August 2018: Servitization and an Outcome-Based Economy

The IoT is helping companies work smarter not harder.

It’s a connected world, brimming with the promise of an IoT (Internet of Things) that delivers reduced costs, increased profitability, an enhanced brand experience, and an optimized customer experience. If businesses want to float instead of sink, all they need is a good old-fashioned digital transformation. Easy, right?

On one hand, pursuing a digital transformation by leveraging the IoT is becoming quite common. MuleSoft’s 2018 Connectivity Benchmark Report says when it comes to digital transformation, it’s a case of when not if, and within the past year, the report suggests organizations have moved beyond planning to execution.

For instance, 74% of IT decisionmakers say they’re currently carrying out digital-transformation initiatives, and an additional 23% say they’re planning to do so within three years or less. 

Organizations’ business goals prompting a digital transformation sound all too familiar: increasing IT’s operational efficiency (83%), improving customer experience (71%), and increasing business efficiency (70%).

On the other hand, while pursuing a digital transformation is quite common, it’s not proving to be easy for many companies. In fact, some say a whopping majority of the companies that undertake a “digital transformation” will fail. When companies implement technology solutions, they start generating a lot of data they didn’t have before, and whether this data reflects customer experiences, asset performance in the field, or something else, this data is meaningless on its own.

It needs to be put to use in a way that drives decisions, informs the development of business strategies, reinvents operational processes, and opens doors to new opportunities that drive revenue, such as services based on new or existing IoT products.

Sam Tawfik, IoT program director at Northeastern University, says the benefits of the IoT are directly tied to business imperatives, and the challenges associated with the IoT are related to the maturity of the technical solutions. These challenges typically fall into either data challenges or connectivity challenges. “Data challenges include the ability to move and manage massive amounts of data while reducing complexity and controlling costs,” Tawfik says. “The challenges with connectivity include the ability to deploy sensors and to economically connect and monitor the machines in carpeted (i.e., headquarters) and non-carpeted (i.e., factory floor) environments.”

Tawfik says companies are utilizing the IoT to gain deeper insights into their businesses and their supply chains. People data is being used to optimize operations and increase employee and customer satisfactions, network data is being used to maintain high-quality communications and collaborations, and fleet data is being used to optimize routes and asset tracking for agility in responding to business demands. Companies are also leveraging the IoT to bring new data sources from the network’s edge to create feedback loops, which Tawfik says maximizes automation while reducing costly and slow manual interventions.

Working Smarter Not Harder

Rob Patterson, PTC’s vice president of strategic marketing—technology platforms, says the IoT is shifting the sources of value and differentiation to software, the cloud, and service, while spawning entirely new business models. “To capture this great wave of value creation opportunity, companies have an urgent need to rethink nearly everything—from how products are created, manufactured, sold, operated, and serviced,” Patterson says. “Those who don’t are placing their current competitive advantage at risk. Those who are able to quickly identify the opportunities (the) IoT provides and deliver market-ready solutions will share in the value expansion and be the leaders of the next decade.”

Feedback loops are a way companies are leveraging the IoT to work smarter not harder. “Companies are using IoT data to gain insight into product usage and performance so they can better design products in the future,” Patterson says. “The same goes for operational processes within a company. Companies look at operation performance to streamline processes and minimize risk within operations using the data generated by their connected assets.” For example, a company may use the IoT to collect data about how its products are actually being used by customers. This data could then be fed back to the company’s R&D (research and development) department, which could use this feedback to shape future product design.

Sam George, director of Azure IoT for Microsoft, defines a digital feedback loop as a “live” connection between a business and its most important constituents—their products and assets, their operations, their customers, and even their employees. “For most customers, these are not connected today, which results in significant inefficiencies,” George says.

“For example, take a company with a manufacturing asset like a packaging machine.  When that packaging machine breaks down, it means production grinds to a halt. (The) IoT enables a digital feedback loop where customers can monitor these machines and use analytics to predict their maintenance needs so they never have unplanned downtime.”

For companies that make products, harnessing the digital feedback loop the IoT enables offers tremendous benefits. “For example, a company that used to sell refrigerators can now take advantage of (the) IoT and build applications for their users that monitor the refrigerator and proactively contact customers if an issue is about to happen,” George explains. “Imagine being a customer that gets notified about a pending failure along with an offer to make a service appointment. That customer is much more likely to be delighted and stay with the brand. For companies, it means gaining access to how customers are using their products, so they can improve future generations. And that’s just the beginning of what’s possible.”

This predictive-maintenance model is another way to work smarter not harder. Organizations can study data associated with their equipment to determine the risk of future failures and then take pre-emptive measures based on this data to reduce or even eliminate unnecessary downtime.

“Remote monitoring of assets and predictive maintenance seem to be ‘IoT 101’ for many companies,” adds PTC’s Patterson. “As organizations become more and more advanced, they’re moving towards things like simulation and prescription to maximize the opportunity to increase efficiency and savings within their operations.” By getting ahead of an issue instead of reacting to it, companies can streamline maintenance schedules, experience better reliability and improved safety, and avoid emergency shipments of replacement parts, which can all lead to lower business costs.

Finally, Patterson says more companies are working smarter by creating new products or “IoT-izing” existing products to create new offerings. With these new offerings comes new services—i.e., upselling opportunities. Services based on IoT products can generate new revenue streams by automatically identifying potential problems for customers and laying the groundwork for proactive maintenance and a long, established relationship between customer and supplier.

“Those who are able to quickly identify the opportunities (the) IoT provides and deliver market-ready solutions will share in the value expansion and be the leaders of the next decade.” –Rob Patterson, PTC

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Mark Homer, vice president of global customer transformation at ServiceMax from GE Digital, says industrial productivity growth globally was at 4% year over year for more than 20 years, but since 2011, that productivity growth has declined to 1% or less. To combat this, companies are turning to the IoT. “There are many drivers around IoT—boosting productivity, driving efficiency, gaining greater insight into how customers use your products and services, and exploring new opportunities,” Homer explains. “I think if you’re a CEO, you don’t really have a choice. Invest in digital transformation now if you have not yet done so. For me, it comes down to the choice of business survival versus extinction. IoT is part of that survival, and you can’t afford to ignore it.”

Homer says in this world of IoT-led digital transformations, businesses are moving to outcome-based, servitized business models in which monetizing service and harnessing field service data is critical to success. In fact, research by VansonBourne suggests companies expect a revenue boost of about 14% by automatically collecting, aggregating, and analyzing service data related to industrial assets, and for every $1 invested in successful service data collection and usage, companies expect an average return of $4.44.

An outcome-based business model focuses on the outcome for the customer rather than a specific product, and it could be the primary way the economy operates in the future. In an outcome-based business model, customers receive extensive maintenance and support services after they purchase a product, which nurtures the customer-supplier relationship. Because customers pay per outcome in this business model, the customer is always left with the right outcome.

Many businesses are already on board with this idea. About nine out of 10 (89%) respondents in VansonBourne’s study believe that a move to more outcome-based business models will enhance the way their industry operates, and 82% say servitization will make their companies more competitive than ever before. Nearly all respondents (95%) who reported their organizations are not currently operating with an outcome-based business model say their organization is working toward this model or plan to work toward it in the future. As the servitization trend and the appetite for outcome-based contracts and business models continues, Homer says Gen Z will probably be the last generation to experience an economy dominated by products without embedded services or outcomes.

“Coupled with servitization, (the) IoT lets many kinds of companies shift from selling products to selling services based on those products,” Homer adds. “Your decision as a business or as a manufacturer is not whether to adopt this model, as it is inevitable. Focus instead on how you can transform, or in some cases establish, your services department, empower your field-service technicians with the right skills and field service management platform, and align your organization with service outcomes, not simply products.”

As more companies realize the value of servitization and adopt outcome-based service offerings for their growing number of IoT-connected devices, this sharpened focus on service and outcomes will cause a ripple effect on business models. For now, though, a lot of opportunity is being left on the table. “The advent of connected equipment assets, industrial platforms, and servitization has made service data more valuable and strategic than ever before, yet it remains under-monetized for most companies,” Homer says.

A step in the right direction is when suppliers talk to their customers about outcomes instead of or in addition to products. In fact, as the term “IoT” becomes crowded and, therefore, less meaningful, PTC’s Patterson says more and more vendors are making the choice to talk less about “IoT” and more about the actual use cases and outcomes realized from the use of the IoT. This, along with a greater shift toward an outcome-based economy, could help boost IoT adoption, ultimately spurring industry growth and supporting IoT innovation.

For companies just starting out on their digital transformation journey, Patterson says a few keys to success are to start small, show value, and grow use. “Don’t try and solve the world’s problems in one project,” he says. For all companies, no matter where they are in their digital transformations, it’s a good idea to look for ways to work smarter not harder. Start by figuring out how to contextualize and analyze data from devices, machines, assets, and equipment as well as people (customers, potential customers, employees, etc.) and environments.

Use this data to drive predictive maintenance, to create new services based on new and existing products, and, ultimately, to provide customers with the outcomes they want and need.

At Microsoft, Sam George says they’re seeing a dramatic increase in IoT adoption across industries, and if a company isn’t taking advantage of the IoT, there is a good chance their competition is. “The digital feedback loop we talk about for (the) IoT isn’t something you do once and are done with,” he says. “Each IoT project a company does leads to further insights, which lead to more sophisticated and profitable projects. As one of our customers told us, every day you don’t take advantage of (the) IoT is compounded … (and) there has never been a better time to start your IoT journey.”

“The advent of connected equipment assets, industrial platforms, and servitization has made service data more valuable and strategic than ever before, yet it remains under-monetized for most companies.” –Mark Homer, ServiceMax from GE Digital

Want to tweets about this article? Use hashtags #M2M #IoT #servitization #predictivemaintenance #maintenance #IoTservices #data #fieldservice #assets #assetmanagement #operations #digitaltransformation

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Guest Contributors

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