Planning for a Product as a Service (PaaS) World

Ed Marsh | Apr 20, 2018

What would your business look like if "capital equipment" wasn't sold anymore

Introduction to SignalsFromTheOP

Guide to episode

  1. Software as a Service (SaaS) grew very slowly until it suddenly took off - now most companies use that model
  2. Many assumptions, tradition and inertia keep traditional capital equipment sales anchored in a purchase model built on down payments and final payment after installation
  3. Increasingly buyers whose expectations are shaped through their consumer experiences will look for similar arrangements in B2B industrial sales
  4. That will create exciting revenue opportunities for proactive companies, and trauma for others - and it requires adaptations to manufacturers' digital and business strategy

Transcript follows

Hi, I'm Ed Marsh. Welcome to this episode of Signals from the OP.

On Signals, I talk about issues that are emerging that are going to impact the ability to grow revenue for industrial manufacturers. Today I'm going to talk about a term that may not be common in your lexicon yet, but I believe it's going to be, PaaS, Product as a Service.

But let's start with something simpler. If we were sitting together I'd ask for a show of hands, so wherever you are show me your hand if you use software online. By that I mean, QuickBooks online, et cetera. Most of you have your hands up, because honestly Software as a Service, or SaaS, S-A-A-S, has become pretty ubiquitous.

I mean it's a solution, it's better for many reasons, but it took a mind shift and the IT Department that used to have a lot of clout in the organizations, because they managed those banks of servers and install the shrink wrap software. Were responsible for upgrades and updates and backups and all that kind of stuff, they weren't so keen on the change.

All right, next question, who uses an online product? Something like Apple Music, Spotify, online courses, Netflix maybe? Again most of us, many of us. It's convenient and it gives us options and it's affordable, it's economical.

Final question, who uses online platforms, like Airbnb or Uber, or LinkedIn for recruiting? Almost everybody right? It's easy, it's convenient, it's affordable, it's effective, so we all do.

All right, trick question coming now. How many capital equipment companies have adapted their model to reflect these kinds of changes and buyer expectations that we see with these above examples? The reality? Of course basically none. My argument is that, that's going to start to creep in, because Product as a Service or PaaS, P-A-A-S, and product service systems' kind of a related cousin, are going to start to get traction. I would argue the days are numbered where a manufacturer would receive an order, get a chunk of down payment, buy the raw material, build the machine, receive more down payment. Ship the machine, get paid, file NET30 upon installation or whatever the case maybe.

Buyers expect a different kind of experience now. Certainly there are some legacy engineers, there's some legacy capital planning expectations. There is a lot of inertia to overcome, just like there was with Software as a Service. But rising generations of finance and engineering and operations people have grown up as consumers experiencing these other kinds of consumer experiences. Begin to just kind of frame their worldview in the context of that's how you buy stuff, that's how you acquire it to use it.

That means that they're focused on outcomes primarily, and not just the hardware. They're not focused on how many horsepower in the car. They're focused on getting there with an Uber. They're not focused on how many stars a hotel has. They're focused on finding an Airbnb to stay at and the place that's convenient, is going to be most related to their experience.

Similarly, in the industrial world, and increasingly we're going to see buyers that are less focused on the specs of the machine and more focused on outcomes, and not just the hardware outcomes. They're going to be looking at other stuff. So that means monitoring and expertise, consulting, data logging, insights and reporting, alarms, goals, metrics and all kinds of stuff.

So the good news is, that creates a whole lot of opportunities for new products and new services, in addition to accumulating a lot of data that I would also argue could be monetized in a number of other ways.The bad news and obviously there's a bad news that goes with it, it changes the cash flow and working capital model for many companies You've got a lot of folks that are presidents, founders, owners, GMs, CFOs with companies that are involved in complex sales. They have long sales cycles and long lead times, building capital equipment they just can't conceive of another way to run their business.

The other thing that's happened, certainly some companies have taken early stabs at this. They've dabbled and they've failed, and so now they've decided and others that have heard their stories, have decided that buyers for instance won't buy monitoring 'cause of fire walls in their factories. So are there technical hurdles along the way? Absolutely, were there barriers and resistance to SaaS software? Absolutely, but that's become the defacto standard now. The same will happen in the industrial world. Just like companies used to buy banks of servers and install shrink wrap software and then fail to buy the service contracts. So then the software wasn't upgraded, then they couldn't get the support they needed. Companies have struggled to do the same kind of thing with some of the early attempts at this sort of a set up.

But those aren't going to define what's going to happen over the long term, the buyers are going to define it. The buyers expect these much bigger sorts of capabilities and outcomes, and insights. So the change is coming, the question is whether your company is considering how it can succeed in a PaaS sort of a world. If not, I think you're leaving yourself exposed. If so you probably have a lot of uncertainty, a lot of ambiguity, a lot of fogginess around what it's going to look like and how you're going to work it. That's okay, the important thing is to begin to think to have those conversations.

Maybe what you do is you start to build some sort of a small pool of used or reconditioned equipment that lets you begin to experiment with some of these. Maybe you have a particularly forward thinking customer that'll let you begin to do some monitoring. I can tell you, as far as monitoring goes, which is often the first impediment I encounter when I talk to people about this. There are a lot of really cool systems now that are independent of fire walls, that give you great dashboard views that can be easily manipulated, monitored from remote locations as well as within the factory. So the stuff is there, the technologies there, we just have to catch up our business models and our expectations.

But I would advise every capital equipment manufacturing company to start to seriously think about how they will operate in a PaaS world. What other products and services they'll be able to sell alongside the kind of diminished or incremental sale of the equipment, as opposed to that capital chunk. This is the kind of thing I do on Signals from the OP, I take these topics, often thorny, sometimes controversial and I try to unpack them a little bit, just to prompt some thinking. If you liked this I'd welcome you to subscribe, you can do that

I'm Ed Marsh, thanks very much for joining.