"The Smart Building Effect"

What does the "Tesla effect" mean? If there is one, what can the Smart Buildings industry learn from how Tesla is doing business? What impact will a "Smart building Effect have on the world at large?

Aug 31, 2020

“You can save hundreds of millions of dollars with continuous improvements to a Smart Building, which is a stark contrast to other Building Automation Vendors that do something else continuously:
- Ask you to pay again!”

DISCLAIMER - I stole this article

Well, I was definitely inspired by it. This article is a 76,6% intentional copy-paste of this fantastic article by Alex Voigt which is depicting the business model introduced by Tesla.
The article intrigued me because it was eerily similar to what I believe is happening in the Smart Building industry. Not only the actual buildings, but even more so the relationship between data-driven organizations and the products they deliver. The image below depicts the residual value of a “smart car” in comparison to that of the more traditional ones. And that is only looking at it from a customer perspective. The brand recognition, the ways of working, the potential to hire the best people in the industry, and the ability for an organization to enjoy a digital operating model that can absorb and leverage data is something that is incredibly valuable in a world that is moving faster every day.
Maybe the next time you buy a car, invest in a building, or any product for that matter, you might be better off looking at the org chart, balance sheet, and the data strategy to see if the organization can keep up with the times, and continuously offer better products. For free.
I copied the original article, replaced Tesla with Smart Buildings. All cars and vehicles with building, and added a few things here and there based on my understanding of building automation. But as Tesla is an OEM, it could also be construction companies, original manufacturing companies in any industry. But Smart Buildings was chosen because of its extreme potential.

Providing additional fuel/energy for the fire/battery was this Over The Air article I read earlier in the week. I had originally posted this comment below to a customer in the construction space, in regard to the “Cheetah mode” for the Tesla S. It provided some additional context to the article.
“If you would have the same idea for everything that you do in a building, subscribing to the same philosophy of flexibility. Then there could be OTA for everything in the building and it would perform better and better over time. Time right now for buildings=deterioration, slippage from as-built. But modern buildings will just be better and better and better because they have a digital operating model, learning and growing in value over time. Not only from a building perspective but from a portfolio perspective. Think of it as cars and a fleet of buildings, acting as a whole, learning from each other”.
And the third influential piece was the new audiobook I’m listening to called “Competing in the Age of AI”. In it, they state that a modern bank is servicing over 600 million customers, in several different countries spanning a continent, with only 10 000 people through a digital operating model. While another traditional bank with over 200 000 employees, service only 60-70 million people, in one country.

Where the main difference is that new customers make the overall solution immediately better for all customers, not worse. And that growth = efficiency. How many traditional companies could grow 25-50% overnight and have better offerings for their customers? Not having to hire more people? And knowing beforehand what the customers want?
Not that many, if any.
I hope this will be an interesting read and that it might challenge you to think or even act in new ways. Because the world is moving faster, smaller, as well as larger every day. If you can’t predict what the world will do in a week, a month, a year from now, and act accordingly then you might be out of the game faster than you think.
If you want to know how to create the future that you want to see, subscribe now, reach out to me, and I’ll get you where you need to be.
And continue reading below of course! Enjoy, and please comment, share, reach out if you want, I’m here to help you solve any and all problems that you have.

A Battle of business models

One of the major reasons why Smart Buildings are winning against its competition hands down is completely overlooked, underrated, and rarely mentioned. It is the continuous value creation for customers and that buildings grow better over time. Other manufacturers have no answer for this.

The companies creating Smart Buildings will add value for its customers like no other companies in the world. I am not talking about safety features, being fun to be in, or sustainable energy efficiency of soft values, but about hard dollars in the pockets of companies, tenants, and especially real estate owners. This has nothing to do with automated buildings, or AI-infused robot buildings, which, if they arrive one day, will add 6-digit value appreciation on top.

What we are experiencing today is not a competition about who has the best net-zero building with the best energy efficiency rating on the planet, the best technical asset management team, or the newest silo solution from a building automation vendor. What we are experiencing is not a competition between automated buildings and traditional buildings, but the competition between two contradicting business models.

When Smart Buildings will become the norm, it will make ALL the difference.

The incremental value Smart Buildings create per building for its customers is higher compared to other buildings, and that is critically important for a successful business.

Smart Buildings will be the norm because if owners, as well as tenants, get a better deal financially, why should they ever buy again from the competition?!

Why would anyone want to use an old building when a Smart Building is so much better?
And that it also has the possibility to get better over time, for free?!

The business case a smart building offers to its customers is worth some hundreds of thousands, up to millions of dollars per building over 10 years, and no one can compete with that.

Buildings that get better with age - The Trillion dollar+ opportunity

The suppliers of smart buildings/smart building technology have an opportunity right now to continuously improve the buildings they have sold and for free. Compare this to all other companies that sell you, again and again, a new solution with slight changes for a premium price. With a well-thought-through set of hardware, a Smart Building can continue to improve with over-the-air software updates almost endlessly. Minor hardware adjustments are silently included when ready but not even advertised. Newer updates to the autonomous building offerings are a good example of adjustments in older buildings that are free of charge to keep your buildings up to date.

Other continuous improvements will be included in the hardware when appropriate, and many will not even be immediately detected by the market. Some hardware changes are included that don’t move into previously produced buildings, but that does not matter for the value created for its customers as long as the delta between used building values and new building values of comparable competitor building offerings remains the same.

To conclude: the hardware gets better, the software gets better, and the bulk of it is for free.

“The software version, not the year of production, describes what it can and cannot do.

Smart Buildings suppliers have the option to build a building that improves with software updates. This way, it does not matter how dumb it is in the beginning of what the history of the building has looked like because it’s all about the future. Unlike other buildings that do not get smarter with age, smart buildings do.

The business model requires an integrated and centralized IT architecture and a “buildings-build around a computer” approach. It is superior because, as a consumer, you have a new building all the time regardless of how many years you own it. It is almost as if it does not age, a Dorian Gray of the building world, with many secrets but no hidden aging painting. For that reason, you do not have a Smart Building model year, but a building with a certain software version and that version describes how current your building is. The software version, not the year of production, describes what it can and cannot do.

This is actually not that comparable to smartphones when comparing business models. In that market, you are “gently” forced to buy a new smartphone from the brand of your choice due to your wish to have the latest functionality, or you stick with an outdated phone with old functionality. Smart Building’s approach is different. Because it is so new and different, it is not understood, and the consequences are misinterpreted. Smart Buildings are the most misunderstood industry in the world (in combination with Tesla, and their valuation).

Are Smart buildings the most misunderstood opportunity in the world?

Even today, with continuous strong coverage in the media and a ton of analysts turning every stone over to understand the potential of Proptech, Digital Twins, Smart Buildings and Smart Cities, almost nobody understands the basics of the possibilities of a fundamentally different business model.

The approach from incumbent Building Automation Vendors to sell solutions with enhanced hardware features makes sense since they earn money with every solution sold, and even more important, with spare parts, lock-in effects, and services in the aftermarket. Their global fleet of hardware/software offerings is the cow they milk until it dies in an accident or by old age decades later. And they still get the business because they were there first, the lock-in effects are too great, there’s only a handful that knows the system, or an SLA that is infinite. Why not compete on value and outcomes?

Without the after-sales business, most Building Automation Vendors would be structurally unprofitable, because the revenue stream from the continuous lock-in effects is tremendously large and much more important for their bottom lines than new building solution sales.

Suppliers of Smart Building solutions will initially not have a large offering or significant after-sales business, so how can it make any profit, especially when giving continuous building improvements away for free? If you do not have an answer to that question, you do not understand what a Smart Building solution will provide for its customers.

The difference between Smart Buildings and… the rest.

A truly Smart Building is a building that does not have a lot of wear and tear, compared to a building with a traditional building automation system. The latter is a building that is under tremendous stress, with siloed solutions inside putting force on many parts of it until those parts need to be replaced. Many parts need continuous upgrades and have to be exchanged again and again to keep the building running. An entire industry with a separate supply chain, separate services, and separate manufacturing has lived on that after-sales business for 100 years very well with profits much better than construction companies can offer. Building automation companies do not build smart from start and keep it that way.

Without the after-sales revenue, the building automation industry is structurally unprofitable. An incredibly large portion of the real estate industry in the world need to be repaired and serviced every day. A smart building does not need all of that after-sales service, and it will have a long life. Already, today, Smart buildings improve the asset lifecycle a lot also catering more towards the need of the people, than the systems in them. Not only will municipalities, real estate owners, and also tenants expect buildings to last longer but it will soon be the norm. Smart Buildings will not only have a longer life than traditional buildings, but it will also hold an exponential increase in value for a fraction of the cost calculated over the life-span of the total cost of ownership. And that’s not even taken into account the loss of potential income from the smart building ecosystem, providing value for tenants in an app-store kind of way.

If you now expect low revenue and profits from Smart Buildings, the opposite is true. The ones that supply true smart building solutions will be tremendously more profitable than existing Building Automation Vendors in the world today. How can that be and how is that possible?

What if Smart Buildings were here right now?

The answer is simple, but we still must consider two major players. The ones that build buildings, as well as the ones that supply buildings with building automation solutions. A traditional construction company is only selling a new building if a buyer in that specific building segment needs one to replace the previous building or wants the latest and greatest new model, whatever that means for that specific region. And the large building automation vendors go after the higher echelons of real estate and almost everyone knows there is a LARGE gap in the market in between home automation and larger buildings.

Everyone should be seeing the run towards affordable housing, medium city pull, and work-from-home movements during the current COVID Chaos. The mid-size CRE market, along with some niche players in the critical building segment will explode in terms of demand for better buildings that cater to the needs of new tenants. And if Smart buildings would be the norm today, how sought after would they be?

Once they have done that, they can bundle anything “Smart” as a service eliminating the need for continuous services because it was broken in the first place.

They could instantaneously offer an Over the air firmware upgrade for the whole building and instead of “cheetah-mode” someone might call it “Retail-mode”, delivering real-time modifications based on the demand of the customer and the modular aspects of the infrastructure. Where the possibility of offering any retrofit for free in order to grab the lifecycle value. The reason being that it is not in the retrofit camp companies are making money in a world where Smart Buildings rule. It is in the software and the ecosystem they make available for its tenants and the ability to continuously cater to their needs, irrespective of what they do. And if they want to, they can sell dedicated hardware offerings that are plug and play with the other things they offer underneath their umbrella of services during the entire lifecycle.

Who cares about passive anti-fragility when a building can take an active role in making my life better?

The market for construction companies especially is saturated with the demand of about x amount of million buildings per year. And for building automation companies, due to them having to cater to only the complex and large buildings, the Innovators dilemma will soon become even more of a reality most likely leading to disruption/acquisition by tech giants where 95% will be scrapped.

Disruption, or at least Creative Destruction

This goes to show that it’s not as much Smart from Start that matters most, but the fact that someone can come in, raise digital maturity, and thus decapitate any future earnings from existing building automation companies by providing a software suite that takes care of the smartness itself. That alone could be the largest revenue increase the world has ever seen in the real estate segment and could mean long-term revenues and profits.

The margin and revenue from a Smart Building will be much bigger than what any traditional building will ever create.

Altogether, a Smart Building offers a growing ecosystem of high-margin products and services that can be bundled and structured to make them especially attractive to consumers attractive. Who can take the opportunity to truly become a software company that happens to deal with buildings? The jury is out, but they will soon be back with a verdict heard all round the world.

Most likely the software companies will learn real estate, acquire top talent from the construction space that have had roles of running national innovation programs, but haven’t had the backing they deserved. Armed with complete intelligence of how traditional companies provide value today, people like that will be highly sought after from the software giants aiming to disrupt a wreckable industry. It will be people from the building automation space, Master System Integrators, and people from basically the whole lifecycle. Once software companies that happen to do real estate have done that, they can bundle anything “Smart” as a service re-thinking the need for traditional continuous services because it was broken in the first place.

The opportunity is there to not only sell a building, but also the building software, smart grid solutions, energy to power it, building insurance, solar roofs, eco-system offering, and millions of other things that will be made on top of a global building app store. And questions like “What is APPLE CarPlay and Android Auto?” we’ll be accompanied by APPLE BuildingPlay and Android Real, and possibly also Tesla Buildings, or anything else like it. Because all of this needs software and software is eating the world, with incredibly high margins.

With the costs for hardware as well as software decreasing faster than anticipated, margins are increasing rapidly too, and the pure pace of innovation in manufacturing and new technology gives us all a sense of how much additional cost reduction and profit gain is still possible. All of that cannot be easily copied by the competition and could be a gigantic moat for Smart Buildings offerings worldwide. It is not a moat yet, but it will be.

But I don’t want a “Smart Building?”

Even if you are looking just for a building and do not care at all about all the other services and products, a Smart Building could be worth much more to you over a long period of time than any other building in the market, because it does not get old in the same ways and it manages to go beyond staying current. It will continue to evolve over time, increasing efficiency by the number of users in other buildings throughout the portfolio and better cater to the needs of its users. This is important for ANY stakeholder that has anything to do with buildings.

Technical asset managers can manage 10, 20, 100 buildings instead of 5 people on one building
The knowledge gap/skill transfer gab will be no more because it will be data-driven through and through with virtualized assets as the norm
Organizations will have an easier time hiring people because their ways of working will be data-driven and not manual
The energy efficiency won’t even be an issue because buildings will create their own power in a sustainable way, adding power to the grid
Asset management will be taken care of by the building itself for the most part and everything will be tied together in a data-fabric, making automated decision-making suggestions
Productivity, well-being, whatever KPI the users of the building wants to cater to, the building can adapt accordingly
Smart Buildings have an exponential increase in the ability to cater to the past, present, and future demands and happier tenants, whatever they might be. Robots, or people - “Just put it in Robot-mode” and be done with it.

The money a consumer loses to the building automation industry today by continuously buying new upgrades and paying for aftermarket needs is lost forever. But with a Smart Building, the value remains within the building and is reflected in a higher resale value too.

You can calculate with many different buildings, and building automation offerings and compare them to that of a Smart Building that has a software approach. But in every case, the value saved over 10, 20, 50 years will be either in the millions, or tens, and hundreds of millions (euros or dollars). And in addition to the money saved, also consider the loss of possible income (LOPI) and the importance of the ability of money made.

Smart Building Solutions that have an over the top software offering could drive serious revenue with a 90% margin if it wanted.

The need for flexible buildings is also an important factor to consider. This article describes the aftermath of COVID19 where Pinterest will pay $89.5 million to cancel a lease on new San Francisco offices. Why? Because the new normal is working from home. But what will the new normal be in 10 years? 20 years? 30? And how well do technology choices today reflect a world where the new normal is anything but the normal we have today?

If you want the latest and greatest building with the most current functionality, like with a Smart Building, you would have to sell/demolish your old building, accept the cost, and buy one of the newest buildings.

With the advent of new migration patterns away from large cities to suburbs and a shift to smarter real estate in general. Creating smart buildings that give consumers more money back than anybody, Smart Buildings will never have a shortage of demand from owners, construction companies, municipalities, or tenants. It is only a matter of time until this will be a mandate by law that buildings will be smart buildings allowing and enabling data-driven strategies to be built on top of them. Not only from a money saving/money making perspective but of course also from a sustainability/climate perspective and the exponential increase in well-being and productivity at large.

By creating a viable Smart Buildings industry we can help create a society where we have;

Buildings that everyone wants to buy.
Buildings that everyone wants to be in.
Buildings that are managed by companies that everyone wants to work for.

Because how many people buy anything but Smartphones today when they are considering a new purchase?

The “Smart Building Effect” is based on data

Construction companies, as well as real estate owners, will sell buildings with a strong margin for decades, because it gives more back and, if needed, the company can define its optimal price point. The options to scale additional businesses and services around long-lasting buildings with the entire lifecycle in mind are underestimated and a still huge untapped opportunity. The building data collected alone is worth billions if not trillions, and with incremental entertainment services, Smart Building Solutions that have an over the top software offering could drive serious revenue with a 90% margin if it wanted.

Construction companies could become software vendors that happen to be skilled at construction as well as totally disrupting the building automation market. Not only building smart from start but also coming in from a retrofit angle, raising digital maturity for buildings. Possibly for free, making money on traditional construction. Or vice versa, offering retrofits for free, but making money on the ecosystem they provide. Traditional companies in the real estate industry have existing challenges with people, processes, culture, systems, and a hierarchy that can’t keep up with the times which result in failed innovation efforts, and a lack of initiative and vision to turn their existing ways of working into something for the future. Their fear of being first will enable software companies to absorb the cost of a retrofit solution, understanding that they can continue to offer smart building solutions over the top forever.

Money in the pocket matters for consumers and the consumer is what Smart Buildings are about. Not only tenants, but ALL stakeholders benefit from a Smart Building. Instead of ripping the consumer off, Smart Buildings will be giving the consumers back the money other building companies rely on for their existence. That small detail will create tremendous business pressure on the incumbent building automation industry.

If you do not have buildings that incrementally improve for free with over-the-air updates, you won’t be in business for very long, or it will shrink until you are unrecognizable.

Smarter people than me may create a nicer name for this, but I call it “The Smart Building Effect.”

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