Digital Transformation & Customer Centricity for Industrial Manufacturers – Part Four: New Business Models
This is my fourth blog in a series covering customer centricity in a digitalized world, now focusing on new business models for industrial manufacturers. Check out my first blog, second blog and third blog on customer centricity, and my blog on “Equipment-as-a-Service for industrial manufacturing companies”.
From Selling Products to Solutions to Equipment-As-A-Service
Digitalization is an enabler for new business models in industrial manufacturing. Indstrial manufacturing companies typically sell products and services or provide bundled solutions, some already started to also offer equipment-as-a-service (charging their customers for the outcome):
- products such as (configurable) machines, equipment or parts
- aftermarket service
- value-added services
- solutions, by bundling products with
- other products
- value-added services
Extending the aftermarket service offerings (maintenance, repair) could be an interesting area for profitable growth, e.g. also servicing machines and equipment from other vendors or providing service in select markets through partnering with other service companies. Especially for those manufacturing companies who already achieve higher profit margins in service than in their products business.
Value-added services (including professional services and performance services) is another interesting area for profitable growth or increased customer satisfaction. Like a European bearings manufacturer who started to produce and sell bearings, later on added services to the portfolio to help its customers to mount the bearings (as per request of its customers), and now also offers predictive maintenance and service, e.g. for its customers who use larger bearings in vessels: monitoring the bearings (vibrations, temperature etc.) to maximize the up-time and also to lower the lifetime costs, since the need for repairs can be identified much earlier and the repair can be scheduled for reduced repair costs (e.g. the bearing can be repaired when the vessel arrives at the harbor, where a cheaper repair is possible).
Industrial customers expect complete solution bundles including hardware, software, service, and financing rather than a basket of individual products. Industrial manufacturers need to rethink their core value-added activities performed in-house and how to orchestrate business networks of specialized partners externally for increased revenues streams, as complete solutions have higher perceived value.
Digitally-enabled manufacturing companies drive new business models in highly competitive markets through performance and outcome based contracting, such as equipment-as-a-service. They need to rethink how to increase customer intimacy while jointly sharing risks and maintaining profitability. There is great opportunity in extending business models by moving from selling products (CAPEX) to selling performance (OPEX), invoicing customers based on actual consumption:
- customer billing is triggered when the output is actually consumed
- aftermarket service strategies become an integral part of service level agreements
- built-in digital capabilities enable integration into fulfillment processes
- manufacturing companies become part of their customers’ processes and sources of further value-added services
While offering equipment-as-a-service has been a successful business model in select areas such as office equipment (customers to pay for their consumption, e.g. per print out or copy, instead of buying printers or copy machines) or for Rolls Royce’s 50+ years old “Power-by-the-Hour” model, it is still not a typical business model for manufacturing companies. And most probably it will not be for the majority of them in near future. However, more and more manufacturing companies need to consider this business model and make a strategic decision. E.g. while the equipment-as-a-service model is attractive for the customers of a compressor company (e.g. Kaeser Compressors), it is not yet appreciated by the customers of food packaging equipment manufacturers (as per my recent discussion with some of these companies). Other manufacturing companies, such as coffee machine manufacturers are analyzing if the equipment-as-a-service model would be appreciated by their industrial customers (“pay per cup” model).
For more information on what need to be considered when offering EaaS please read my blog on this.
In any case, the next evolution of business models (including equipment-as-a-service) are being driven by digitally-connected equipment combined with business data and 3rd party information and digitally orchestrate the entire value network for selling customer-specific solutions. Equipment-as-a-service requires connected products to make this model cost-attractive.
Why Manufacturing Companies Need to Have an Answer on “Equipment-As-A-Service”
Manufacturing companies are looking for differentiators to drive profitable growth even in highly competitive markets, and their customers are interested in
- lowering the TCO of the products they buy from them
- enhancing their business agility
- reducing their capital investment expenditures – e.g. “turning CAPEX into OPEX”!
Equipment-as-a-service is an interesting business model in this game and a new trend for larger enterprises (e.g. enterprises in the oil and gas industry). As a consequence, more and more manufacturing companies need an answer on this topic to stay competitive and win against their competitors who might already provide equipment-as-a-service, being already prepared to offer this model in a cost-attractive way. They need to check
- if they could cover this model with their existing business processes and software
- if they could charge outcome-based services (through usage-based billing)
- which other pre-requisites would need to be fulfilled
For those who are not really under pressure from their customers, this model could be even an opportunity to further differentiate against their competitors in a highly competitive market – especially when the products are no longer the differentiators.
“The aggressive use of data changes business models, enables new products and services, creates new processes, creates more benefits and provides for a new management culture,” says Professor Walter Brenner, University of St. Gallen. While previous digital transformations were only concerned with one new issue at a time, such as the PC or the Internet, now several things such as IoT, Social Media, E-Business 3.0, tablets and smartphones are happening at the same time. Brilliant ideas result in a “quantum leap with a data aspect”, says Brenner. Source: news.sap.com
Connected Equipment and Industry Asset Networks
Industry Assets Networks are the next step in this business model evolution: Building a digital network for equipment or components, enriched with external data is the foundation to offer value added services, software applications, and cloud solutions. In tomorrow’s world, insight into machine data combined with external data like business or environmental information will be the sources for immense competitive differentiation. Manufacturing companies will have the opportunity to build industry asset networks and offer software applications to increase the value provided to industrial customers. New services can be offered by collecting machine, business, and 3rd party data on one technology platform:
- machine information can be leveraged to enable smart manufacturing, service, and logistics networks
- information, such as machine data, can be resold in digital networks, as OEMs become “data brokers”
- software solutions can be developed and sold in an application service marketplace
Check out this blog which provides further information on industry asset networks for manufacturing companies and another blog on SAP Asset Intelligence Network.
How to Get There
In order to offer equipment-as-a-service in a cost-attractive way, manufacturing companies should ensure that they could
- keep the up-time of the equipment on a maximum level – through monitoring of the equipment and predictive analytics
- keep the maintenance costs on a minimum level – through performance-based maintenance instead of regular maintenance
- keep the repair costs on a minimum level – through predictive maintenance and automated service processes
- keep the admin costs on a minimum level – through offering self-services so that the customers could maintain their profile data
- get full transparency in operations – through easy-to-understand analytics, considering the information about similar products from other customers
New technologies (including in-memory such as SAP HANA for big data analysis and predictive analytics) and standard end-to-end solutions for the IoT space (such as SAP’s Predictive Maintenance & Service solutions) with full integration into SAP’s core transactional systems enable manufacturing companies to connect their machines and equipment to collect large volumes of valuable data, analyze and predict to increase up-time and lower the lifetime costs – without the need to develop proprietary solutions or being limited to a smaller set of data.
The minimum you need to be successful with an equipment-as-a-service model is the ability to
- connect to your products
- manage a larger data volume
- analyze the data
- predict issues
- automate the end-to-end processes to reduce the manual work to a minimum
- charge per outcome
And, of course, your products need to be ready to provide the required data.
There might be different reasons why manufacturing companies need to think about their business models across selling products, solutions or services:
- products are no longer the differentiator
- companies wanted to increase their business with new offerings, e.g. driving service contracts business, monetizing software
- their customers will demand new business models
- new technologies would enable new types of valuable business, e.g. IoT enabling outcome-based services
The good thing: to digitally connect equipment no longer requires home-grown solutions and is no longer limited to collecting and analyzing limited data volumes. Standard solutions such as SAP’s Predictive Maintenance & Service and other SAP IoT solutions are not just capable to collect and analyze high volumes of data, they are also integrated into SAP’s core transactional systems for fully automated end-to-end processes and provide valuable capabilities such as predictive analytics with nice visualizations.
Digitalize your customer experience with SAP! SAP provides a single platform that brings together marketing, sales, services, and commerce to ensure seamless digitization of the entire customer experience. SAP Customer Engagement and Commerce powered by The SAP Cloud Platform enables a 360-degree view of your customer, real-time interaction and sophisticated predictive analytics, fully integrated into the core transactional system. SAP provides valuable solutions supporting the digital transformation through new business models such as equipment-as-a-service: SAP Hybris Sales Cloud, SAP Hybris Service Cloud, SAP Leonardo, SAP Cloud Platform IoT Edition, SAP Hybris Revenue Cloud and more to come. For more information check out the SAP Solution Explorer.
Looking forward to your responses and new ideas on how manufacturing companies leverage Digital Transformation & Customer Centricity to grow their businesses and attract their customers.
Dietmar Bohn is a Vice President of Industry Solutions Management at SAP SE, focusing on customer centricity and digital transformation. He brings more than 15 years of CRM experience from both outside and inside SAP and more than 25 years of industry experience. Dietmar has held various executive roles spanning CRM strategy projects, CRM implementation projects, CRM development and CRM product management. Before joining SAP, Dietmar has held different management positions in R&D, IT and Global Sales & Marketing organizations at Heidelberger Druckmaschinen AG. Dietmar holds degrees in Electrical Engineering and in Telecommunications.