Over the last decade, the subscription economy has become synonymous with how we consume everything from music to beauty products and videos. Could the same type of customer-driven model work for Original Equipment Manufacturers (OEMs) to rent or provide access to their machinery and industrial equipment to users for a recurring fee? The rise of devices connected by the Internet of Things (IoT) and sensors might make this the right time for Equipment-as-a-Service (EaaS) to take off but let’s look at the obstacles that first need to be overcome.
Subscription-based e-commerce has been the biggest gainer in recent years, with firms like Birchbox providing monthly beauty samples and Spotify providing access to millions of songs at one go. The winners of this phenomenon have been Netflix which forced giants like Blockbuster to close shop and led Disney to change its operating model.
The subscription model demand has been resonating with manufacturers around the world who would like to shed their capital expenditure (Capex) heavy model of acquiring assets instead of directly purchasing outcomes. OEMs typically ramp up production to meet demand or look to slash costs when sales are down.
With the pandemic onslaught, OEMs specifically catering to the travel and hospitality industry as well as certain sectors in manufacturing saw a steady decline in production. This makes the case for creating new sales models that generate more consistent revenue streams for OEMs – and EaaS could provide a needed solution.
Decoding the EaaS phenomenon
EaaS represents a business model that aims to reduce the Capex for enterprise customers while the OEM retains ownership of the asset and charges the customer subscription rates. This helps the OEM create a recurring revenue stream while ensuring the asset ownership remains in-house. EaaS was pioneered by Rolls Royce when it trademarked “power by the hour” as a notion to sell power jets based on performance. This model further allows airlines to pay for their engines based on their usage, such as the number of flight hours.
IT has witnessed this model with firms like Dell, Hewlett Packard Enterprise, and Cisco selling IT equipment through an “as a service” model. Hyperscalers like Amazon Web Service, Azure, and Google Cloud Platform have also been selling their infrastructure services on a pay-as-you-go model where these data center operators continue to own the physical servers. However, IoT-enabled solutions in manufacturing would not be as easy of a transition as seen in IT.
With the onset of the Internet of Things (IoT) across the manufacturing landscape, it has become easier for any manufacturer to measure equipment usage or performance, which can then be used to compensate in the EaaS model. While giants like Caterpillar have initiated EaaS, more time is needed for industry-wide adoption.
Role of IoT in propagating EaaS
IoT devices have rapidly grown across the ecosystem, finding applications in the industrial space as well as in our homes in the form of voice-enabled Alexa. IoT in the industrial area generates large volumes of data collected from smart meters, delivery trucks, and equipment. This has given rise to IoT analytics. IoT analytics can help organizations by monitoring and alerting them in case of anomalies, identifying problems, and answering pertinent questions to make better forecasts and future decisions.
IoT also is being used across devices for flexible pricing and billing. As the IoT sensor captures pertinent data, it can help create pricing models based on consumption patterns.
How can OEMs provide EaaS?
With the success this model has seen on the IT side, EaaS looks attractive and has the potential to be a sure-shot success, or does it? EaaS is plagued with a few fundamental flaws that inhibit its spread across the manufacturing industry, with only a few large players opting for it.
OEMs need to figure out these two key issues before jumping on the EaaS bandwagon:
- Pricing model – OEMs must determine the pricing models they want to offer to customers. A simple usage-based model can be followed that measures the output generated by the machines. This, however, presents a problem if there is a pandemic-like situation or a strike that halts operations across factories, wiping out the recurring revenue mandate. The other is an outcome-based model. These outcomes can be operational or financial, such as a reduction in Capex that results in financial benefits. This is a riskier model because of the uncertainty in determining the value generated by the machine. Each factory is optimized in a certain way, making it extremely difficult to provide an exact benchmark stating performance levels without sourcing the factory data. OEM suppliers would have little or no control over factors such as market demand, making this model more difficult
- Organizational change – Moving from a product formation selling equipment to providing continuous services to customers would require organization-wide change across various departments from sales to product development. A revamp in hiring strategy also would be needed to go beyond providing technical support to developing collaborative relationships and providing customer service for this type of business arrangement. On the product side, the equipment would need to be equipped with IoT sensors making it easier to maintain, repair, and measure the outcome
The way ahead
Of course, no enterprise can shift overnight from a product selling model to services. Some companies have found success in making this change. For example, German-based manufacturer Heller offers HELLER4USE, which provides customers with pay-per-use of their machinery and insurance during equipment downtime. Companies specifically focused on coffee vending machines and 3D printing have moved significantly towards the services space.
As OEMs move into this space, it would open a completely different revenue stream in the form of IoT integration, data analytics, and system design. These high-value add-on services would ensure OEMs maintain a constant stream of recurring revenue rather than a one-shot sale of equipment. OEMs initiating the EaaS model would gain a first-mover advantage in making close relationships with buyers as they get entrenched into the data ecosystem generated from the industrial unit, making them much more valuable partners. We predict these first movers will become key players in grabbing the full-service models that will float in the future.
If you have any questions about how an enterprise can go ahead with EaaS, or if you would like to share how your organization has used EaaS or any other innovative business model, please write to me at [email protected].