Digital transformation is affecting many industries, but it has the potential to completely redefine OEM (original equipment manufacturer) business models within automotive, industrial equipment, electronics, medical equipment, among others.
The operating model of traditional OEMs was designed to optimize the push of prepackaged products to customers via large, up-front deals. The goal of this CapEx model is to get the maximum amount of product assets transferred from the OEM’s balance sheet to the customer’s balance sheet in one big order, with 70% or more of the total purchase price paid up front.
There are two huge problems facing these CapEx business models today:
Digital transformation has been a hot topic for the last few years. And the conventional wisdom is that if you’re not doing “it”, your company is in a lot of trouble. But, what exactly is “it” and why should you care?
Digital transformation is generically defined as “a novel use of digital technology to solve traditional problems”. Later in the post, I list six technological advancements that enable a digital transformation— one of them being sensor technology. These new sensors enable OEMs to capture a complete digital representation of a product’s physical properties, i.e. a digital twin, and store it in the Cloud. But simply digitizing your product doesn't mean you're participating in the digital transformation.
Digital transformation is generically defined as 'a novel use of digital technology to solve traditional problems'.
That’s because the key word is not “digital”, it’s “transformation”. When you start to leverage this data to improve business outcomes for both you and your customer, then you can claim you are digitally transforming. Ultimately, the data being collected across an entire install base will deliver more business value than the physical component itself. Let that sink in for a little bit—when the data becomes more valuable than your manufactured product, the old CapEx model is dead.
The key question is whether a traditional manufacturer can turn itself into a modern technology company faster than high-tech entrants can learn drivetrains, valves, radiology, crankshafts, conveyance, etc.
Very few people would disagree with the notion that OEMs are in the midst of a digital disruption, but how fast and severe the change is, plus how to respond, is still a matter of fierce debate.
The most obvious sign that a company is encountering disruption is when their stock price and market cap aren’t growing. However, is this the first indication of digital disruption?
An earlier warning sign is when traditional product and product-attached service revenue growth slows down. Customers are sending a strong signal that the historical product “feature face-off” is not cutting it anymore and that they only care about the product to the extent that it helps them achieve their business outcomes. Fortunately, the customer sends earlier signals that their needs are changing.
The key question is whether a traditional manufacturer can turn itself into a modern technology company faster than high-tech entrants can learn the product.
When OEMs put more bells and whistles into the product than the customer can consume, new deals start to get disrupted with discussions of consumption-based offers, i.e. customers only want to pay for what they consume. And even before that, customers begin to insist that service level agreement (SLA) criteria move away from response time commitments, and towards resolution time, and ultimately to equipment uptime and availability.
There is a series of unmistakable signals that the customer wants the OEM to be more aligned with their business outcomes (presented in the order of appearance):
So, while the digital transformation is disrupting traditional OEM business models, the good news is that it’s not something that just pops up overnight.
A tipping point is that moment beyond which a significant and often unstoppable effect or change takes place. For OEM business models, that tipping point is here.
There are six technological advancements that are rapidly moving entire industries from owning the asset and towards buying as-a-service. These advancements enable OEMs to create “as-a-service” offers that will categorically change industrial business models.
These six advancements will force OEMs to move from their comfortable “make, sell, ship, and forget” approach to “make, sell, own, operate, and remember” model. In turn, it will require every OEM to become more of a software company and system integrator.
In my upcoming State of Field Service 2019 report and in my upcoming TSW Power Hour session, “How the Digital Transformation is Wrecking OEM Business Models,” I will share interesting industry trends from TSIA’s Industrial Equipment 40, Service 50, and Healthcare Technology 20 indices. These insights will help you identify the warning signs in your industry and present practical next steps based on where your industry and company are in the transformation. I hope you’ll join us at TSW, taking place in San Diego May 6-8! We have a lot of great content planned that will be relevant to any company that deals in hardware.
I am also excited to introduce TSIA’s new Healthcare Technology and Industrial Equipment benchmarking peer groups. While the digital transformation is well underway across all OEMs, the impacts and timing for enterprise IT, industrial equipment, and healthcare technology companies are different.
Read more Technology & Services World blog posts in which I and the rest of the TSIA research team share a preview of what you can expect to learn at the conference:
Post Date: March 7, 2019
Vele Galovski is vice president of research, Field Services, for TSIA. Using his nearly 30 years of industry experience, he has consistently helped companies both large and small drive double-digit top-line growth with a proven retain, gain, and grow strategy. Vele has also written a book, The Perpetual Innovation Machine, which describes a holistic approach to management based on ambitious goal setting, data driven analysis, skillful prioritization, inspiring leadership, and the lost art of employee engagement.
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