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Slower global economic growth and the opportunities and challenges brought on by digital transformation is tremendously changing the competitive landscape for industrial equipment companies. Digital transformation has led to a shift in the customer's perspective away from simply product features and functions towards how a complex system of smart, connected devices and equipment can optimize their outcome.

As new IoT-enabled services are emerging, there is a battle to capture these values between equipment manufacturers and software and platform providers.

How Business Models are Changing in Industrial Equipment

Through TSIA’s extensive research, we know that the “Make/Sell/Ship” business model, which focuses on having a strong product engine, is under pressure. Customers are increasingly demanding OpEx consumption models and guaranteed performance and outcomes.

The results from our latest Industrial Equipment 40 index report shows:

  • The number of companies with growing revenues and NOI-margin is shrinking dramatically
  • 83% of the companies facing shrinking Net Operating Income margins
  • For the first time in the history of the index, product revenues are shrinking
product and service revenue growth and margin  

(Click image to enlarge)
Source: The TSIA Industrial Equipment 40 Index.

The intense focus on the product business of the C-suite in industrial equipment organizations leads to a service business, which:

  • Is more transactional and less contractual
  • Monetizes less and gives more for free and on warranty to push the product business
  • Provides more product attached services and less value-adding services to improve overall performance and customers’ outcomes
  • Is less profitable than the product business.

In short, equipment companies are missing opportunities to increase service revenue share and service margin.

Two Main Business Challenges for Industrial Equipment Companies

In this environment, let’s have a look at the top business challenges impacting industrial equipment companies. Over the past year, TSIA has analyzed the inquiries from industrial equipment companies within our membership community, identifying the most important business challenges they’re facing. We then translated these challenges into the core capabilities that services organizations of industrial equipment manufacturers will need to embrace to succeed in 2020 and beyond.

1. Creating Additional Revenue Streams While Protecting the Existing Traditional Ones

Industrial equipment companies are working on creating new revenue streams by pushing recurring and subscription by growing their Tech-as-a-Service (XaaS) businesses. Additionally, they are working hard to protect their traditional revenue streams.

In this environment the top business challenges are:

industrial equipment business challenges  

Industrial equipment business challenges.

The data shows that industrial equipment companies are working on optimizing their offer portfolio to move from free to fee and to extend their service orientation on:

  • Offers, Portfolio, and Analytics: To capture the value of IoT, industrial equipment companies offer digitally-enabled services like dashboards to manage the equipment and the workflows in which the products are embedded. Such services can get delivered as standalone services or as part of a premium contract. The data handshake with customers and the installed base generates the source for valuable insights to enable information services and predictive analytics.
  • Attach/Renew/Expand and Customer Sucess Capabilities: Optimizing the customer lifetime value requires attaching maintenance and information services to the initial product deal as well as managing the product and service lifecycle. To do this, TSIA developed the LAER model, consisting of four stages of the customer journey: Land, Adopt, Expand, and Renew.
  • Value and Outcome: Value-added solutions are anchored around business value to help improve customers’ processes and to help them achieved their desired outcome.
  • Recurring + Subscription + XaaS: Subscriptions and Tech-as-a-Service in industrial equipment are more than pure cloud and SaaS services. Subscriptions for equipment means that you’re providing a product and adjacent services as well as the software to process edge computing on-site. Cloud services then enhance the on-premise services, which I cover in my blog post, “Subscription-Based Offers in Industrial Equipment.”

But, enhancing and optimizing the offer portfolio needs a precise strategic alignment, which brings me to the next business challenge impacting industrial equipment companies.

2. Strategic Alignment

Making the move to a services-centric business model while also becoming or staying a pacesetter in your industry needs insights on ambitious but achievable goals. To help with this strategy, TSIA’s vault of data and benchmarking research is the best starting point for achieving strategic alignment within your organization.

strategic alignment in industrial equipment  

Areas where you can seek alignment.

Increasing recurring and subscription revenue streams creates challenges for service organizations to ensure that customers receive an excellent and standardized service experience globally. Optimizing the organizational structure for your service delivery functions means establishing an executive responsible for service offer portfolio management and the global service delivery of all business lines. A global service delivery organization is needed to scale service delivery and to provide a “follow-the-sun” support coverage model with an optimized support channel mix. It is uncommon for service organizations to establish their own, dedicated sales force.

Industrial equipment companies need to invest in tools and platforms that will help them manage service delivery, contracts, subscriptions to improve the support on all relevant channels and to increase the efficiency of the service delivery.

Stronger Momentum of Digital Transformation

Industrial equipment companies have made progress in accepting the structural challenges presented by digital transformation and are turning them into strategic initiatives. As an industry, we are expecting even stronger momentum on the digital transformation journey and an increase in outcome and subscription offers.

Service executives are in the middle of digital transformation and are often the internal evangelists of the services-led world. Equipment companies need to work on building or acquiring the required capabilities based on a strategic plan.

Learn More About Digital Transformation for Industrial Equipment at TSW

At our upcoming Technology & Services World conference, taking place in May 4-6 in San Diego, you can learn even more about how digital transformation is impacting industrial equipment companies and how you can prepare your organization for the future. There’s still time to register, so I hope you’ll join us!


Harald Kopp

About Author Harald Kopp

Professor Harald Kopp is the director of industrial services research for TSIA. He also teaches an MBA program for sales and service engineering at Furtwangen University, Germany. In his role at TSIA, he is responsible for the further development and enhancement of TSIA’s research agenda, according to the needs of businesses in the EMEA region and for industrial equipment manufacturers. His focus is chiefly on services in industrial automation, equipment, instruments and technology companies. Harald has 25+ years of accomplished experience in the areas of supply chain management, IT consulting, and industrial services.

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