Outcomes-based Services: How the Internet of Things Is Driving the Future of Manufacturing

Outcomes-based Services: How the Internet of Things Is Driving the Future of Manufacturing

With the Internet of Things manufacturers now have an opportunity to engage customers beyond the purchase by using service based contracts to create a partnership built around high value product and service performance.

For years, a washing machine was an analog, mechanical device controlled by a big dial and two buttons. Along with countless other products, today’s washing machine has become a “smart product,” enabling it to do many different things with the touch of a button.

Aside from redefining the user experience with a laundry list of new features, today’s machine can even go as far as alerting the customer before there is a problem – before the floor floods, before the laundry piles up.

These smart, connected products are redefining the way world class manufacturers are thinking about their business model, especially as it relates to servicing their products to avoid the failure and improve the performance.

What happens when we look at service through a new filter, as something that adds value throughout the customer relationship instead of resolving problems?

Whirlpool (IW 500/66), manufacturer of major home appliances, is an example of a company actively working to have smart products connect the traditionally siloed service divisions – and turn what was once a cost center into a sustainable profit center.

Anyone who has had to wait for a repair technician and return a failed part knows that service organizations could be more efficient, but there is a much larger opportunity for tomorrow’s manufacturers to build loyalty while driving revenue and profit growth.

Imagine if your washing machine itself was the diagnostician monitoring machine behavior and sending alerts to the service department ahead of failures eliminating the manual and time consuming steps such as a calling the support center, scheduling a service call and ordering the service parts.

Imagine if the machine could detect the problem, capture and analyze the information through a service system, advise Whirlpool to deliver the right replacement part, and schedule the field service technician once the part is delivered, ensuring a successful first (and only) service call. This process would not only satisfy a customer in the short term, but that positive experience helps establish a loyal relationship in the long term; meanwhile, Whirlpool stands to slash the wasteful costs of repeated service visits and overstocking parts.

This transition from break-fix service model to a customer-centric service approach is an example of servitization, the process by which a manufacturer shifts its business model to provide a holistic service experience to the customer, rather than just engaging in a single transaction through the sale of a physical product (Aston Business School).

Using the Servitization Model to Create More Value to Customer

In the servitization model, the point of sale is not the end of a transaction, but the beginning of a customer relationship that provides high margin revenue to the manufacturer - as well as ongoing responsibility for product performance and maintenance to the customer.

It is risky, because it requires companies to take on the responsibility for a product’s performance throughout its lifecycle, but if successful, this can foster stronger relationships with customers.

By being customer outcomes focused, manufacturers have the power to differentiate themselves from their competitors because each “product sale” becomes a sort of “performance-based contract,” an agreement where the manufacturer only succeeds when products and services are achieving their intended performance.

For manufacturers who have tried to squeeze every bit of inefficiency out of manufacturing processes, this business model will improve work flow, time-to-market, and even the quality of the end product. It will help manufacturers forge tighter connections to customers while driving revenue and fueling profitability.

While most companies are stuck in the rut of break-fix product service, and more progressives have embraced profit-centric service contracts (also product-centric), pioneers like Rolls-Royce Aircraft Engines and Alstom Trains are pushing the envelope towards complete servitization, where the manufacturer proactively optimizes operates and maintains product performance continually over the course of its life.

Put simply, this requires changing the way a company thinks about its products and services so they can align their goals with their customer’s goals.

In the case of Alstom Trains, specifically their operations in the UK, the train manufacturer has partnered with a regional rail operator, Virgin Trains, to deliver all ongoing maintenance and services to keep the trains running per service level agreements– including taking over the track-side maintenance and repair facilities.  Alstom has moved from the production and sales of trains to being an integrated services provider. This has created competitive differentiation as well as a much stronger relationship with Virgin Trains.

However to be successful, this required a significant shift within Alstom Trains to develop the ability to continuously identify, analyze and respond to performance outcomes to realize new efficiency gains and even turn around new services offerings.  And for Virgin, they can now apply more resources on their core competencies – moving passengers and delivering a successful travel experience – which has improved customer satisfaction and resulted in higher volumes of passenger travel. 

A  New Way of Interacting with Things

What binds this business model together is the explosion of “smart” products with built-in software driven intelligence. It has changed the way we interact with a product, how that product interacts with other smart products in the Internet of Things (IoT) and how it digests and reports information.

Designing smart products with the added feature of online connectivity allows manufacturers, service partners and operators to gather and share product performance information through a “digital umbilical cord” which allows for remote visibility, where we can interact with products in real time.

By collecting this information, it lets us understand how it’s doing in the field and can even alert us to arising problems. There is, however, an elephant in the servitization room: how does a manufacturer efficiently use and analyze the massive amounts of data that come from these devices?

In late 2013, PTC acquired ThingWorx, providers of a platform for building and running applications for the IoT to transform data from connected devices into actionable, useful information.

The ThingWorx platform is designed to speed the creation of high value IoT applications that support manufacturers' service strategies, such as predictive maintenance and system monitoring.

Manufacturers now have a means to establish a secure, reliable connection to their products as well as a platform to rapidly develop applications for optimizing their operation and maintenance - and ultimately for finding ways to create new value from them.

As manufacturers continue exploring the potential of the Internet of Things in our world of smart connected products, all signs point to servitization as the future source of competitive advantage, giving manufacturers an opportunity to engage customers beyond the purchase by using service based contracts to create a partnership built around high value product and service performance.

Lee Smith is division general manager of Service Lifecycle Management at PTC.

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