The internet of things and the chemical industry

Chemical companies are investing heavily in connected devices to capture, process and use data, attracted by huge commercial opportunities and potential returns on investment. However, a full realisation of those benefits depends on awareness and management of the risks that come with the “Internet of things” (IoT).

The Internet of Things

The IoT is a network of physical objects containing embedded technology gather and communicates data concerning their internal states or the external environment. However, data alone is relatively useless. It is only by implementing intelligent systems to capture and convert data into action that companies can realise the IoT’s true value.

Actionable data

Already, chemical companies are capturing and using data to great advantage. Examples include:

Predictive Maintenance – increasingly, assets such as chemical reactors incorporate embedded software and analytics. Real-time status and performance data allow companies to predict possible malfunctions and maintenance needs. 3D asset visualisation allows critical systems to be reliably tested without interrupting production.

Operational Intelligence – Chemical companies exploit only a fraction of the data generated during manufacturing to improve decision making and add value. Applying sophisticated analytics to full data sets massively improves performance and profitability.

Supply chain management and improved logistics – Data from sensors embedded in product packaging or shipping containers can help to track and trace the location, condition, and authenticity of products. For example, data showing unacceptable temperature or moisture levels might provide an early warning that a consignment will not meet quality criteria.

Dynamic procurement and smart contracts – Real-time monitoring of stocks, coupled with dynamic procurement can reduce costs and close the gap between inventory and orders. Smart contracts, formed through multi-supplier platforms, promote competitive pricing and reduce reliance on contracts that impose minimum commitments through “take or pay” clauses.

Key risks

To take full advantage, organisations must be able to store copious data and to access processing capabilities powerful enough to apply advanced algorithms for predictive insights. They also need a user-friendly, graphical interface to make sense of the results. However, development costs are high and the relevant expertise is unlikely to exist within most organisations.

Further, developing in-house solutions carry significant compatibility and interoperability risks. Efficient IoT development depends on integration, drawing on global resources such as the ISO 27000 family of management and operational standards. The IoT’s commercial logic dictates a high degree of outsourcing, and with that comes a pressing need to ensure that legal, regulatory and contractual risks are properly managed.

Big data: big risks?

Moving maintenance, supply chain management and customer insights onto IoT-driven systems means that each project has the potential to be a “bet the company” risk. Technology failures, service outages or service provider insolvency could disrupt or even close down production, perhaps triggering substantial liabilities to customers or other links in the supply chain. Equally, inadequate security or data management can expose a company to major compliance risks and penalties including, when the EU’s General Data Protection Regulations come into effect on 25 May 2018, corporate penalties for breach of up to 4% of global turnover. Consequently, contracts with IoT service providers must address:

• Availability and performance

• Change management and control over subcontracting

• Security and data management, and

• Business continuity

Although the technology is new and rapidly developing, the contractual risk management tools remain familiar. As with any contract, paying close attention to scope and specification reduces the risk that failures will fall outside the contract terms, leaving a company with inadequate remedies, or no remedies at all.

Any remedy’s value depends on unambiguous drafting and a full understanding of the relationship between:

• Indemnities

• Damages

• Limitation and exclusion clauses, and

• Insurance cover – including cyber-attack exclusions

The IoT’s global nature also requires focus on governing law, jurisdiction and dispute resolution clauses to ensure that remedies are enforceable.

IoT contracts must provide for regulation-compliant data flows at either end of the contractual relationship – commencement and termination. Regulatory compliance must be assured, and supported by adequate contractual remedies. Crucially, termination must not result in a loss of data, or of control over it.

The IoT is a game-changer for contract management. Real-time data greatly increases the risk of losing remedies for breach. For example, failure to act on data flows showing unacceptable temperatures or moisture levels during shipping might amount to a waiver.

The IoT brings enormous opportunities to increase productivity, quality of service and competitiveness. There are also risks. Some are new but all can be managed with a proportionate approach being taken to project management and by securing adequate contractual protection.

Source: Bond Dickinson LLP

© Chemical Today Magazine

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