Anyone running a business in the machinery and manufacturing sector knows that the only constant these days is change. As technology continues to evolve, the focus for manufacturing companies has shifted from a single-sale, product-driven revenue structure to a more complex, all-inclusive sales cycle. Instead of manufacturing companies constraining themselves with a simple transactional business model, they must re-imagine the sale to allow for greater stability within their customers’ cash flow structures.
What has emerged is an all-inclusive, low-risk, high-productivity solution: subscription-based sales models. Common in the software industry, subscription-based sales are gaining momentum in the manufacturing sector because they solve problems and mitigate risk. Manufacturing companies can expect a more predictable and long-term relationship with customers, while customers can eliminate the risk of owning a piece of machinery they don’t have the infrastructure or money to repair or replace as new technologies arise. The model is service-inclusive, often offering equipment installation, maintenance and even plant operation services as part of the sale.
For example, GE Oil & Gas and Diamond Offshore (a leader in offshore drilling) entered into a performance-based service agreement in 2016 for a subsea blowout preventer (also called BOP). This particular piece of equipment may range in value from $25 million to $60 million. With a new performance-based deal structure, Diamond Offshore paid GE based on the reliability and availability of the BOP. As a result, GE was able to keep the equipment on its balance sheet as an asset, allowing the large company to take on greater risk and assume a competitive advantage. GE was able to do this because of its size, but also due to its intimate understanding of the equipment and dependability of the BOP components. In order to make this groundbreaking agreement successful for both parties, GE needed to take on the research and development of subsea control and monitoring systems. With an investment in BOP operations, monitoring and maintenance, GE could confidently rest its bottom line on how well the BOP worked day-to-day. As for Diamond Offshore, offloading the BOP maintenance and repair work allowed the company to mitigate nonproductive time for their drillers and operators, thereby creating incredible upside in terms of cash flow and overall efficiency.
The benefits to agreements like GE and Diamond Offshore’s are plenty: customer satisfaction and efficiency increases, more predictable equipment costs, and steady, reliable cash flows. Manufacturing companies have the ability to truly become a partner and solutions provider to their customers. This kind of relationship, if successful, can last and grow for many years, increasing competitive advantage within a given industry. That said, such a shift can also be disruptive to the way a business operates from sales, marketing and operations teams to pricing structures, operations protocol, liability and financial structure. Making a change like this requires flexibility and innovation, and a greater focus on customers’ outcomes and ever-changing needs. For GE, that meant adjusting business to address Diamond Offshores’ greatest problems: time wasted repairing and maintaining the BOP. This required GE to learn a business and develop expertise to allow for a full partnership with Diamond Offshore in the BOP sale. It also meant reinventing their pricing structure to address this new relationship and new level of expertise and service around the BOP and related analytics.
As businesses move toward a subscription model, two major areas offer growth opportunities: operations and service. Manufacturing companies will need to allocate more people, money and time toward creating, understanding and managing the software and cloud analytics that help ensure maximum operational efficiencies. GE isn’t the only example out there. In fact, Emerson is also leveraging subscription-based sales to differentiate and capture long-lasting relationships. The company has created a host of products and capabilities that affords their customers a comprehensive process-improvement plan. Emerson’s Pervasive Sensing Center, accounting for $13 million of a $27 million investment in new technology and infrastructure, has been put to great use on Jurong Island in Singapore. The new technology allows for energy loss and equipment failure to be noticed in real-time, saving money and economizing manpower. For Jurong Island that has meant saving $150 million and sidestepping 450 kilotons of CO2 emissions.
Another great example is the partnership chemical company Quaker made with General Motors to address oil contamination in a GM plant’s cooling water. Quaker built out an innovative statistical model to pinpoint precisely where GM was losing oil which subsequently reduced oil consumption, eliminated clogged water lines and lowered overall water consumption. Quaker saved GM more than $800,000 annually and got paid on its ability to be a true solutions provider, not just a chemical supplier.
The Industrial sector has the opportunity to move quickly and capitalize on subscription sales through the growth of the IoT. This kind of innovative and nimble business strategy does require both changes in how they run day-to-day and early adoption from sales and marketing to operational teams. But with flexibility and targeted investments in the direction of a results-driven, customer-focused sales model, this kind of shift can change the course of the industrial and manufacturing world, allowing companies to grow in new, defining ways.
Patrick Mascia is Industrial General Manager at Catalant Technologies, Inc.