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Software disruption accelerates Across industries, companies face the challenge of -led transformation Executive summary

This paper looks at how advances in software are transforming three major industries—industrial , health care and . These insights can be applied to most industries. Software is at the front and centre of all major disruptive today—whether as part of big data, the of Things, artificial intelligence, connected homes, autonomous cars or drones—giving enterprises the opportunity through new digital capabilities to offer entirely new services, to enhance customer experience, to improve efficiency and to reduce costs, in ways never before imagined.1

1 In a series of white papers that began with the PwC Global 100 Software Leaders, we have used rankings—global leaders, cloud growth leaders, emerging markets leaders—compiled in conjunction with International Data Corp. to examine how the software is evolving. In this fourth and final article in the series, we turn to the future: using qualitative research without a ranking list, we look at how software itself is transforming multiple industries.

2 Software disruption accelerates Introduction

The Web revolutionised the way The vast pervasiveness of the enterprises did business at the turn software-led digital transformation of the century not just because we are witnessing today was best Tim Berners-Lee developed described by General Electric (GE) HTML, which standardised how CEO Jeff Immelt in late 2014 when information was displayed on a he spoke to a conference on the computer screen, but also thanks state of the industrial Internet: “If to the widespread deployment of you went to bed last night as an graphical user interfaces and high- industrial company, you’re going speed networks. A similar evolution to wake up today as a software and of how enterprises are leveraging analytics company.” 2 the low cost of reliable multi-faceted connectivity is taking place today, aggregating new in a wave of convergence between and operations so significant as to change the way enterprises conduct business in all industries.

In short, software-led advances in technology are digitally Software-led advances in technology transforming industries and are digitally transforming industries enterprises. Digital transformation tends to be a catch-all phrase and enterprises. these days, but one that nicely encapsulates everything from increased efficiency, lower costs, accelerated , easier and newer forms of interaction with partners, higher employee productivity and enhanced customer experience and satisfaction.

2 http://fortune.com/2014/10/10/ge-data- robotics-sensors/

PwC 3 The new era of software

Two years after Immelt made that statement, he returned to the same conference with another prediction: he estimated that GE’s annual software , including sales of its Predix platform for asset performance , would triple from US$5 billion in 2015 to US$15 billion by 2020.3 But there’s more. According to a September 2016 Suisse report on GE,4 the profit margins on after-sale services for industrial companies are double or triple the margins on the sale of the original gear, especially in competitive markets.

And GE is no outlier. According to an October 2016 PwC Strategy& Business report entitled Software-as-a-Catalyst,5 since 2010 companies that committed a higher proportion of their research-and-development budget to software earlier than their competitors are more likely to experience faster revenue growth.

3 http://fortune.com/2016/11/15/ges-ceo-digital-remake/ 4 Credit Suisse report on General Electric 5 http://www.strategy-business.com/feature/Software-as-a-Catalyst?gko=7a1a

4 Software disruption accelerates The potential to save money across Forward-thinking companies in a Clearly, there is a strong upside all processes could be even greater variety of industries are already to the transformation in how than the potential for new revenues laying the groundwork: industries conduct business and in this era of transformation. As reap rewards. But pitfalls also loom: Julien Courbe, Lead Partner for the • Financial services: Goldman if not done right, the transformation Financial Services Advisory practice Sachs CEO Lloyd Blankfein8 and can be counter-productive, with at PwC US, notes, “Every financial JPMorgan CFO Marianne Lake9 stumbling blocks relating to services firm is looking at every have referred to their financial everything from cost of one of their business processes services firms as “technology resources to development styles to and understands how software companies,” with one-fourth of measuring efficiency. Success will can help revenue growth and cost Goldman’s and nearly one-fifth of depend not only on how enterprises reduction.” Similarly, margin- JPMorgan’s employees focusing navigate the technology, but also strained hardware companies are on technology.10 the attendant business process leveraging the profitability potential improvements and culture. of software. • Health care: Joseph Touey, Senior Vice-President for Global ERP at In fact, that benefit applies to pharma leader GlaxoSmithKline, all industries. Consider these has said, “By 2020, we will have a projections. The chief digital officer healthcare delivery system that is of Zurich-based ABB, a leader in fully digitised.”11 industrial robotics and automation technology, stated in an October • Manufacturing: According to 2016 speech to investment bankers David Cote, CEO of Honeywell, that the electricity transmission half of manufacturing leader and market could Honeywell’s engineers are save as much as US$23 billion per software engineers, up from less 12 year through and software than one-fourth four years ago. improvements to substations.6 A 2013 West Health Institute study estimated that by connecting medical devices to electronic medical records (EMRs), the US health system could save US$30 billion per year by reducing clinician time spent manually entering information, adverse events, redundant testing and length of stay due to information delays.7

6 http://new.abb.com/docs/default-source/investor-center-docs/cmd/cmd-2016/abb-cmd-2016-digital.pdf 7 http://www.westhealth.org/wp-content/uploads/2015/02/The-Value-of-Medical-Device-Interoperability. pdf 8 http://www.bloomberg.com/news/videos/b/8df546df-20d1-46e5-824b-0702e9225046 9 http://www.businessinsider.com/marianne-lake-says-jpmorgan-is-a-tech-company-2016-2 10 From https://www.statista.com/statistics/270610/employees-of-jp-morgan-since-2008/ and http://www.businessinsider.com/marianne-lake-says-jpmorgan-is-a-tech-company-2016-2, JPM has 234,598 employees, and 40,000 technologists 11 http://www.pwc.com/us/technologyandinnovation 12 http://finance.yahoo.com/video/honeywells-transformation-digital-age-ceo-120600030.html

PwC 5 The advantages of software-led transformation

The transformation brings numerous drive more yields for customers.” advantages to various industries, Occasionally in process control and, as with cloud , scenarios, an improper proportion customer companies now have the of chemicals, over or under the opportunity to obtain services using specification, can affect the yield and their operational budgets, not their cause waste. “Process control can tell capital budgets. Just as technology you when something is out of spec, companies offer hosting services but you also have operators who to customers who pay a monthly may not have the deep knowledge fee for infrastructure as a service, of chemical engineering to correct an industrial company, like GE or the issue. With connected plants and Caterpillar, may increasingly offer ongoing monitoring, we can provide its equipment to customers on an ‘as experts who have that additional service’ basis without them having to knowledge. It helps us augment our own it. conventional offerings.”

In manufacturing, predictive Other opportunities, according to maintenance is the easiest Steve Eddy, Partner and Advisory goal to achieve through digital Leader of PwC’s Global Industrial transformation. While GE has been Products Industry, include investing in it for a long time, the digitisation of internal supply idea of creating digital revenues by chains, product optimisation, augmenting service offerings for asset performance management, the installed base looms as a future inventory optimisation and field competitive market. service efficiencies.

Krishna Mikkilineni, Honeywell In anticipation, manufacturers are Senior Vice President, Engineering, devoting significant investment to Operations and IT (see interview), digital technologies, according to cites his company’s efforts in offering PwC’s June 2016 report entitled, consultative services to its customers “Manufacturing’s next big act: with chemical processing plants. an industrial digital “We have created ways, through our ecosystem.”13 In the last two understanding of process controls years, US manufacturers invested and how chemicals are used, to an average 2.6% of their annual

13 https://www.pwc.com/us/en/industrial-products/assets/pwc-industrial-digital-ecosystem.pdf

6 Software disruption accelerates revenue in digital technologies, but they expect to increase that investment over the next five years to 4.7% of revenue—for an estimated US$350 billion in investments in digital operation technologies across automotive, industrial production and manufacturing industries alone.

The goal: manufacturers expect Cumulative Benefits digital investments to lower costs, from Connected with about four of ten expecting cost Technologies savings of 11% to 30% over the next five years. Not surprisingly, they also expect digital investment to generate new revenues.

In healthcare, similar efforts are underway. “Technology is a force for good,” says Michael Weissel, Group Executive Vice-President and Head of has a new diabetes protocol that result: faster time-to-market and Strategy for health services company incorporates a consumer-focused lower expenses. Reilly’s colleague, Optum (see interview). “It has the smartphone app, available via App Aditya Bhasin, CIO of the ’s power to lower costs and enable Store download, that monitors Consumer and Wealth Management better care.” insulin and sugar levels of diabetics. group, says that the cost incurred when a customer deposits a check Weissel and others note that Some savings through digital via smartphone app is 1% of the cost analytics software is increasingly transformation are relatively easy of depositing it at a branch. Thanks used to manage large volumes of to achieve. David Reilly, Chief to adding this one small piece of data from varied sources to predict Technology Officer of Bank of technology to the bank’s mobile health patterns. According to Daniel America (see interview), calculates application, a traditional business Garrett, Principal and Leader of that it has saved US$1.1 billion process is now not only faster and PwC’s US Healthcare IT Practice, per year by creating a cloud-based much cheaper, but also enhances pharma companies are trying internal infrastructure that allows customer engagement. to incorporate tech that serves for standardization and nimbleness consumer needs and develops better creating new opportunities through relationships. For instance, Eli Lilly highly flexible workloads. The

Manufacturers expect digital investments to lower costs ... they also expect digital investment to generate new revenues.

PwC 7 Jump-starting software-led digital transformation

There are basically three ways non-software enterprises can jump-start digital transformation efforts: through internal, organic growth; through acquisition of other companies, mostly technology-focused; or through . Each method has advantages and challenges.

Some companies are growing organically. For example, pharma manufacturer Eli Lilly expanded its research-and-development centre for innovation in Cambridge, Mass. GE established its GE Digital division in San Ramon, Calif., in part to take advantage of its proximity to Silicon Valley. Manufacturer Honeywell has built a software centre in Atlanta for more than 700 employees who will focus on application development, , data analytics and user experience.

Strategies for digital transformation Strategy Advantages Challenges Organic growth • Control the growth process • Compete for costly • Capitalise on internal knowledge and programming talent processes • Assume all development risk • Leverage IP portfolio • Take longer to market • Spend less than other options • Run risk of being late to • Maintain market leadership exclusivity market or entirely eclipsed • Limit areas of expertise to core competencies Acquisition • Acquire critical mass of talent quickly • Spend large amounts of • Adopt new ways of thinking money and time • Minimise or limit development risk • Discover you acquired the • Shorten time to market wrong company • Acquire IP beyond core competencies • Retain acquired talent that might be disaffected • Integrate effectively Partnerships • Gain industry-wide insight based on • Commit significant resources multiple, non-exclusive relationships to nurture relationships • Share risk • Reconcile divergent agendas • Leverage capabilities you lack: skills, • Survive cultural challenges markets, IP among entities • Disagreements over competing purposes and agendas

8 Software disruption accelerates Some are acquiring software- Interestingly, the number of non- closer relationships. At Bank of focused companies: technology companies acquiring America, CTO Reilly has overseen technology start-ups is growing the organisation of innovation • Honeywell bought Intelligrated, considerably. According to data summits to learn more about and a developer of supply chain compiled by Bloomberg, in 2005, develop relationship with start-ups. and automation 75% of technology M&A was It has purchased the Splunk log solutions.14 done by technology companies management software application themselves. Even before 2016 had and the Tanium application • In September 2016, GE bought ended, that percentage was down that it first learned about at one of asset performance management to 57%. its summits. developer Meridium15 and 3D printer manufacturer Arcam.16 Lastly, the digital transformation can also be started or accelerated • Caterpillar’s marine division 14 https://www.honeywell.com/newsroom/ by cultivating relationships with news/2016/08/honeywell-completes- acquired ESRG Technologies start-ups that focus their efforts on acquisition-of-intelligrated Group in 2015 for its vessel 15 http://www.genewsroom.com/press- a specific business-process issue. releases/ge-digital-acquires-meridium-inc- monitoring and analytics Many companies, especially in accelerate-delivery-comprehensive-asset- 17 performance capabilities, its oil and gas manufacturing and technology, 16 http://www.geaviation.com/press/other/ division acquired M2M Data other_20160906.html have their own venture capital 17 http://gcaptain.com/caterpillar-marine- Corp. in 2016 for monitoring groups, which invest in start- acquires-key-big-data-esrg assets and performing remote 18 http://www.compressortech2.com/ ups specifically to develop those July-2016/Caterpillar-Acquires-M2M-Data- diagnostics.18 Corp/#.WFg8RPkrL-w

PwC 9 The challenges of digital transformation

In their journey toward digital transformation, enterprises encounter major challenges in at least four areas: talent, funding, culture and technology.

Talent: Companies in vertical sectors now compete against traditional technology companies for the kind of capabilities have; according to research reported recently in the Wall Street Journal, the top job openings in the manufacturing sector, based on the number of postings, are sales reps and software engineers.19

19 https://www.wsj.com/articles/manufacturers- struggle-to-woo-software-developers-1476741531

10 Software disruption accelerates Technology companies may have advanced factory technology. That this skill set, you can differentiate an advantage when it comes to will make its journey to digital yourself a little more, and the total compensation, including transformation harder. opportunities for advancement are salary, stock options and other better.” perks. According to the same Wall But not everyone sees a bleak view, Street Journal article, technology suggesting that sector companies The talent issue is not just in companies pay US$105,227, have other ways to compete. Joe software, adds Honeywell’s “pay US$105,227 per year for Kennedy, a Principal in PwC’s Mikkilineni. “We are selling a experienced programmers,” US Architecture, Integration and different set of services, which 12% more than manufacturing Mobile Development Group for requires different capabilities employers, for software developers, the financial services sector, notes in sales and —in fact and for entry-level software jobs, that “individuals who are excited throughout the company. We tech companies pay US$88,820, by technology aren’t limited are now figuring out the right 5% more than manufacturers. in financial services, because benchmarks for success in these The same article20 notes that the companies offer a range and variety areas and driving improvements manufacturing sector is trying to of services.” Adds PwC’s Courbe: aggressively.” regain its footing after decades of “When you are a superstar engineer offshoring production to countries at Google, everybody looks like with cheaper labour or more you. In other industries, if you have

20 http://www.wsj.com/articles/manufacturers-struggle-to-woo-software-developers-1476741531

PwC 11 Funding: Digital transformation— PwC’s Eddy notes, “Manufacturing indeed, any transformation—is companies are trying to pivot into both expensive and far-reaching. a huge cultural change. They may That makes it difficult to justify spend years developing an engine, to stockholders who may be but software iterates routinely. It’s focused on short-term gains a different value proposition selling rather than long-term investment. a product versus selling a solution. Vertical enterprises, especially The shift to software and solutions in manufacturing, also face a means a change in , challenge in how they report a change in talent and, as a result, revenues from software, since it a need to change culture. Different may not fall into any existing line talent means different cultures.” items (see the initial paper in this series for more on the financial In health care, “digital reporting challenge.) transformation is a question of thinking differently about how you Health care, because of its use data to change the way you numerous participants and previous treat and engage patients,” says investment, also faces a funding Weissel. “It means changing the way challenge. “Leapfrogging over consumers empower themselves. legacy platforms is expensive, and The issue is much broader than the you see many systems and digital platforms themselves.” health plans spending hundreds of millions on upgrades,” says Optum’s Bank of America’s Bhasin insists Weissel. “You have to ask what the that enterprises must guard against ROI is and how you get there, and hewing to old processes when trying can you afford not to get there.” to make the transformation: “Old- line IT organisations would wait for Culture: Cultural issues the requirements document that frequently flummox enterprises. would be thrown to a development Manufacturing is a traditionally team. That kind of 18-24 month lead Cultural issues conservative industry, notes time can’t exist in 2017. You have to Honeywell’s Mikkilineni. “Our move to a more agile development frequently customers are not used to model, and take steps to embed flummox consuming these kinds of services. security and risk and compliance enterprises. They look at risk differently. We into the application development see their situation changing and process (see interview).” maturing rapidly though, so I believe customers will embrace it soon.”

12 Software disruption accelerates Technology: Within the technology As for data , it’s not just This technology challenge for challenge, there are several a question of who controls it— digital transformation is not limited subcategories. Perhaps the biggest especially if it’s gathered from many to IT. In manufacturing, industrial relates to data—where it comes sources—but who’s responsible equipment has been running from, how it’s used and how it’s for the privacy and security of the for years. Now shared. One of the key tenets of data. Deeply related to the issue the sector must upgrade networks successful digital transformation is of security is the issue of trust; and applications to link to ERP the ability to share data smoothly, i.e., how can an enterprise be systems and deploy APIs to link to but that means understanding how sure that the source of the data is partners. data will be aggregated and who trustworthy? If executives can’t owns it before, during and after that be sure, they’re less likely to buy Stumbling blocks aside, it’s still process. into the changes that software-led early for vertical markets. It’s not digital transformation requires. as though enterprises are already As PwC’s Garrett notes, “The more being left behind. There’s time complex issue is that all the data Another potential obstacle for to overcome these issues. PwC’s being collected in health care is transformation is the infrastructure Eddy says, “Even most progressive in unstandardised formats. There that allows for smooth exchange companies are in early days of are massive amounts of data of information. To move to that digital transformation. In fact, being spun out of everything from capability, enterprises may have to many companies are still exploring diagnostic devices and wearables to spend money to upgrade equipment potential use cases versus delivering telemedicine and electronic medical and software (cloud computing real business outcomes at scale.” records. Aggregating it will be a lessens the financial impact significant big data and analytics somewhat, but not entirely). challenge.” PwC’s Kennedy says, “It’s difficult The technology has come a long way to convince CFOs and CEOs of with APIs (application programming the importance of enterprise interfaces), especially cloud-based architecture.” At its most APIs, but there’s no guarantee fundamental, digital transformation that a lot of medical record and requires tech-centric initiatives other database information can that solve large business problems, be aggregated accurately. That but it’s hard to get them on creates a challenge for analytics— the radar screen of those who enterprises only get smarter data approve funding. Because they’re with more sources; they can’t be infrastructure-based and not client- efficient without analysing the data. facing, it’s frequently difficult to see how they can save millions in time and processing across an enterprise. “Sometimes the way firms manage IT spend is the problem,” adds Kennedy.

PwC 13 Where traditional technology companies will play

As software invades other industries, The recent proliferation of start- traditional software companies ups has inspired a response by are not idle observers. The major larger technology companies. Two technology vendors—including years ago, says PwC’s Courbe, new , Oracle, SAP, Apple and financial services technology was others—are aggressively partnering “purely the domain of start-ups, with non-tech companies, matching but the landscape has changed. As technology to business expertise. much as the start-up community is Other technology vendors with still present in the financial services venture capital divisions—including landscape, we see more of the bigger Google Ventures and Intel Capital— technology companies taking that are nurturing non-technology start- space.” ups. The question remains, will they Others are working to adapt be successful? On the one hand, their core offerings to vertical according to the PwC CEO Pulse applications. IBM is fashioning 2016,22 60% of respondents “expect its Watson supercomputer as a a tech-based, non-traditional foundational system in health care competitor to enter their industry. analytics. Salesforce is collaborating On the other hand, Min-Sun Moon, with health care companies (among Senior Manager in the Data & other verticals),21 using its CRM Analytics Delivery Services group at application as the patient database. PwC US says, “GE understands that “Health care companies have no way customers have their own issues that Major technology of doing this on low margins,” says need to be customised, and it thinks Dr. Joshua Newman, chief medical it has an advantage in figuring out vendors are officer at Salesforce(see interview). solutions.” aggressively “Technology companies have a special ability because innovation is partnering what we do every day.” with non-tech companies, matching technology to business expertise.

21 https://www.salesforce.com/solutions/ industries/ 22 http://www.pwc.com/gx/en/ceo-agenda/ pulse.html

14 Software disruption accelerates One way to succeed is to nurture vendors realise they can’t be the technologies. “When it comes new ways of collaborating, to single point of innovation; start- to emerging technologies like enable the rapid accumulation, ups do bring value. APIs linking robotics, artificial intelligence or transmission and sharing of data, established systems to those created blockchain, we’re seeing much more which is an essential element of the by start-ups expands the use of cooperation between technology digital transformation. Technology vendors’ core processing capabilities companies and financial services companies can contribute to that without cannibalising other services. firms,” Kennedy says. He particularly effort through industry APIs. Such cites blockchain, a way to create a APIs standardise and simplify Amazon CEO Jeff Bezos issued secure record of transactions, as “a connections between systems, a mandate in 200223 about the very open capability that doesn’t helping companies increase their importance of APIs: “All service require aligning with a vendor.” The ability to interact while reducing interfaces, without exception, must same logic applies to open-source internal costs. PwC’s Kennedy says, be designed from the ground up… software, says Moon. “Technology “We see a number of companies to expose the interface to developers companies are investing heavily exposing their APIs to larger in the outside world. No exceptions.” in open-source software because development communities, which One could argue that this helped [applications based on it] can get allows for individuals to create new Amazon’s transformation from adopted more quickly.” apps for payment processing.” online bookseller to e-commerce and cloud leader. Similarly, technology vendors can contribute to the process by vetting Technology vendors can also start-ups. Kennedy notes that be the guide for new, untested

23 https://apievangelist.com/2012/01/12/ the-secret-to-amazons-success-internal- apis/

PwC 15 Conclusion: How software will change all industries

Consider these possible milestones on the way to the software-led digital transformation:

• Advanced automation becomes rampant in factories around the world, eliminating the need for low-cost workers. Without the need for lower-level workers, manufacturing returns to the developed world in droves, because those regions can provide the high-level engineering talent necessary to manage a completely automated factory.

• The health care industry works with technology partners to create a standardised communications protocol for medical devices, simplifying the ability to collect, anonymise and share information. The cost of health care drops accordingly.

• The financial services industry uses industry-standard APIs to exchange information in real-time on cybersecurity, thus protecting data and web sites from hackers.

Whether these possibilities manifest or not, it’s certainly true that in five years “the landscape and business models will be fundamentally transformed,” says PwC’s Courbe.

16 Software disruption accelerates Software will enable financial services robo-advisers in wealth management. Manufacturing entities will use automation to improve response time and agility. The health care industry will, at the least, improve communication across care-givers.

Overall, industries will be able to create an environment that’s both customer- centred and context-centred. Enterprises will be able to tie massive amounts of situational data from smartphones, sensors and wearables to operational data, such as transaction history and risk profiling. All these industries will be able to take advantage of real-time, next-action recommendations.

Likening the effect to the impact of lean manufacturing, Mikkilineni says, “It’s skinny in the sense of process streamlining, which we believe will lead to a lot more efficiency and effectiveness. We’ll see it especially in the streamlining of process, leading to more plants where highly skilled, technology-savvy operators can make predictive decisions in real time.”

Optum’s Weissel concurs: “Whether we like it or not, we’re being forced to go digital, because the efficiency opportunities that exist are incredible. Moving to digital will save money and lives.”

None of this change will happen without commensurate advances in various issues that are difficult to tackle today, whether on the technology side (integration, security and agile development) or on the financial and cultural side (well-funded investment, communication to stockholders). The fundamental building blocks for the software-led digital transformation are available now, but much remains to be done. As Salesforce’s Dr. Newman says, “The next level of capabilities we’re talking about is unprecedented. You can’t describe it as ‘the Wild West’ because it’s wilder than that.”

The good news: that means no one’s behind yet, and anyone can get ahead.

Enterprises will be able to tie massive amounts of situational data from smartphones, sensors and wearables to operational data, such as transaction history and risk profiling.

PwC 17 www.pwc.com

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PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please seewww.pwc.com/structure for further details.