The formula is straight-forward: markets match customer needs with businesses that provide options intended to satisfy them. Products have historically been the solution. The customer gives the business money. In exchange, the business transfers product ownership to the customer and the customer puts the product in use to complete a task, perform a job or achieve an outcome.
There is an increased demand for solutions that perform a job or deliver an outcome.
Things are changing! There is an increased demand for solutions that perform a job or deliver an outcome. This demand is pushing industries to convert from a product-base to a service-base. While some industries (think software) are close to 100% converted, many still wonder if their industry will change. It’s not a matter of if, but when!
Industry by industry, the shift to as-a-service is happening. This is not a phenomenon exclusive to the software sector or something that only matters in the B2C world. In this rendition of “Recent Examples of Servitization” we cover glimpses of servitization in Industrial Process Automation, Industrial Equipment Sustainability, Medical Devices and Electric Vehicles.
Industrial Process Automation
ABB understood the requirements and presented us with excellent automation and digitalization solutions
Our first example of servitization is in Industrial Process Automation. ABB has been awarded a contract for front-end design services for automation, electrical and advanced digital solutions at Cerilon’s first gas-to-liquids (GTL) facility, a greenfield site in North Dakota, USA. The project will use automation and digital twin technology, which provides a virtual replica of a facility and its process technology, allowing one to test scenarios and ensure a fit for purpose design. The site also aims to integrate carbon capture and storage. Cerilon (the client) credits ABB (the service provider) with getting the win because they “understood the requirements and presented us with excellent automation and digitalization solutions.”
For more insight into servitization trends in industrial process automation, read the article “ABB wins automation contract for Cerilon’s first gas-to-liquids plant” from ABB.com.
Industrial Equipment Sustainability
CAT’s ReMan service for equipment and machinery remanufacturing delivers ESG wins for CAT and its clients
Up next is an example from Industrial Equipment where a service based approach is delivering real results against enterprise sustainability goals and corporate sustainability initiatives.
Caterpillar (CAT) continues its trajectory of service-based innovation with its CAT ReMan service for equipment and machinery remanufacturing. The service takes components that would otherwise be scrapped and turns them into like-new condition – decreasing the need for raw materials, water and energy associated with producing new parts. It also helps CAT’s customers achieve their sustainability goals.
This service launched CAT onto Barron’s 100 Most Sustainable U.S. Companies list, debuting at #74.
For more insight into how a service approach intersects with sustainability initiatives read the article “Caterpillar Named to Barron’s List of 100 Most Sustainable U.S. Companies” from Caterpillar.com.
Medical Devices
Operating lease (recurring) revenue has grown as much as 58% year-to-year for Intuitive Surgical
Up next is an example from the medical device space (but one could easily think of it in terms of robotics and specialty equipment). Intuitive Surgical is the star of this show, an early mover and pioneer in what many now call device-as-a-service (in the case of Intuitive, it’s an “operating lease”).
In the past, customers paid upfront (transactional purchase) for an Intuitive da Vinci system. While this classic approach gave the company an immediate boost to revenue, they began offering operating leases as an alternative. With the operating lease model, Intuitive doesn’t get to record the revenue upfront; but, it’s able to build recurring revenue instead!
Operating lease (recurring) revenue has grown as much as 58% year-to-year and in one quarter as many as 41% of orders were under operating lease agreements. At the time of the linked article, 18% of Intuitive’s install base were on operating leases. This makes financial performance steadier, allowing the company to plan more effectively with more of its revenue being predictable.
For more insight into service trends in medical devices read the article “3 Important Things to Know From Intuitive Surgical’s Q3 Update” from The Motley Fool.
Electric Vehicles
GM is evolving into a technology company and can boost revenue and profit by not only churning out cars but also offering services that generate recurring revenue
The last example in this series comes from the automotive industry and the ever evolving landscape of electric vehicles. At first glance, this one appears like a product competition story: make electric vehicles to compete with other electric vehicle makes; but, there’s more to this story from General Motors (GM)!
The Detroit car maker aims to more than double revenue by 2030, aided by new battery-electric models and auto-related services. At its business case is clear: boost operating margins to 12%-14% by 2030 by rolling out new automobile models and related services that can help bolster the bottom line.
This future-forward forecast truly underscores GM’s move to convince investors to value it more like a tech-oriented business than a manufacturer (which is a benefit of a service-based approach). Its executives have been trying to make the case that it is evolving into a technology company and can boost revenue and profit by not only churning out cars but also offering services that generate recurring revenue.
For more insight into service trends in medical devices read the article “GM Sets Ambitious Revenue Target, Challenges Tesla With $30,000 Electric SUV” from The Wall Street Journal.
While there is still plenty to figure out in this space, one thing is certain: these new outcome-oriented approaches will re-shape the landscape of the mining industry as we know it and what it means to be an equipment or service provider in the space.
For more insight into the forces of servitization shaping the mining sector, read the article “Five mining trends to watch beyond 2021” from ABB Conversations.
This shift to services is not contained to only the industries above. The move to as-a-service is happening everywhere. Act now to be a leader in your industry, generate growth, and capture options for increased market share, wallet share and recurring revenue.
