COMPASS: How are the business models of industrial equipment (IE) manufacturers changing, and what has brought about this change?
Vele Galovski: IE manufacturers’ business models have always revolved around making a product, selling the product, and then shipping the product. With the exception of the occasional support and maintenance contract to keep the product running, anything after the sale has always been the customer’s responsibility. The customer was generally responsible for owning, operating and using a product to achieve their business outcomes.
But this is now changing. Customers are increasingly wanting IE firms to not only make, sell and ship great products, but to own and sometimes even operate them, and to assist them in achieving the return on investment that was promised in the original sales call. This is what we mean by ‘equipment as a service’ (EaaS).
Customers don’t care about the product or the features anymore, they care about the outcome. A new generation of IE manufacturers is realizing this. The rules of the game are changing thanks to the ubiquity of new technology such as sensors, machine learning, artificial intelligence (AI), analytics and the cloud.
How does EaaS differ from traditional lease offers?
VG: Equipment as a service means many things to many people. Some people incorrectly define it as any type of subscription offer where the customer pays for access to the technology as an operating expense [OPEX}. A standard lease would fall into this category and should not be considered EaaS.
To create a true ‘as a service’ offering, you must go beyond the OPEX payment method and focus more on the value-added service provided. For instance, a company that traditionally sells air compressors as a capital expense [CAPEX] purchase can now offer ‘compressed air as a service’, in other words, cubic meters of compressed air consumed. Included in the ‘as a service’ fee, the original equipment manufacturer [OEM] provides the compressor, on-site maintenance services, remote services, air treatment systems and logistics services. This fits the longer-term industry trend of OEMs shifting from selling units to selling consumption.
What challenges does this present to IE manufacturers?
VG: Running a business according to these new rules is fundamentally different from the traditional capex model that IE manufacturers have been used to. In fact, there’s an exhaustive list of challenges.
Customers are increasingly wanting IE firms to not only make, sell and ship great products, but to own and sometimes even operate them, and to assist them in achieving the return on investment that was promised in the original sales call. This is what we mean by ‘equipment as a service’ (EaaS).
The old way of working saw IE manufacturers receive at least 80% of their revenue from the customer upfront. But now the whole economic engine is changing. The risk is shifting to the manufacturer, and now they have to install their product and provide demonstrable success before there’s any chance of getting paid.
Ultimately, this is a change of huge proportions, which will have a significant financial and cultural impact.
What are the key areas of focus for IE companies looking to succeed with this new way of working?
VG: First,IE manufacturers need to put a greater onus on ensuring their products are of the highest quality. After all, if something goes wrong, it’s now on them to fix it.
But that’s not all. Perhaps most importantly, they need to embrace owning technology and get to grips with everything from sensors and telemetry through to data analytics – key things which are imperative to their success.
It’s the evolution of these digital technologies that is both enabling transformation and driving disruption all at the same time. Low-cost sensors, for example, have opened the door to getting greater value from EaaS, since they offer a way for IE firms to monitor, track and measure what their equipment is doing. As a result, equipment manufacturers are rushing to incorporate sensors in all of their products, primarily with a focus on monitoring product performance.
Does the change from sell to sense-and-respond change the challenge and the opportunity?
VG: The hard part is connecting these sensors, not only with the cloud, but with each other, allowing devices to communicate with one another within a single operating environment, or to ‘home base’ [the manufacturer] to report performance in real-time. This enables suppliers to move beyond monitoring of the physical product and create value-added services based on insights gathered from device usage data.
Utilizing these insights effectively will be the key to success. The advent of low-cost storage allows companies to collect and store more data, which can then be used to help identify equipment failures, predict when a failure will occur and provide insights on the optimal operating environment.
These monetization opportunities are the reason why the data collected from sensors will ultimately become more valuable than the physical product itself. With this in mind, I believe that those IE manufacturers that will experience the biggest success will be those that implement a digital platform so that they can close the gaps on digital transformation and manage everything all from one place.
How do you see EaaS evolving in the future? Will the traditional product-selling model disappear?
VG: Unfortunately, I think IE manufacturers will need to do both – essentially, they need to meet the demands of their customers, whatever they may be. Some customers will always want to own their own equipment, but I definitely see a time where EaaS becomes a more favorable option for many. It’s also possible that we will move toward a hybrid model, where vendors sell their product for a lower fixed price and then they get additional revenue on usage.
Vele Galovski, Vice President, Support and Field Services Research, Technology & Services Industry Association (TSIA)
For more than 30 years, Vele Galovski has driven business model transformation in a diverse set of industries, including technology, financial services and business services. At California-based TSIA, the world's leading research organization dedicated to helping technology companies achieve profitable growth and solve their top business challenges, he enables companies to transition from traditional capital expenditure (CAPEX) to annual recurring revenue (ARR) business models based on value realization and improved customer business outcomes.