transformation

It is a sobering fact that the future for manufacturers over the next 2 – 3 decades lies in selling consumption of outcome-based services, not in sales and ownership of manufactured goods. This is because manufacturing in the digital age is dynamic and the industry cannot compete solely on quality and cost any longer. This shift – Servitization – is a natural response to increased competition, fluctuating demand and rising market costs and, in some cases, sustainability pressures/drivers. A servitization model offers B2B manufacturers the potential to grow recurring and sustainable revenue streams. What are the opportunities and challenges facing manufacturers as they consider shifting from a make – sell business model to Product as a Service (PaaS) revenue streams? This blog will delve deeper into this subject.

Re-inventing Sales Revenues

In the automotive sector, manufacturers like Mercedes-Benz, BMW, Fiat and Volvo all offer car-as-a-service subscriptions, with the option for customers to change models over time when they wish. A study by Aston Business School found a 5 to 10% increase in growth rates and 25 to 30% reduction in costs for companies adopting a servitization model for their business. Servicing and repair have traditionally been seen as a secondary part of a heavy steel fabrication company’s operations. Products are invariably sold with warranties, and customers can also take out optional service contracts for service and maintenance. Service interventions are typically field repair for failure (reactive), maintenance-based (preventative) or, where a product is digitally connected, predictive. Servitization, however, sees a fundamental shift in the approach to, and shape of, service offers. In a servitized model customers can subscribe to business-related services that directly and pro-actively address their own strategic and operational needs. This is a world apart from focusing on product-related or technical issues alone – for example, the repair of pressure vessels. Recent research compared the financial performance of B2B manufacturers providing industrial services. It found that organizations offering predictive and proactive services, such as optimizing business processes and delivering business outcomes, generate the highest gross margin and enjoy increased recurring revenues and contract penetration rates.

Role of Technology

The business transformation required to introduce servitization is technology enabled and requires careful investment in digitalization and digital service eco-systems. It also requires a cultural shift to embrace unfamiliar business challenges. The way a manufacturer captures value is changing: it is no longer about producing products well; servitization is about engineering outcomes that create greater value for customers, whilst also collecting real-time data that can then be monetized. Manufacturing CFOs, for instance, are faced with the dilemma of pricing and selling an entirely new product as a service value proposition. The commercial aspects and the data monetization can be difficult to scope and product management software can help in that regard. Rigid manufacturers are used to cannibalizing the revenues of physical products. Whilst service revenues will take time to build, they will eventually outperform revenue from hardware sales. An effective corporate IT platform, with the ability to leverage data and digitalization, is a pre-requisite of any pivot towards PaaS offers. A service-based model also means that maximizing product performance and longevity becomes more important than minimizing the cost of production.

Finishing Touches

Manufacturers and fabricators are gradually understanding that when they start selling outcomes, it allows organizations to differentiate and move away from commoditized saturated product sectors. Solutions are expected to emerge where manufacturers can manage production, distribution, maintenance, and service operations on a single platform, all informed by a unified database. It is time to find higher value, and more difficult-to-replicate products and services – and manufacturers need to bring their A game to the table!