Industrial giants borrow a page from the tech playbook
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If you’re an executive at an industrial company, you’ve likely been grappling with the industrial Internet of Things. The rapid development of technologies that connect every part of our lives has moved from our smart phone to the jet engine. There’s perhaps no greater testament to the importance of this connectivity than General Electric’s massive effort to rebrand itself as the “digital industrial” to attract the world’s best technologists. IoT’s emergence is causing leading manufacturers to rethink their go-to-market strategies and take a page from the technology playbook: subscriptions.
Zipcar for manufacturing?
Historically, manufacturing companies and OEM providers have operated in a capital expense (CAPEX) environment, meaning their revenue has come from selling a certain component or product to another company in a one-time, upfront transaction. The shift to a subscription model, or operating expense (OPEX), means manufacturing companies and OEM providers can now generate recurring, long-term revenue from the successful operation of, rather than the sale of, their products.
The companies that invest in this new model now will ultimately reap the rewards.
This new approach creates a smoother stream of cash flow for providers, while customers are assured that they have the most up-to-date products and that they’re only paying for what they need.
Think of it as the Zipcar model for manufacturing. Customers are not purchasing the vehicle, and thus are not responsible for the risks associated with ownership (repairs, insurance, storage, etc.); they simply pay for the operational benefit of having a car. It has already proven successful: Gartner’s Building a Strategy for the Subscription Economy report shows that “about 35 percent of global industrial enterprises project[ed] five percent incremental revenue from subscription-based services in 2015.”
Subscriptions and IoT
The subscription model will only be successful if the manufacturer offering the subscription has a way to track and manage the performance of that part or product remotely. If a company is paid on the successful operation of their product, it has to ensure that quality never slips. Here are a few early success stories that show the impact this model is having on the sector:
- GE Oil and Gas and Diamond Offshore recently announced the first performance-based Subsea Blowout Preventer (BOP) service agreement. The partnership gives Diamond the right to pay based on the operational performance, reliability and availability of the GE product rather than purchase the product outright. GE’s advanced technology has allowed Diamond to track and monitor the performance of the BOPs, enabling this subscription-based model to succeed. As president and CEO of Diamond Offshore Marc Edwards has noted, GE would not be able to sustain the cost of maintaining the BOP unless it had a superb understanding of its component reliability.
- Quaker, a chemical corporation, adopted a subscription model with General Motors to tie Quaker’s compensation to the quantity and quality of the services it delivered. No longer responsible for the amount of product sold, Quaker is now compensated based on the successful delivery and management of its chemicals. The structure of the contract encourages Quaker to look beyond material savings and seek process savings. To monitor process savings, Quaker uses cloud-based statistical software, allowing the company to pinpoint issues in the new process. This model will become increasingly common as predictive analytics in the cloud permeate the sector.
- Manufacturing giant Emerson has created a suite of products and capabilities that enables it to offer a full process-improvement solution. The alignment of interests between Emerson and its clients is a win-win: Emerson is compensated for improving process efficiency while customer cost is reduced. The results have been compelling, as seen in the operational efficiencies realized on Jurong Island in Singapore. By structuring the contract to be mutually beneficial, the island has been able to avoid 450 kilotons of CO2 emissions and drive $150 million in savings.
As IoT advancements shift the economy toward an outcome- and performance-based model, industrial companies will increasingly explore commercial strategies pioneered by global tech and software innovators. The transformation is underway, and the companies that invest in this new model now will ultimately reap the rewards.
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