CEO at Actify, Inc., helping manufacturers to build some of the world’s most complex and advanced products.
Manufacturing companies are often unfairly characterized as Luddites when it comes to the adoption of technology, but the reality is that manufacturing was one of the first industries to fully embrace business computing when it became commercially viable in the 1960s. They were building accounting systems, time-keeping systems and production tracking systems while many industries were still using clipboards and multi-part paper forms to manage their businesses. Manufacturing is also where huge integrated software systems like ERP were developed, and it was the place where breakthrough technologies such as computer-aided design (CAD), programmable machine tools and industrial robotics emerged in the 1980s.
More recently, manufacturing has been embracing the internet of things and artificial intelligence, but I’ve observed that it’s been late to the party when it comes to cloud computing. Established software vendors, and their customers, can be so invested in their legacy on-premise applications that they fail to transition to the cloud even as other industries like banking, retail and insurance move forward aggressively. All of their hand-wringing about data security and latency has, in my view, just been resistance to change.
When I look at what has happened to the manufacturing industry in the last 20 years, it’s hard to escape the realization that cloud computing is what it needs. Most of the prevailing manufacturing business systems were designed and built in the 1980s and 1990s when the major concerns were Y2K compliance and the transition to relational databases and graphical user interfaces. Those application designs reflected a manufacturing industry where nearly everything was done within a single giant factory, products had 20-year life cycles, vertical integration was the prevailing strategy and virtually everyone using the software was a badged employee working inside the building.
Fast forward to 2021 and you find that manufacturing is transformed. It is highly distributed with plants all over the world, dependent on a constantly changing global supply chain, and products are consumer-driven and short-lived. In my experience, today’s users of the software are mostly on the road or working from home. A significant percentage of users are not permanent employees and may actually be suppliers or customers.
By any measure, the cloud computing model fits this dynamic environment better than giant, complex on-premise systems that cost a fortune, take years to implement and can’t adapt to market, organizational or process changes. For too long, manufacturers have invested in technology that may have improved their productivity but limited their agility. I believe these aging engineering, production and commercial systems, and all of the business processes and employee training that sustain them, have become an impediment to progress.
What other industries have learned is that moving the applications, and the massive amount of data they manage, is liberating. The company can focus on those activities that truly add value and differentiate the business. They can organize the data independent of the application and optimize it for sophisticated analytics. But, perhaps most importantly, by virtualizing their IT portfolio they can encourage innovation in both the business processes and the business model. How they go to market, what products and services are offered and what activities should be done in-house versus outsourced are all candidates for change.
We have seen in the last several years that massive disruptions, such as climate change, geopolitical unrest and the pandemic, are capable of wreaking havoc on the economy. Manufacturers cannot expect to survive by doing the same things they have always done. They must develop a culture, and supporting IT environment, that allows them to respond instantly to threats and opportunities. Whether that means acquiring or divesting businesses, introducing new products or entering new markets, they will need a flexible portfolio of cloud-based applications.
Another major trend is driving the need for manufacturing companies to shift to a cloud environment: mergers, divestitures and acquisitions. The M&A activity in the manufacturing segment is white-hot. In 2018, we saw over 2,500 transactions worth more than $100B, and while it has slowed a bit because of the pandemic, I saw that the pace was back up in the second half of 2020. Large industrial corporations and investment firms are continuously buying and selling plants and divisions, while companies like Danaher are building out large portfolios of complementary manufacturing businesses. Giant, on-premise IT environments present challenges when you are selling off a business or trying to stand up a new one. Cloud-based systems, by contrast, don’t require the same amount of human or capital infrastructure and they can be quickly deployed anywhere in the world on either public or private clouds. This inherent speed and flexibility advantage minimizes one of the key M&A risks and facilitates the all-important effort to develop synergies quickly.
One of the most overlooked reasons for manufacturing to make the transition to the cloud is talent, as evidenced by research from Deloitte Insights. Many surveys of manufacturing executives indicate that their number-one growth constraint is the scarcity of younger employees in both management and technical roles. Manufacturing is not considered to be an attractive segment for young people starting new careers. Part of the reason for this attitude is the outdated technical and IT environment that characterizes many industrial companies. These young people are “digital natives” and they expect to do their jobs using modern systems and devices that they can access anywhere and anytime. This is also a generation of “citizen developers” who are comfortable with low-code and no-code platforms, analytical tools and artificial intelligence. These capabilities live in the cloud and manufacturers who don’t embrace them won’t attract the talent they need to grow their businesses.
We are well into the era of cloud computing, but too many manufacturing companies have neither accepted or embraced it. They are trying to maintain decades-old systems that are damaging their businesses and diminishing their ability to compete. There is a rapidly growing marketplace of innovative, native cloud applications and it is time for manufacturing companies to embrace them.
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CEO at Actify, Inc., helping manufacturers to build some of the world’s most complex and advanced products. Read Dave Opsahl’s full executive profile here.