Moving towards a service and outcome based business is a key strategic priority of industrial manufacturers. In talking to our customers, it is clear that focusing on new service offerings not only helps industrial equipment manufacturers combat commoditization of their products, it helps increase revenue and margins, as well as addresses rising customer expectations and delivers a more complete experience.
There are many example of this – see how INDEX, a machine producer has used a digital customer platform to expand their service offerings. Hoval, a heating producer is now offering Internet of Things (IoT)-based services. Kaeser Kompressoren, a producer of compressors, has gone even further and is reshaping it´s business model to provide “air-as-service” not just compressors to its customer base. And Tetra Pak has also extended their service offerings to include Profitability Services. Where they provide a range of outcome-based services.
TSIA, one of my favorite research companies, has issued the report The State of Services for Industrial Equipment Manufacturers. And reported very similar findings. Although the report was created before COVID-19 times. I believe that COVID-19 even has made the arguments even more compelling.
TSIA highlights that customers aren’t primarily asking for just product features anymore, they are demanding an optimized outcome from smart and connected assets. They suggest that a winning strategy is to offer services that aren’t directly linked to (and with that depending on) new product sales.
It is clear from the report – that improving service business and being able to move to a more outcome based approach requires a very efficient, digital and “intelligent” service process. And even more so now given the pandemic, new digital tools such as customer self service capabilities are more important than ever. The ability to provide services that help customers – such as reviewing performance data, to see how performance could be optimized, or when maintenance should be carried out – will be a competitive differentiator. Fundamental analysis of equipment data and benchmarking the data will allow industrial manufacturers to offer services that are value based – such as pay-per-use models for equipment usage, or optimization services.
All of this requires a digital value chain – and the ability to capture and analyze data to create value. I like the digital value chain concept, as it combines service offerings with the required underlying technology capabilities.
TSIA discusses Customer Lifetime Management, for which they have developed the LAER model (Land-Adopt-Expand-Renew). This is a nicely structured method of how to win, retain, and grow customers.
Industrial manufacturers often face the innovators dilemma – they need to create new service revenue streams, which requires digital capabilities built into their equipment, while protecting their existing service revenue – even if that means retrofitting capabilities in older equipment and providing more automation into their processes. So there needs to be a strategic alignment between all aspects of the company, development, service, legal, marketing and sales – as developing new business models is not something that the service department can do in isolation.
I found the advice that TSIA gave to be very practical. They suggest a holistic approach is needed to develop the entire portfolio and subscription base offerings and create a more recurring revenue stream. In addition, using the shared risk approach allows differentiation on how customers are treated. In parallel there will need to be organizational (and underlying technological) capabilities to go on this journey, which TSIA gives a concrete approach. What we at SAP have experienced from discussions with our customers from the Industrial Machinery industry is: most of them are already on their way, but with different individual speed and maturity level. This highly depends on the industry sub-segment the company operates in, and with that the requirements of the end customers.
Moving towards Servitization and outcome-based business models will be a journey for industrial manufacturers. Companies will need to be able to be flexible and adaptable. Innovating on products, as well as new business models and processes and then adjusting the processes as needed. We see customers moving from best practices, to next practices through to the vertical edge. To give you an example: we regard best practice as offering modular services and contracts only for own products, covering a broad range of services, from pure support to all-in services, with agreed service level agreements (SLA’s). Next practice is offering services and contracts for both own and third party products, with guaranteed outcome, i.e. performance, yield, cost, and with that taking over more risk and responsibility for the operation of equipment. The highest level – innovation at the vertical edge – is operating and running full customer production lines or even factories, taking responsibility for the customer’s complete production process.
SAP’s Industry Cloud recognizes the need for innovation and flexibility and SAP will be extending our industry specific solutions and collaborating with partners to offer even more solutions.
The SAP Industrial Manufacturing solution portfolio for Aftermarket Service and Outcome Business, will help companies grow service revenues and margins through new service offerings.
So stay tuned! If you like to learn more about this topic, feel free to get in touch with me.