Previewing The Servitization Journey for Manufacturers

Ed Marsh | Jan 26, 2022

Imagine if You Didn't Sell Machines - Your Buyers Are Already There!

Introduction to SignalsFromTheOP

Guide to episode

  1. B2B Buyers are gradually bringing their B2C consumer expectations to business procurement. That means that trends like subscription purchasing is gaining traction in the B2B space.
  2. Capital equipment manufacturers face challenges as they think about transitioning their financial, sales and service models from transactions to ongoing financial relationships.
  3. There are various hurdles to overcome.
  4. There are substantial benefits, including competitive differentiation, for companies that start the process.

Transcript follows:

Hi, I’m Ed Marsh. Welcome to this episode of Signals from the OP. In these videos I work to share emerging ideas for senior management of middle-market industrial manufacturers - in digestible chunks.

Today’s topic is servitization. I’ve touched on this in the past in discussions of PaaS (product as a service) and Product Service Systems. Zuora, the subscription billing business that sprung from Salesforce, has coined the expression “Access vs. Assets.” The premise is the same – recasting your business and customer relationships based on the capability your products, services, and expertise create – rather than those discrete elements.

In other words, instead of selling a machine that does x, runs Y speed, and requires an ABC table of preventative maintenance and parts, you’d sell the capability for your customer to produce certain output. This could be according to a piece rate, or a contractual time-based period. Either way, it’s a dramatic shift, and one that every capital equipment manufacturer should be preparing for in their business strategy.

I recently had a great conversation with Neil Tumber of The Advanced Services Group discussing this topic. I’ll drop a link below if you’re interested in a deeper dive. For now, let’s look at why this idea is gaining steam, the implications for companies like yours along with some challenges it entails and benefits it can deliver.

First, why change if the current model isn’t broken. That’s what you’re thinking, right? Fair point. But just because it’s the same as it’s been for some time – you know, sell a machine, received progress payments which provide working capital, deliver the machine, then provide a menu of products and services including training, tech service, warranties, replacement parts, upgrades, trade-ins, etc. You’ve built your financial model around that and you’ve come to live with the ebbs and flows.

Before we declare that nothing is broken, though, let’s remember that there are different parties to the transaction. Additionally, there are large market trends that impact business norms. So even if it’s worked for you and continues to, and even if it’s worked for your buyers, and seems as though it continues to, there are changes in market expectations that are migrating from B2C to B2B. At some point, those expectations will reach a tipping point and business buyers will expect it because they’re building their financial and production models around those expectations.

So as the market changes, if you remain the same, that creates incongruities – in other words, the traditional model of capital equipment sales will break precisely because it doesn’t change regardless of how any of us feel about it.

I get it. It’s not necessarily a pleasant prospect for you. You’ve worked hard to optimize for the current model. Replacement parts are a large and profitable part of your business. Your sales team sells projects. Your service team typically responds to break-fix situations. Perhaps most importantly, your financial model is built on these assumptions.

When this topic comes up with companies like yours I often hear concerns expressed about the IIoT aspect – after all, in most cases, these PaaS situations rely on connectivity to monitor current and developing conditions and to collect data that’s used to improve performance.

And companies are hesitant to connect their core production equipment to the outside – and more so as more stories of ransomware attacks emerge. Further, I find concern about the technical hurdles of building that infrastructure – designing it into machines and monitoring/logging. It’s true that those will often be mentioned as barriers and are implications worth understanding. However, rest assured, that there are reasonable solutions to both.

There are some important challenges and benefits to consider as well.

Let’s put aside, for now, the primary benefit – becoming a better solution for customers and gaining incremental competitive sales, and it’s corollary, not losing competitively because another offers it and you don’t

The challenges include:

  1. This is a significant change management undertaking. Many of the core embedded assumptions in your business will be disrupted by this. That means that CEOs, boards of directors, and other senior leaders will need to articulate a clear vision and compelling reasons – and continue to do so.
  2. You’ll have to retrain sales – from selling assets – machines or products – to selling access – the production capability
  3. Finance will have to adapt as there will be a transition impacting cash – if you receive subscription payments gradually instead of progress payments for machinery
  4. You’ll probably have to adapt your service scheduling and delivery model, as well as staffing. The Product Service System model will likely include more proactive service delivered by your team or field channel partners
  5. And as noted above you’ll have to address some technical capability

There are clear benefits as well. These include:

  1. Significantly higher profitability
  2. Smoothed revenue cycles and easier business planning
  3. Happier customers
  4. An opportunity to aggregate data that will help you consult individual customers to optimize their process, and collectively to understand production issues globally that impact your equipment. This data can be monetized in a number of ways.
  5. And as noted above, you’ll create a competitive advantage

So servitization can certainly feel daunting – particularly when everyone is stressed just managing current workloads.

The harsh reality is that the market doesn’t care. Rising generations of engineers view the world through this lens and procurement is starting to find efficiencies that they’re leveraging.

So while you might ignore it or hope it goes away, it’s probably better to start understanding what’s involved and perhaps taking some exploratory or capability steps. Neil and his team may be a resource.

In addition to the link to access the recording and documents from my discussion with Neil, I’ve also added a link below to an article from Zuora discussing how industrial manufacturers can begin to think about the journey.

I’m Ed Marsh. Thank you for joining me for this episode of Signals from the OP. If you enjoyed it, please share it and subscribe – either to my YouTube channel EdMarshSpeaks.TV or at the related blog

Zuora article