Servitization Could Be Manufacturing's Next Game-Changer

The competitive pressures and customer expectations that sparked the digitization movement are at work again.

Augmented Reality2

The familiar competitive pressures and customer expectations that sparked a massive digitization movement in the industrial manufacturing sector are at work again, powering another potentially game-changing shift by industrial manufacturers to an emerging business approach known as servitization.

Manufacturers in a wide range of industries, from industrial machinery to commercial lighting to laboratory equipment, are leading a fundamental shift in the traditional OEM role, to the point where some companies are now as much a service provider that delivers an outcome as they are a manufacturer that delivers a product.

Kaeser Compressors certainly fits that profile. While the company continues to manufacture compressors for industrial applications in markets around the world, it also has built a thriving compressed-air-as-a-service business, whereby customers pay a fixed monthly fee for compressed air produced at their facility by a system designed, installed, monitored and maintained by Kaeser. What would otherwise be a large capital expense for the customer instead becomes a more predictable operating expense.

This is the essence of servitization: bundling a product with complementary services, software, parts and/or consumables to create a solution or outcome that adds value for the customer, who pays a recurring or per usage fee for the service.

The customer benefits from greater cost certainty and equipment uptime, for example, while the manufacturer gains revenue streams that are more consistent and more profitable, with margins that, according to recent research by Deloitte, can be more than twice those of equipment sales. During the pandemic, these types of services provided a stable and even growing revenue stream for some manufacturers, helping to offset lagging equipment sales. Ultimately, they enable manufacturers to break free of traditional industry boundaries, open up new territories, diversify their revenue sources and scale beyond their products.

“For some manufacturers,” Deloitte observes in the report, “aftermarket [service] already accounts for the entire profit generated by the [company]. In many cases, new equipment is no longer sold to generate profits for the firm, but to fuel the future aftersales business on the installed base. Many manufacturers generate 40–50 percent of their overall profits from services.”

As compelling as the business case for the servitization (essentially “anything as a service,” or XaaS) model is, the challenge for industrial manufacturers is turning that model into a viable, profitable line of business. As industrial manufacturers already are demonstrating, there are a variety of ways to bring that model to life.

As Dr. Melchiore Bryant, a partner at Bain & Company, detailed in a recent webinar, the spectrum ranges from basic installation and maintenance contracts and digitalization of the service journey to offerings that support equipment with utilization data, predictive maintenance based on parts condition, and deep analytics to help with benchmarking and plant optimization.

In addition to its traditional products, Hewlett Packard Enterprise, for example, is developing service-based revenue streams around outcome-based, subscription-based solutions that bundle equipment with other services. Agilent Technologies has built a similar subscription service around its laboratory instruments. Offerings like these are proliferating across the industrial manufacturing landscape. 

Succeeding with these kinds of solutions takes not just strategic acumen on the part of the industrial equipment manufacturers, but also:

  • The wherewithal to build intelligent, connected products. Digital, networkable, sensor-equipped products are the foundation on which service-based solutions are built.
  • The ability to digitally and remotely monitor and analyze data from the connected products they provide to customers. With analytics tools that are connected to customers’ smart products in the field, manufacturers can extract insight from the data supplied by those products, then supply that insight as a value-added service.
  • Shifting to a subscription-based sales mindset. As product-centric as the traditional sales approach has been, the XaaS movement requires a sales force to focus on uncovering customers’ needs, priorities and pain points, and matching solutions accordingly — in short, less transactional and more relational. XaaS solutions entail more risk-sharing between manufacturer and customer, which gives the manufacturer’s sales force a chance to position the company as a trusted partner, leading to deeper customer relationships that can produce additional cross-selling and upselling opportunities.
  • Seamless collaboration between IT and OT. As heavily as service-focused solutions rely on software, connectivity, data security and the like, it’s critical that IT and OT have a common environment in which to share information and insight.
  • Advanced modeling and predictive capabilities. How to price a subscription based XaaS offering? What ingredients and guaranteed outcomes (around price, yield, uptime, etc.) to wrap into a service solution to maximize its appeal? How to staff new servitized ventures? Data-monetization and financial modeling tools can help to answer these questions.
  • An enterprise-wide digital core capable of managing service-based solutions alongside existing offerings. Once a company establishes how its services are going to be configured, priced, marketed, etc., next comes the work of piloting, launching and integrating those solutions into the business, then managing them on an ongoing basis. That’s a straightforward proposition for companies that have a strong but flexible digital core.
  • A digital platform that networks the manufacturer with partners and customers. In many cases, the success of a solution-based offering depends on the ecosystem that underpins it. With the manufacturer, its partners, suppliers and customers all connected digitally within an ecosystem, they can share real-time insight and information, resolve issues and co-innovate. For example, using experience management tools, a manufacturer can capture critical customer experience data around their XaaS offerings, then analyze that alongside information about profitability and customer retention to optimize their offerings.
  • Leverage technology to accelerate digitalization. Efficiency and visibility are vital to the success of outcome-based services. When embedded into the processes behind these services, AR (augmented reality) can significantly increase productivity, reduce human errors, limit machine downtime, and enable manufacturers to improve operational efficiency and customer experience in maintenance and repair service scenarios. 

Now more than ever, your customers put a premium on predictability, guarantees and positive outcomes. Capabilities like these can enable you to deliver all that, with service-based solutions that are sustainably profitable.

 

Stefan Krauss is the senior vice president and general manager of Discrete Manufacturing Industries and Energy & Natural Resources at SAP.

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