Every company wants to create new value for competitive advantage. One component of value is hyperproductivity. In the past, I blogged about eight levers that help achieve hyperproductivity; and I have observed more than one company achieve a 350% productivity improvement in a year using these levers. I now want to focus on one of those companies and key strategies the CIO used to produce the outcome.
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.
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.
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.
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:
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].
Stuart McGuigan, the former CIO of the U.S. Department of State and, earlier, the CIO of Johnson & Johnson, says innovation-driven companies (like pharmaceuticals) usually “either furiously spend money to support the launch of new products or later go back and then cut costs. To do both at the same time requires an operational mindset and an incredibly focused use of technology.”
The rapid shift to digital payments due to the recent COVID-19 pandemic has accelerated the need for banks to modernize their antiquated payments infrastructure as demand rises for contactless payments and automation of accounts payables.
While banks’ corporate and retail customers have constantly strived for faster and secure payment experiences to ensure seamless business operations and fulfill commerce needs, now is the time to act.
According to GlobalData, in the next decade, 2.7 billion transactions worth $48 trillion will shift away from cash to cards, interbank payments, and alternative payments instruments. This can be attributed to changing customer demands in this digital era, where users want immediate execution, security, transparency, and a low-cost and omnichannel payments experience.
Payments modernization is also a key imperative for banks as the industry transitions to real-time payments infrastructure. Across the globe, government and private organizations are collaborating to launch real-time payment schemes to support innovation in low-cost multi-currency payments processing. This is pushing banks to invest in the consolidation of fragmented legacy payments systems to achieve interoperability and support these payment schemes.
Regulations also are creating pressure. Market infrastructures such as the Federal Reserve, The Society for Worldwide Interbank Financial Telecommunication (SWIFT), European Central Bank, and Bank of England have announced the go-live date for the ISO 20022 payments messaging format. ISO 20022 will become the de-facto standard by 2025 for high-value payments systems of all reserve currencies. As banks face compliance deadlines for ISO 20022, they need to invest in convertors or translation systems to upgrade their existing payments infrastructure that cannot support the new messaging format and leverage opportunities it presents.
On top of this, the cloud-native and integrated platforms offered by BigTechs and FinTechs to disrupt the digital payments industry are also forcing banks to rethink their payments strategies. As central banks do not completely regulate these new market entrants, they have more freedom to innovate in the payments market. They can leverage their customer base to commercially distribute payments to end-users and utilize payments data to build other profitable overlay services.
As banks face the triple mandate to meet customer requirements, comply with emerging payment regulations, and control costs, it has become imperative for them to either build a proprietary system or leverage a third-party modular payments platform.
Banks should keep the following in mind in their modernization journey:
As banks undergo their payments modernization journey to bring payments innovation for their customers, reduce the cost of payments processing, and manage evolving regulations across geographies, they are leveraging payments platforms from third-party vendors such as ACI Worldwide, Global Payments, and Temenos.
These payments technology vendors are expanding their payments offerings to deliver integrated payments solutions and provide support for multiple global real-time payments schemes by investing in partnerships and augmenting their digital technology capabilities.
Some examples of these investments by payment technology vendors include:
In our recently released report, Payments State of the Market Report 2021: Modernizing Data, Applications, and Infrastructure for the Next Phase of the Payments Revolution, we take a deeper look at the payment technology market trends across products, experiences, infrastructure, regulations, data, and technology themes. We also study how technology vendors and service providers are gearing up their investments to cater to these demand trends.
Please feel free to reach out to [email protected] to share your experiences.
The world’s businesses are moving into a deeper level of competitiveness and productivity. In the past, when we introduced sailing into the oceans, it improved trade, which resulted in a huge explosion in wealth. When we introduced the telegraph and phones into the world, it dramatically changed communication. When we introduced common accounting practices where we could professionalize the accounting function and rely upon a consistent way of record keeping, we thereby improved productivity. The next wave is where companies will share information across countries and organizational boundaries. However, this transition necessitates moving away from current IT architecture.
I expect 2021 will be a banner year for the third-party services market. The main driver for the activities is pent-up demand from the COVID-19 pandemic, which shut down or postponed many projects. But companies now seek to buy digital and IT services from a different perspective – I call it practical digital at scale.
I previously blogged about the need for a new third-party services operating model that would be more productive and agile and focus far more on results. Though the industry was on the verge of moving to a new model, adoption was slow at first. Now, attraction for the move to a new model is picking up in the marketplace, but enterprise customers and service providers define expectations differently.
At Everest Group, we study a lot of forward-looking indicators, and we believe the service market prospects for next year are significant. In a recent blog, I talked about anticipating a robust market in the third-party services space in 2021. However, companies face a surplus of opportunities in the coming year at the same time as they face a scarcity of talent.
Everest Group CEO Peter Bendor-Samuel will deliver the keynote address at EmpowerCX 2020 virtual event hosted by Sitel Group. Peter’s keynote address is titled I Can’t Get No Innovation! in which he will discuss the past, present and future of innovation and its impact, why you should invest in it and what you can expect from your service provider as you move through digital transformation.
Thursday, October 15, 11:00 AM – 11:55 AM EDT
Live, virtual event
Peter Bendor-Samuel
CEO, Everest Group
Design Thinking
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