Calculating the Total Cost of Ownership for IoT - Should You Build or Buy?
Use this guide to understand key decision factors in the build vs. buy decision and run different cost scenarios using the free calculator.
What Total Cost of Ownership Means - And Why You May Not Be Calculating It Correctly for IoT
The total cost of ownership for IoT deployments can be calculated by quantifying the direct and indirect costs of building and maintaining it over its entire lifecycle. TCO is a vital metric for determining the return on investment you’ll get from an IoT initiative.
TCO is often the focal point of the decision to build vs. buy an enterprise IoT platform. There are a number of factors that must be considered when calculating it, and not all of them are obvious.
For example, the opportunity cost of getting to market at a slower pace is hard to quantify. The costs incurred by bringing on multiple vendors and microservices and making them “talk” to each other are also generally hidden from projections.
These hidden costs are where most TCO calculations fail.
Calculating the Direct Costs vs. Indirect Costs of IoT
Most businesses are great at calculating the technical costs of IoT. This includes the hardware, operating system, software, and connectivity. These are generally what companies focus on when forecasting the size of the investment they’ll need to make.
The qualitative or indirect costs of IoT are much more difficult to forecast, and that’s where you can start to see the cost of an in-house-built IoT deployment spiral out of control. These include:
- Security, compliance and certification
- Maintenance and support
- Engineering and management labor costs
- Change management costs
- Opportunity costs and time-to-market
Those last two points - change management and opportunity costs/time-to-market - are often not taken into account in the early stages of planning an IoT deployment, particularly if the goal is to build in-house.
Change management in IoT refers to reconfiguring your internal processes to adapt to the needs of connected products. This influences everything from marketing and sales and revenue recognition, to supply chain, engineering and IT.
In a report for Siemens Advanta, Dr. Peter Louis, Gerhard Geisert, and Rainer Blessing wrote that many business leaders underestimate the costs associated with transforming their business with IoT.
They’re great at projecting the technical and operational costs of buying point solutions, hardware, and devoting internal resources to the project, but they fail to project the costs of developing new processes and tools, developing their workforces to handle those new additions, and change management across departments.
Focusing only on costs incurred within the technical stack leaves out a significant portion of the total cost of ownership, creating an illusion of a lower TCO.
The opportunity costs of building your own IoT platform are also difficult to determine. If the average time-to-market for an in-house built platform is 1-2 years, and buying a platform can get you to market in fewer than six months, what is the opportunity cost of getting to market one to one-and-a-half years later?
How much revenue would be lost in the delay? What if a competitor got to market first with a connected product?
Being a first mover with an IoT product can be a major advantage. When end users have connected products embedded in their context - whether as consumers or business users - it’s hard to dislodge the incumbents as switching costs tend to be high.
The data and functionality become sticky, and if a competitor got to them first, you would have to be several orders of magnitude better for your customer base to find you to be worth the switching costs.
Calculate and Compare the TCO of Building vs. Buying an IoT Platform
Use this Free Calculator from MachNation to Test Different Build vs. Buy Scenarios
To help you project the costs of building an IoT platform vs. buying one, we’ve brought in MachNation, the industry’s only independent, hands-on, benchmarking lab for IoT platforms.
MachNation's easy-to-use TCO calculator compares the 5-year total cost of building an enterprise-grade platform versus buying one as a service from a vendor.
Step 1: Input your projected number of devices for 5 years.
Step 2: Watch results change as you modify assumptions.
Step 3: Enable advanced input to tweak your scenario more.
Step 4: Press the "Get link to results" button to get a link you can share with stakeholders.
Building a Business Case for IoT
Understanding the difference between the TCO of building and buying is important, but before you do that, it’s critical to validate the business case for IoT.
Too often, businesses start with an “intent to connect” and focus on the technical challenges of IoT instead of thinking about how it augments their business model.
IoT is ultimately a technical solution to a business problem. The business case is made when you can determine if the savings or profit the solution delivers is greater than the annual cost of implementing the solution.
At this stage, companies often fail to understand the business problems they are facing or the customer needs they need to serve. They then build an IoT product to solve minor problems that don’t deliver real value.
Whether you’re selling to consumers or to other businesses, the first step to a successful IoT deployment is understanding if your customers actually care about connectivity in the products. Work with your customers to validate if adding an IoT layer to your offering is something they would pay for.
IoT products only prove economically viable when they deliver continuous, recurring value for your business and customers.
The types of problems you want your IoT solution to solve will determine the kind of IoT ecosystem you need. From there, you can more accurately assess if you can build connectivity into your product yourself, or if you should invest in an IoT platform that can give you the functionality you need.
The decision to build connected products shouldn’t be based on “Can we do this?” but rather, “Should we do this based on our assessment of the business problem, customer need, and the available technical solutions?”
Build vs. Buy Whitepaper
Get our full deep dive into how you should be thinking about the decision to build vs. buy an IoT platform
IoT - Deciding Between Build vs. Buy
The total cost of ownership is only part of what you should consider when choosing to build vs. buy an IoT platform. In this section, we’ll look at other key factors you should take into account when making this decision.
Internal Expertise and Resources
Research from PTC showed that the average enterprise IoT project involved over 23 different vendors for a single product.
Here are some of the key areas you’ll need to evaluate your team on to see what they’re capable of building:
- Embedded device hardware and firmware
- Networking and communications
- Cloud computing
- Mobile application development
- Data security and privacy
- Data storage architectures
- Performance tuning
- Reliability testing
- Over-the-air updates
- Power optimization
- UX design
To build the teams needed to cover all of these areas would require you to add substantial headcount or otherwise stretch a small team to its limit.
When deciding to build vs. buy, you have to determine which of these areas is worth investing internal resources into based on your core competencies. The rest should be outsourced to an IoT platform provider.
Desired Time to Market
As mentioned above, the average in-house IoT project requires 18-24 months to get to market. This timeline doesn’t include things like failed certifications, changing the scope of the project, hiring and onboarding new teams, etc.
By contrast, buying the Particle IoT platform that gives you the full stack of technologies needed can help you get a working prototype in weeks and a market-ready product at scale within 12 months.
Getting a workable product in just a few months allows you to announce the offering, begin selling it, and start generating revenue, rather than spending 1-2 years validating and developing it.
Again, consider the opportunity cost of waiting to get to market. In addition to missed revenue, you could be opening the door for competitors to gain a foothold in the market. Without a clear differentiator, you would be trying to come from behind to win market share.
Integration with Other Systems
Most IoT platforms built in-house are essentially a collection of microservices that provide “point solutions” for different parts of the IoT product.
This includes device provisioning, application enablement, access control, monitoring, device management, event processing, data management, analytics, etc.
Assembling the point solutions and microservices that meet your needs individually into a coherent and integrated whole can add significant time to your product development cycle. Additionally, you would have to hire a large team of engineers with deep expertise in each part of the IoT architecture.
Buying an integrated platform makes this simple. You can buy the devices you need, activate them, and get working connectivity right out of the box.
This will allow you to focus your team’s time and effort on solving customer problems and driving business value rather than putting out fires and connecting solutions.
Managing cellular connectivity in an IoT ecosystem is difficult even if you have some of the expertise in-house. Cellular connectivity is essential for IoT to function properly. Interruptions in connectivity can mean the loss of vital asset data, costing revenue and additional maintenance costs.
Managing connectivity involves managing a full stack of technologies, even before you get to your own hardware and software that need to be connected. Here are just a few of them:
- SIM card manufacturers
- Modem components
- Modem modules
- Microcontroller network stack
- Signal quality
- SIM provider MNOs
- Roaming partner MNOs
- Internet providers
- Network protocols (ICMP, UDP, TCP, TLS/DTLS, CoAP, MQTT, HTTP)
Managing this complexity yourself is enormously difficult and costly due to the engineering costs and the time spent ensuring all of these different components work together. Another obstacle is getting the attention of major carriers if you only have a small fleet of devices. It’s unlikely you’ll get a major carrier like AT&T to give your project priority attention if you only have a few hundred devices.
A full-stack IoT platform will manage all of this connectivity for you. It ties back into the opportunity cost of building cellular connectivity capabilities in-house - is that your business’s core value or differentiator? If not, buying a solution makes more sense.
Security and Certification
Protecting user security and privacy is critical for any IoT deployment, and the penalties for noncompliance with local regulations can be steep. Security is one of the biggest challenges for IoT, and it can significantly slow down your time to market.
In general, you can expect to spend six to nine months and up to $200k acquiring FCC, PTCRB, OTA, and carrier certifications, along with RoHS compliance certifications.
Even those timelines can be pushed out, putting your whole project at risk due to the high rate of FCC certification failure. 80% of all first-time FCC certifications fail.
Scale is a major factor for an IoT deployment that has to be considered when deciding whether to build or buy. You might have the expertise to build a POC in-house, but the people who can design and build a prototype may not be the right people to scale it up to a market-ready product.
For example, rolling out firmware updates to 10 devices is a fairly easy task. Rolling out firmware updates to 10,000 devices is a completely different process.
You must be able to assure quality control and checks as you scale, and be able to remotely upgrade connected devices in a controlled fashion without bricking them or causing downtime. Every new feature or fix that gets pushed must do so seamlessly, without interrupting the end user’s experience or the device’s performance.
Maintenance and Support
Getting an IoT project live is just the first step. Maintaining and supporting it is a major part of the product lifecycle that requires considerable resources on an ongoing basis. These costs can often be underestimated when determining your initial investment.
Managing the cellular layer alone - certifications, carriers, privacy, etc. - is challenging, to say nothing about continually upgrading the hardware and firmware. You also need to balance the stability and uptime of your IoT deployment while making upgrades and adding features based on end user needs. Any TCO analysis needs to take this into account.
Maintaining a complex system requires headcount that could be otherwise devoted to developing new products and features. Beyond that, tracking issues and resolving them with minimal downtime is essential for customer satisfaction. Too many issues with the connectivity side of your product can cause customers to look elsewhere.
By contrast, a third-party IoT platform will manage the difficult parts of IoT for you so you can shorten the timeframe in which you resolve issues. It should also make it easy to push OTA updates in real-time without bricking devices or causing outages.