Lucia Rahilly is the global editorial director based in New York City.

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IoT comes of age 9