IoT Takes Service-Based Business Models To Less Expensive Assets, But The Organizational Change May Prove Too Difficult For Many
Rolls-Royce began shifting its business model away from selling expensive metal, plastic, and carbon-fiber products (jet engines) toward delivering the service of miles flown way back in 1962. Now, with TotalCare, the company earns more than half of its revenues from delivery of a service, not sale of a product.
Rolls-Royce is not alone. Its competitors in the jet engine business quickly followed suit, and other large, expensive, and long-lived assets also fit the model well.
Now, with increasingly affordable internet-of-things (IoT) sensors, increasingly reliable connectivity, and increasingly capable IoT software platforms, we’re seeing the same ideas trickle down toward businesses where the assets are less massive, less expensive, and less long-lived. X-as-a-service and “servitization” are becoming part of the conversation in manufacturing, in oil and gas, in the supply chain, in insurance, in healthcare, and beyond.
On the whole, the shift is a positive one. It:
- Creates opportunities to build closer, deeper, stickier relationships between supplier and customer.
- Allows customers to only pay for what they use.
- Shifts money from capex to opex.
- Offloads the management of non-differentiating assets to someone else.
But, to work, the changing relationship between buyer and seller also requires transparency: Unless they have the permission and the skills to peek inside, customers may suspect that the black-box algorithm suggesting they install expensive spare parts is acting more in the supplier’s interest than the customers’. And, for suppliers, the organizational upheaval may prove too disruptive to contemplate. It requires different sales skills, different support skills, different product design assumptions, and a very different approach to cash flow: Public companies in particular may struggle to persuade Wall Street that the inevitable dip in revenue as they shift from up-front payment for physical assets to ongoing trickles of income from services is short-term and transitional.
In my latest report, “Use Data From The Industrial Internet Of Things To Deliver Customer-Centric Business Models,” I look at the pros and cons of as-a-service and offer some lessons from companies that are making the transition.
As always, Forrester clients can schedule an inquiry call to talk about this. Anyone can schedule a briefing.
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