How Honeywell’s CEO is turning the legacy manufacturer into a SaaS player

Honeywell CEO Darius Adamczyk had a busy year.

Alongside ramping up production of critical COVID-19 response equipment like N95 masks, the company released its quantum computer for commercial use; acquired several startups, including the $1.3 billion purchase of Sparta Systems; and struck key partnerships with Microsoft and SAP.

Cumulatively, it marked a significant step forward in Adamczyk's vision to turn Honeywell from a legacy industrial manufacturer into a top software provider for sectors like real estate, life sciences and aviation.

"The one common fiber across all our businesses is we are a controls company," he told Protocol at an event on Tuesday. "When you're a controls company, you're connected to everything, you're connected to all the systems in that building, in that aircraft. We use that data to drive controls, but we could use that data to drive energy savings, to drive efficiency."

That journey has yielded substantial progress, but changing the public perception of Honeywell is still a work in progress. It's why initiatives with top software providers like SAP are so critical, and why more are on the way, per Adamczyk.

Protocol talked to Adamczyk to learn how he is managing the business overhaul, why now is the time for Internet of Things technology and what Honeywell is doing to create a business around its quantum offering.

This interview has been edited for brevity and clarity.

You had a very busy 2020. You re-entered the Dow Jones Industrial Average, launched your quantum computer, acquired several companies, launched partnerships with SAP and Microsoft and scaled up production of critical pandemic response equipment. At the same time, you had to manage several business segments that were hit hard by COVID — aviation and real estate, for example — as well as just manage the impact of the pandemic on your own people. What did you learn through such a chaotic year?

It was certainly an exciting year last year, there is no doubt about that. We had a couple areas that were heavily, heavily impacted. It's that old saying: "What doesn't kill you makes you stronger." It was very true. It was a bit of a test year for us. I think our organization, as painful as it was at times, gained quite a bit from it.

You released a playbook on how states can set up mass vaccination sites. Why did you want Honeywell to take a leading role in helping with this effort?

It all started with a walk with some of my friends: one is the CEO of Atrium Health, another is the president of the Carolina Panthers. If we could pull together our efforts, expertise and assets, maybe we could show how we do this vaccination effort faster and more efficiently. We proposed that to both the state and the local government, [North Carolina] Gov. [Roy] Cooper quickly embraced the effort and very quickly we formed a public-private partnership that was highly effective. We administered a vaccine every 4.5 seconds, the average waiting time was under 30 minutes and we were able to process 20,000 people in one weekend. This can be done quickly, efficiently, without wasting any vaccines.

Switching gears, much of the transformation to an industrial software company is taking place within Honeywell Connected Enterprise. I read that the board approved the plan for creating that unit in one day, which seems outrageously fast. What led to its creation and what did you see within the organization that gave you the confidence that this was something you could do successfully?

The strategy goes all the way back to 2016. I became COO and I used the time when my predecessor Dave Cote was still here to really formulate the strategy. The one common fiber across all our businesses is we are a controls company, so whether it's controlling industrial plants, whether it's controlling aircraft, that is the common technology thread against all these end markets. When you're a controls company, you're connected to everything, you're connected to all the systems in that building, in that aircraft. We use that data to drive controls, but we could use that data to drive energy savings, to drive efficiency, proficiency, safety and so on. We already collected all this data, so using it differently was not a big leap.

The most painful step was to extract that business even further and give it much more control and autonomy over itself, while still having a connection to our major business units. At the same time that we created a strategy around external solutions, we also did the same thing internally. We refreshed our whole digital infrastructure. We're not done, but that was a very important effort on this journey as well.

One of the biggest impediments to digital transformation is culture. When you were looking at structuring Honeywell Connected Enterprise, how did you structure it so it could coordinate with all of Honeywell's divisions and ultimately succeed?

It's really challenging to tell people who have been selling products or solutions their whole career to go sell or promote software. It's a very different mindset. It's a very different business model. We had to go outside and recruit talent. And we did that and are still doing that. We hired probably more than 1,000 people from a lot of the leading digital companies worldwide.

I also don't believe in a model where you just dump billions of dollars upfront and hope that things happen. At Honeywell, we have a mindset that you pay as you go. And while this business does require investment, it's an investment that is self-fulfilling. It's not as if Honeywell was nascent in software. We had about a $4 billion software business. But we extracted the connected part of it, which was $1 billion-plus, and that was really the nexus of our connected business. It was an ongoing, operating business. That approach enables us to have the rigor, the finance discipline right away to actually have it perform, not in this mindset of "build and hopefully good things will happen."

If you look at Honeywell a decade ago versus now, what has been the biggest change in the make-up of your workforce? And is there one skill set that is much more visible within Honeywell's ranks?

It's speed and lack of bureaucracy. We want to move quickly, we want to be agile and effective. And we don't want to be slow. I think we achieved it, though I think every CEO says that. But a lot of people joined us from West Coast tech companies and they come into Honeywell and say, "Wow, you guys move every bit [as] fast, if not faster, at Honeywell than the company I came from." And that's rewarding for me.

And when we carved out our Honeywell Connected Enterprise business, they also operate under a different set of rules and controls. Not dramatically different, but different enough so they can make the decision they need quickly to generate momentum. I don't want them operating in the same culture as the rest of Honeywell.

A lot of the products you sell revolve around the Internet of Things, or IoT. It's technology that has been buzzed about for years, but has had a slower trajectory than some would like. Why is now the time for IoT and what has changed today versus a couple years ago?

The expectations were a little bit unrealistic. There's confusion between consumers and industrial customers. The adoption rates in consumer offerings is generally greater. And there is a very good reason for that: Your risk profile is lower. When your software doesn't work, it's annoying, but you're not bringing down an industrial facility, you're not putting an aircraft in peril. The risk profile of the industrial customers that we serve is just that much higher. Thus, the adoption rate is going to be slower. We should expect that. It's accelerating, but we shouldn't expect this exponential curve. You have to do proofs of concepts, you have to demonstrate the value, you have to demonstrate the ability to scale, then you have to demonstrate the value, and then you have to upkeep it, enhance it and improve it. That's going to continue to be a limiter in terms of the pace of the rollouts. It's never going to be at the pace of consumer businesses.

Honeywell has reported year-over-year revenue declines for a few quarters. Part of that, I'm sure, is due to the COVID-19 impact on the business. But when do you think you really start to reap the benefits of all the investments that you've made?

We already are. If you look at our software business, despite two of our biggest markets being down substantially, it grew. Aerospace markets were down 20%-plus, energy was down double-digits — and our software business grew. That's a proof point that our strategy is working. As these markets recover, particularly as we see vaccination rates going up quickly in the U.S., I'm optimistic and bullish on the second half of the year. That's going to not just boost the economy in general, but disproportionately help our businesses. You couple that with even more interest in a lot of the industrial IoT solutions, I'm optimistic about double-digit growth for our software business for the foreseeable future.

You have this vision of being this system of record for industrials. Where do you view your efforts as different than some of those legacy software providers like SAP that have been at this for decades?

A lot of those software providers play in the IT space. We play in the operational technology space. There's no overlap between what SAP does versus what we do, which is why we are natural partners. We can provide a complementary solution that is both IT- and OT-oriented.

Why did you pick Microsoft and SAP to pursue a partnership with? And what can we expect in terms of future partnerships?

As many software companies have proven, to be successful it's not a single solution. Partnerships are part of the growth equation. SAP and Microsoft are natural partners. We also have a lot of partnerships with Salesforce, more on the front end of the business. Our strategies are complementary; that has to be true because if it's not true then you're really competing. And we're innovating together. If you're just putting two things together without putting dollars into innovation, then I don't view that as a true partnership. With those three companies, we very clearly are innovating together to create unique solutions. You should expect more partnerships to come. It is very much part of our strategy.

We also have a very active venture capital fund for Honeywell. It's only been active four years and we've invested in close to 100 different startups. We offer something unique. Every VC offers money. We take an equity stake because it makes sense to create that bond. But we provide a technical partnership that, in many instances, we incorporate their solutions into our technology, or we help them develop their technology further or we give them access to our customers. A lot of these new startups that serve the industrial segment are so creative, and we welcome that. We don't view it as competition. All the companies that we invested in, we view them as our technology partners.

One area you have done some partnerships in is in quantum computing. How did you start on this journey? I imagine you didn't wake up one day and just tell your engineers to go build a quantum computer.

I have to give my predecessor credit for that. But it really came about because, with the trapped-ion approach to quantum computing, one of the key technologies that you have to have a great deal of expertise in is controls. It's a very delicate system that requires you to have very strong controls expertise. We hired some quantum physicists and coupled our controls expertise with quantum expertise to formulate this startup.

We're not that new at this. We've been incubating this technology for about a decade. And this year, it's generating revenue, so it's now becoming real, and we feel really good about our technology. It's maybe not a typical thing that Honeywell would be associated with. But I think that's looking backward, not forward.

A lot of the quantum efforts at clients like BMW and JPMorgan Chase are in the pilot stage. When will companies see commercial benefit from the technology?

The commercial benefits are incredibly large because quantum computers can solve problems that no other machines on earth can solve. We're not there yet, but we're not that far away. I expect that to be in the single-digit years away. And we already have functional quantum computers today. They're not the end vision, we're still progressing that, but we're already making it commercially available. I would say five to seven years — or maybe less — from being able to solve some very unique challenges that were frankly unsolvable before.

What does the business around quantum look like? And how are you mapping out how to sell it, what to sell it for and how to create the sales team around this technology?

We're very much in the first inning of that. The commercialization of quantum offerings is brand new and the business model is evolving. It's anything from taking a portion of the benefit that the quantum computer takes, to servicing these, to leasing of time. And we're not being rigid about our business model at the moment, because it's not a time to be rigid. We want people operating on and really testing the quantum capabilities.