Control Amplified: Analyzing the Top 50

Nov. 20, 2018
Jim Montague speaks with A.R.C. Advisory Group's Craig Resnick and Larry O'Brien to dig deeper into this year's Top 50 report

In the first podcast of the Control Amplified series, executive editor Jim Montague speaks with Craig Resnick and Larry O'Brien of the A.R.C. Advisory Group about the research and analysis that went into their Control October 2018 cover article on the Control/A.R.C. Top 50 global and North American automation vendors, and give the results some added context and trends. 


JIM MONTAGUE: Hi, this is Jim Montague, executive editor of Control magazine and, and this is the first in our new Control Amplified podcast series. In this series, we'll be talking with different experts about important topics in the process control and automation field, and go beyond our print and online coverage to explore some of the underlying issues affecting users, system integrators, suppliers and other people and organizations in these industries.

To kick off this podcast series, we thought it might be a good idea to interview our friends at A.R.C Advisory Group, who researched and analyzed all the content that went into our October 2018 cover article on the Control/A.R.C. Top 50 global and North American automation vendors, and maybe get beneath some of the numbers and trends—or at least get under their skin, which I'm always good at doing.

With me today is Craig Resnick, vice president and a member of the automation consulting team at A.R.C. that covers the PLC, PAC, HMI, OIT and industrial PC markets, as well as the packaging, plastics and rubber industries. We're also joined by Larry O'Brien, A.R.C.’s vice president for research. His area of expertise is process automation on the supplier side, and the upstream and midstream oil and gas industry.

Well, guys, thanks for talking to us today.

CRAIG RESNICK: Thanks for having us, Jim.

LARRY O'BRIEN: Yeah, thanks, Jim.

JM: OK, let’s get started. First off, many mainstream industries have already had a hard time transitioning from higher-profit but increasingly obsolete hardware products to software and services that are more in demand, but generate less revenue, even as they require more effort to produce. How do you think the Top 50 is dealing with the stress of this shift and responding to it?

CR: This is Craig. I think that they’re doing a pretty good job. I mean, this is an industry that’s evolution, not revolution, and I think the way they’re actually going about it is really trying to beef up, in many cases, their services business. They want to be in a position where they can move from the CAPEX side to the OPEX side, because for some companies, that’s an easier way to help generate revenue and help get projects approved. So, we’re really seeing that they really are making the transition and developing those service groups. The other area that I think is also helping them with the transition is their willingness to work with partners. Virtually all the major companies in the Control Top 50 have partnership programs of various sizes that really helps them look at companies that do maybe a better job filling some of the gaps versus what they provide versus what the partners provide and working in a collaborative fashion, they’re able to help their customer by putting together a solution that works out well for the customer and works out well for both partners.

LO: Yeah, I agree, and I think a lot of this is driven also by this overarching theme of what we call digital transformation, which includes the adoption of new tech like IoT. So, some of this stuff is stuff we’ve been talking about for a long time, you know the growth in the services business, the growth in the software business, but IoT and digital transformation has really accelerated these trends, even a lot in the past 18 months. So, we see a huge shift in the businesses of a lot of these companies, where they’re becoming primarily software companies with services to go with it. And I don’t think you can say that hardware is no longer going to be a focus, I think there’s always going to be hardware. I think there’s a lot of maybe dumb assets, previously dumb assets, that a lot of the suppliers are working to make intelligent as they buy up a lot of these types of companies, things like manual on/off valves and things like that, but I think the bottom line is it’s all right now driven by IoT and digital transformation in some way.

JM: Just to introject an additional question. I’m always kind of worried this might be psychologically or mentally taxing going from hardware to digitalization. Is there any evidence of that or any ways that the Top 50 copes?

CR: I think what’s happened is that as the needs of the market have evolved, in many cases in the Top 50, the type of people that are employed by those companies is also evolving. You know, when we talk about the baby boomers retiring and Millennials filling a lot of those gaps, that is not just something happening at the factories and the plants, that’s happening just as much at the Control Top 50 as well. In many cases, the people who are filling the roles of people who are retiring, the people that are retiring usually had that great expertise in hardware from a design and implementation perspective. A lot of the Millennials who are taking their place really bring a great set of software skills, the ability to leverage a lot of the tools that are available for digital transformation, applying low-cost sensors for Industrial Internet of Things applications. So, in many cases one of the things these companies are doing is by letting their workforce evolve that’s helping them better re-position themselves, and I would say to your question, Jim, maybe eliminate some of that tension that you described of how these companies are changing, but in many cases, the evolution of the workforce is actually one of the things that’s helping to change the culture of the company and help eliminate some of that stress of change.

LO: Yeah, I agree. You see the cultures changing, and you see the you know this is sort of how this whole conversion of IT and OT is coming out in these companies and you see more the IT focus and that convergence is happening even with the leadership.

JM: Alright, so what's the difference between suppliers that are genuinely developing as-a-service programs and outcomes-based subscription programs and those that maybe look like they're doing it?

CR: Well, I think the thing is that you know all of these companies are having to evolve and make these changes because they’re really being driven that way by their customer base. So, there’s really nobody within the Top 50 who is successfully growing that isn’t taking various levels of steps to not only re-position their companies to be able to move to the as-a-service models, but also again as I was talking earlier about partnerships, and the partnerships also extend out to the channels as well to make sure the channels are evolving to be able to help the Top 50 companies to be able to provide their level of service, so whether their distributors, whether they’re reps, whether they’re partnerships with systems integrator companies. They’re all making that change because they recognize that they’re not going to be here long term if they’re not evolving and with the level of communication they have with their customers, this is where their customers want them to be able to evolve. So, I think the combination of market pressures and feedback from customers is having them move. I mean, albeit at different paces and different speeds, but if you’re going to maintain your position in the Top 50 list, you’re really going to have to be moving to various degrees to be able to provide the as-a-service models.

LO: Definitely. What you said earlier, Craig, about the demands from the customer side is driving a lot of this change, too. I think if we went back a couple of decades ago, the influx of sort of commercial off-the-shelf IT technology was just beginning, and my rule of thumb back then was always oh there’s a 10-year lag time between when something when something is largely adopted on a large scale in the IT world versus when that technology being adopted in the in the world of automation and the OT world. But that 10-year lag time has compressed greatly to the point where at least I’m seeing, I’m sure you are too, Craig, this accelerated adoption of these new technologies, they’re adopting these technologies much, much faster than they used to. I think a lot of this goes back to the resource crisis among a lot of these end-user companies. They’re having a lot of problems filling a lot of the gaps and replacing people that are leaving or retiring out and a lot of that knowledge that is just departing these companies, they’re relying more and more on things like software-as-a-service and sort of placing some of those burdens onto the suppliers and third-parties to do that for them, and that demand has resulted in some very graphic change as well.

JM: So, everybody needs some Tums or Rolaids at all levels. Since we’re talking about channels and partners, IIoT and digitalization appear to be putting new pressures on longstanding distributor networks and those relationships. How’s everybody dealing with that trauma?

CR: Well, I think that as the customers’ demands have evolved and as the Top 50 companies have evolved, the channels have to evolve along with them. At one time, the channel did a great job just keeping products on the shelf in the world of hardware, collecting the money, and whether it’s in the net 30, net 45 terms and gathering the money to the Top 50 supplier, and they served, at that time, a vital role. But today, especially with online, Internet commerce, the role of the channel has completely changed to not only having a local stock that can be delivered sometimes in a matter of hours as needed, especially for MRO when something has failed within a plant, but as Larry mentioned earlier about the skills gap within the plant and the fact that many of the end-users through retirements don’t necessarily have that skill level and technical level on the plant floor. In some cases, the channels have developed service packages of their own where they can provide that level of what I would say is some application engineering, and kind of help with the installation and maintenance of the product. Where so many these products today are software based and there’s questions about things that come up for example with updates and upgrades and patches for example, and they’re really taking a far more consultatory role with the end-user and really providing a much stronger value proposition than they had for many, many years just being a local inventory and somebody who would be collecting the funds for the Top 50 supplier. So, the role of the channel has really changed, and those that are successful and thriving have evolved with it. If you’re a channel that just purely wants to be a local shelf and just collect money for the vendor long-term, I think the Top 50 supplier will either force that channel to evolve or their customers will force that channel to evolve or somebody else will be picking up the mantel and assuming that role, but the day of the channel as just providing local stock and collecting money, those days are pretty much over and the few that are left will have to evolve or they will cease to exist in the very near term.

JM: OK, at the risk of causing even more indigestion, revenues have remained relatively stable for the Top 50 in recent years, but oh man, if they're forced by subscription and annuity programs to slash margins, earning will undoubtedly suffer. How are the Top 50 likely to compensate?

LO: I don’t know if that’s necessarily true. I mean if you look at a lot of the big IT companies, they’ve already moved to that kind of a model, right? They wouldn’t be doing this if they didn’t feel it was profitable. I think a lot of end-users are adopting these types of models a lot more quickly than people thought they would. So, I don’t think it’s necessarily a bad thing where we’ll need to reduce profitability, and I don’t feel a lot of indigestion this year also, because the market is actually coming back, so the market is pretty healthy right now. A lot of this change to subscription-based models and things like that is driven by the actual requirements of the end-users that are demanding this. So, I don’t think this is going to lead a more Rolaids-inducing business environment for the suppliers. In a lot of ways, I think this is good news for the suppliers, it’s a change. What we’re seeing right now is these business models that have been around among a lot of the automation suppliers since time in memorial are really starting to change and that’s probably the most indigestion-inducing part of it is this change.

JM: I may be speaking autobiographically, because in the publishing field, printed publications historically would generate the revenue, they always called it license to print money. And when everything went onto the Internet, publications of all kinds have a very hard time monetizing digital content, and when I witnessed many of the process control and automation suppliers talk about going from selling 50 hardware cabinets to one blade server with virtual device on it, I was like oh man, people don’t want to pay for …

LO: That’s right. Yeah, and clearly the future isn’t in selling large amounts of cabinets, right? Or the old business model of we’re going to sell a ton of IO and make your money that way. That’s changing pretty rapidly.

JM: The economy’s ready for that though, maybe, it sounds like, hopefully.

CR: Well, one of the other things, Jim, and both Larry and I and some of our colleagues work very closely with the financial analysts. In many cases, what the companies are doing when they’re making the transition from say CAPEX to OPEX models, where they’re now selling their software on a subscription basis, rather than just selling a bunch of licenses up front, is they’ve conditioned the expectation from earnings per share and revenues to let them know they’re going through that process, so it gives them a little bit of time when they are doing their quarterly earnings announcements to say yes, we recognize we’re a little bit maybe below the growth in the marketplace overall, but here’s what we’re doing, and then what’s starting to happen is now that you’re getting to the other side of the curve and now all of a sudden that now they’re transferring to these subscription revenues, the financial community actually likes it because it gives them a very, very steady cash flow because it’s much more predictable than basing all your sales just based on up-front CAPEX sales. Now, they can very easily predict what they’re going to be selling every month, because typically once they get a subscriber, once they move them from buying X number of seats or X number of licenses to now they’re the company that every month is now giving them a certain amount of revenue. Also, if you look over the long haul, the Top 50 supplier that has these models makes far more money on the long haul because based on selling that software it also kind of locks that customer into that vendor, it makes it far more difficult to change vendors once you’re doing a monthly subscription where part of that subscription is having those patches and updates and upgrades being done automatically as part of the subscription and now because of that you’re also moving some of the maintenance and service is now being handled by that subscription as well. So, they recognize it’s a bitter pill to swallow for a short period of time for the vendor, but they know once they successfully get to the other side, it actually will have very, very far positive ramifications on their top and bottom line moving forward.

JM: Well, OK I’ve replaced indigestion with a feeling of queasiness here. Really the main question is how can the Top 50 keep up with serving hundreds of subscriber relationships with their end users that will probably number thousands of applications represented with maybe digital twin/simulations, isn’t that too tall an order for anyone to handle? How can they possibly do that?

CR: Well, I think how they’re doing it is when I was mentioning earlier about the evolution of the Top 50 suppliers’ workforces. They’re now hiring people that are far more digital savvy, and they’re able to do a better job as far as being able to, in an IOT world, be able to have a much easier time to monitor all these assets and by being able to be connected to and monitor these assets, that’s really what’s helping them move forward. If you weren’t going through the digital transformation process, if you weren’t able to be able to apply say low-cost sensor technology and retrofit for example the hundreds of thousands or millions of rotating assets that are already installed in the field, this actually provides connectivity and it provides information from these assets that wasn’t available before. Whether it be things like vibration and baring temperature for example, and the thing that you can do now by being able to connect to these assets is be able to do things like asset performance management, where you’re able to predict a problem with the asset ahead of time and do a scheduled shut down and a scheduled maintenance to repair the asset before you move over and have a potential unscheduled downtime where the company is now bleeding the profits at a very, very fast pace. So, I think the digital transformation and Internet of Things has really helped these companies be able to kind of move to that level so they can now be able to monitor assets of all types even if they’re a older generation of assets by being able to retrofit with IIoT and being able to leverage that information. Many of the companies that are in the Control Top 50 partner with cloud providers, for example such as Microsoft Azure or Amazon AWS, and in many cases, that information that’s coming from those assets is actually being moved to the cloud, because this is not information that needs to be in milliseconds or microseconds, this is not real-time information that you might want to be gathering say through an age device, but this is typically information that’s being stored to make sure that the products and the assets are running at an optimum level and problems are prevented because the sensors are letting the operators know when there’s trouble, and now the business can know when to take appropriate action to make sure that asset is repaired in a quick period of time before there is an unscheduled downtime.

LO: Yeah, I think that the suppliers know that part of their success is going to hinge on their ability to manage these millions of data points among their hundreds and thousands of customers and you need a good technology platform, a good foundation in place to manage that data and also to make sense of that data, right? What we’ve always said is it’s no good unless you can take all that data turn it into useful and actionable information and give it to the right person at the right time, right? And that’s what these suppliers have been doing over the past several years in the creation of their IoT platforms, and as Craig said, adoption of cloud technology and virtualization and so on. So, all of these major technology sifts I think are done with an eye toward how are we going to manage these millions of data points and make sense of them and also try to provide some sort of intelligence around them, which is where the things like predictive analytics come in and complex modeling and things of that nature. So, I think they understand this data issue and you can see the results as far as some of the major changes they’re making to their product offerings and IoT platforms to do that.

JM: Well, I guess I still need convincing. I’m just glad I’m not in charge of a million data points. Frankly, I can barley handle a dozen myself. Whether the Top 50 is acquiring start-ups to give them the service offerings or they’re shedding divisions that aren't helping, is there any common threads in how the Top 50 is determining which strategy will work the best?

CR: I would say the common thread that the Top 50 companies have are the fact that they’re actually listening to the needs of their customers, and that’s really helping them decide you know what is their value proposition that they have, you know doing a gap analysis strategy to figure out where there’s holes in their offering both from a hardware perspective or a software perspective or service prospective and the willingness to partner with other companies to help fill those gaps and be able to provide fully comprehensive solutions as a result of working with the partners, they sometimes when they do this gap analysis realize that maybe they want to look at some of these start-up companies. We certainly see it in areas of analytics, Larry spends a lot of time with a lot of the cybersecurity providers, whether they want to partner with those companies or even pursue even acquisition of some of these smaller start-up cyber companies, so I think what we’re finding is is that there is no single blueprint that  you follow steps A B and C to get you where you need to go. I think it’s a matter of where you’re already coming from, talking to your customer base and then putting together kind of a combination of a partnership, an M&A and organic development strategy to get you where you need to go to best meet the needs of your customers.

JM: Well, Craig and Larry, this is some great analysis here, and I think we really go under some of the trends and things that were covered in the Top 50 article and learned more about what makes them tick. Thanks for talking to us today.

CR: Thanks for having us.

JM: This has been a Control Amplified podcast. I’m Jim Montague. Thanks for listening.

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