Bring on Digital Transformation in Regulated Industries
Joel Nichols discusses the barriers and challenges facing regulated industries as they attempt to implement Industry 4.0 technologies and change their culture. The article examines the questions that regulated industries must address as they embrace digital transformation and the advances that specific Industry 4.0 technologies can yield. The author argues that although digital transformation may require more time in regulated than in nonregulated industries, “the impact of regulated industry transformation on producers and consumers alike ultimately will be greater than that of the nonregulated sector.”
The hype surrounding Industry 4.0 technologies, and their assumed criticality for digital transformation, will surely follow the typical path determined by human psychology as it relates to technology: New technology generally piques unwavering interest. Greater investigation into said technology often leads to more promises of what it will deliver, with use cases seemingly endless. The reality of implementing the technology, however, may quickly turn downward into pessimism, especially when many promising use cases fail to come to fruition. Consequently, fear and distrust of the technology increase, and most people abandon it. Of course, some use cases become success stories, and the technology may indeed gain some traction — but only in a slow, methodical way. The real problem, however, was never with the technology itself; rather, it was likely with the human psyche’s perceptions of it.
This same human psyche may be the greatest barrier to implementing change. Yet, the ability to change at an ever-increasing pace is likely the most critical element of being a digital organization. Next comes another big barrier: regulation. Regulated industries face not only the human psyche battle of implementing change but also the necessity of doing so within the constraints and barriers imposed by regulation. If a digital transition were strictly a matter of applying new technologies to old problems, regulated industries wouldn’t lag so far behind in the transformation arena when compared to other industries.
But digital transformation requires more than the application of new technology. It requires a fluent change culture, one that regulations and regulatory bodies tend to impede by protecting against dangerous and rushed implementations. Consequently, regulated industries have become known for being change adverse and slow to implement change. More than ever, we need innovation champions within regulated industries to step up and bring the regulators up to speed and on board when it comes to Industry 4.0.
Questions to Tackle
Regulated industries should not pull back in their quest toward digital transformation but should instead find a way to embrace it. To do so, let’s first examine some questions regulated industries should consider:
Does being in a regulated industry mean an inherently slower transition to becoming a digital organization? In almost any company within a regulated industry (e.g., healthcare, finance, transportation), there are some parts of the company to which regulations do not apply, be it recruiting, distribution, finance, or employee social groups. So, if some parts of the company are not under the regulatory oversight that could potentially slow down a digital transformation, why not apply a “two-speed digital transformation,” with one part of the organization transforming intentionally faster than another part of the organization? Theoretically, an organization could choose to adopt digital tools and methods in the parts of the organization not governed by regulatory bodies while taking a slower approach in the parts that must abide by regulations.
The challenge of a partially transformed organization is the effect on the culture of the company as a whole. Consider, for example, someone from research, accustomed to using tools in the cloud with new builds deployed daily using data from all sources in the ecosystem, who moves to a regulated manufacturing position. How will that employee impact and be affected by such a starkly different culture? Management of change, including digital change, requires a beginning-to-end vision. In a two-speed digital transformation, it should be clear that different digital adoption speeds transcend a vision toward a unified transformation, requiring patience from those at the “higher” speed and stimulating curiosity from those at the “lower” speed. But to achieve this type of unification, we need regulatory authorities that are in line with the new digital world.
Can we influence regulators to make the transition to digital? It seems self-evident that a regulatory body not fully versed in Industry 4.0 tools and techniques will not be able to properly regulate a company leveraging such tools and techniques throughout its operations. Regulatory bodies exist because the country or government they represent wants to ensure that “experts” oversee the actions of companies within a given industry to protect the public from unethical or uneducated decisions with regard to products or services that impact public well-being. If regulatory bodies don’t have expertise in newer technologies or processes, how can they possibly be expected to regulate these technologies within the companies they oversee? At the same time, do companies within the regulators’ domain really have a grasp on the level of expertise the regulatory bodies possess? Active communication between regulated companies and regulators would allow each to fully understand what the other is undertaking in regard to a digital transformation.
Regulations often blaze a path to widespread use of new technologies. If the US government were to dictate the use of blockchain for HIPAA-related data by a certain date, for example, companies would be looking at blockchain for many other ecosystems of shared data. However, many regulatory bodies lack the vision to allocate funding to properly understand the impact of a digital transformation on the industry they govern. If a regulatory body hasn’t digitally transformed itself — or educated itself on digital transformation — is there a path to help educate or drive the regulatory body toward such a change? The answer lies in the concept of transparent collaboration and communication between the regulators and the regulated. To avoid any perception of compromise, such as bribes to induce favoritism, the industry would need to create a neutral third party that would accept funding from companies within the industry and offer tools, training, and consulting to the regulators. Industry lobbyist organizations exist today and could perhaps take on this neutral third-party role, but a more direct and targeted intervention is needed to expedite transformations that are positive for both producers and consumers. The benefits of Industry 4.0 processes and technologies benefit everyone in the ecosystem, not just the companies that have implemented them. One potential path is for regulatory bodies to host incubators that make possible the creation of such a collaborative environment. Last year, US Food and Drug Administration (FDA) Commissioner Scott Gottlieb announced that the FDA was creating such an incubator environment for digital health tools.1
Is becoming digital within a regulated industry worth the effort? Consumers within regulated industries receive protection in one form or another — including as safety (e.g., improved data enhances safety in air travel), transparency (e.g., clear view of all parties/charges in financial systems allow for greater transparency in mortgages), and equality (e.g., creating easier access for startups to offer Internet services provides more opportunities) — making the effects of Industry 4.0 in regulated industries potentially more impactful than in other industries. In nonregulated industries, the benefits passed on to the consumer are clear: lower cost, higher quality, closer business-customer relationships, and increased speed of innovation. While many of the applications and use cases will be industry- and even company-dependent, it is the interest in the Industry 4.0 digital tools that sparks much of the interest in the transformations around the world.
Let’s take a look now at how some specific Industry 4.0 technologies can create advances within regulated industries:
Artificial intelligence and machine learning (AI/ML). Analyzing data to find correlations not previously seen is clearly a way to speed new innovations, as well as reduce costs and improve safety. One common challenge within regulated industries involves the requirements on software testing, ensuring that the software works as intended and that new changes haven’t introduced unwanted results. Despite testing, “programmer bias” will always exist. Regression testing based on criticality is certainly beneficial, and testing automation has allowed for greater use of more robust and complete sets. But why not let the computer itself look for unexpected and ignored bugs? Training a model on what the software is intended to do can allow AI to test beyond the design to predict and demonstrate “unintended features” in the software. For regulated industries, AI/ML-assisted testing would extend testing beyond what today’s regulations require — and let all of us as consumers sleep a bit better as a result.
Cloud computing. The horsepower of cloud computing has allowed companies of all sizes to do things they wouldn’t ordinarily have the data centers to do and allows them to more easily take advantage of powerful tools that never existed before. Despite early concerns about the security of cloud-stored data, most users would readily opt for the cloud in a decision between storing data in a small server room in a remote distribution center or in a military-grade secure facility with redundant everything. Cloud computing offers the kind of security for consumers that many companies operating in the ever-increasing ecosystems of regulated industries can’t normally obtain on their own. The result is increased protection and greater reliability (i.e., consistent results) of consumers’ critical and private data.
Blockchain. Blockchain as a technology is gaining momentum. You can already find blockchain technologies in use in finance, as countries see great savings through the use of a shared ledger.2 Blockchain offers the world of multichannel ecosystems within regulated industries a way to operate that is both safe and fair to producers and consumers alike. As a patient, for example, you want your medical data shared with the group of healthcare providers caring for you, but you likely want to share only the data relevant to the condition being treated. At the same time, if one of those providers makes a change to your treatment plan, you would like that to be immediately communicated to the team treating you. While you want your insurance provider to have some information regarding your treatment as well, there is a good chance you aren’t comfortable with your insurance company having access to all your information. Blockchain makes accountability for the sharing of patient information transparent and can limit sharing to your treatment team.
3D printing. We have already seen 3D printing, and its wide variety of use cases, develop into a niche technology. Although it is always easier to purchase an item that is “stock” and “close enough” to meet specific needs, 3D printing offers the opportunity to meet the exact needs of a specific application. The capabilities of 3D printing can thus improve the raw materials and tools used in manufacturing within regulated industries. Moreover, as a delivery solution, 3D printing can eliminate tampering and counterfeiting. Indeed, once regulators approve something created via 3D printing, the manufacturing of your medicine, for instance, could occur while you wait at the pharmacy.
Industrial Internet of Things (IIoT). Just as with humans, proper communication leads to expected results with machines. The more easily and accurately devices and machines can share data, the better they can make use of this data and the more understanding they have about the world in which they operate. In a simple regulated industry example, a large mixing vessel preparing to add a toxic chemical could stop the process if it becomes aware that a person is unexpectedly in the area. IIoT will allow that mixing vessel to ask its ecosystem whether any humans are present, providing greater flexibility than today’s need to push information to the vessel.
Augmented reality/virtual reality (AR/VR). Today’s AR can allow remote experts to provide support for maintenance in regulated industries, while VR can provide a new dimension of training, where variants of unsafe and unfit environments can be created as experiences for trainees. But we can take these benefits even further. Providing just-in-time training — and augmenting it with visuals — improves success in new ways. Now imagine if we can also add in digital twin elements and allow the computer to evaluate actions to flag potential variances along the way. Training then becomes a significant step in quality, the likes of which we have never seen before.
Big data/smart data. While we often see data as a way to improve insights and understanding along the way, data goes way beyond that. Smart data seems to have replaced big data in importance because we now realize that data beyond our understanding and control becomes noise. Smart data, which specifies the data context — to whom the data belongs and its risk profile for safety, quality, and privacy issues — creates a world of understanding to look to when things go wrong. Smart data makes knowing the impact of a security breach possible, for example, allowing appropriate notification without causing worry and panic. Smart data could also avoid holding up a series of flights due to a data out-of-limits event because sufficient other data would exist to allow the making of the right decision with a safe path for the airlines and passengers.
While there are many use cases for each of these technologies, their true impact occurs when they all work together in an organization that embraces them along with the rapid changes that are intertwined in their use. Digital transformation is said to be exponential because each of these technologies has the power to act as a multiplier.
Although the path to digital transformation may be slower in regulated industries than in nonregulated ones, the impact of regulated industry transformation on producers and consumers alike ultimately will be greater than that of the nonregulated sector. Thus, innovative Industry 4.0 champions within regulated industries need to step up for regulators, producers, and consumers — and make things happen. After all, disruptive innovation with the right change management has the power to improve quality of life globally. So now is the time to push the boundaries of change management and find new ways to collaborate with regulators.
1Gottlieb, Scott. “Transforming FDA’s Approach to Digital Health.” US Food & Drug Administration (FDA), 26 April 2018.
2Huang, Roger. “Central Banks Are Using Blockchain to Stabilize the Global Financial System.” Forbes, 23 June 2019.