At TSIA, we receive a steady stream of inquiries from our members, which give us insight into the most pressing business challenges technology companies are facing across the industry. We then translate these challenges into a list of capabilities organizations will need to embrace in order to succeed in the coming years. One of these key capabilities is something that has become so prevalent across the industry that we've dedicated an entire blog series to it: organizational alignment and convergence.
Challenges Faced by Hardware Manufacturers in the World of XaaS
Before I get into what organizational convergence means for my area of research expertise, field services, I'd like to first explore what's driving the need for this alignment. The industry-wide shift to “as-a-service” business models, where customers look to purchase technology-as-a-service instead of an asset they own, is still uncharted territory for many tech organizations. This is why at TSIA, we're hard at work developing frameworks, organizational constructs, and benchmark performance metrics to help our members navigate these unfamiliar waters and accelerate their business transformation in an increasingly cloud-based world.
Unfortunately for hardware manufacturers, there's still a disconnect in understanding exactly what these new business models mean for them. After all, there's no way that a turbine, instrumentation, valves, robotics, etc., can be put in the Cloud. Instead, the goal here is to create a “digital twin” of each piece of hardware that resides in the Cloud, where the physical properties of the hardware and data about its performance is collected, stored, and easily monitored without having to go on-site to a customer location. These analytics can then be used to inform future offers that both improve the function of the technology and lead to better customer outcomes.
The Shift from CapEx to OpEx and its Effect on Field Services
With this new focus on delivering customer outcomes rather than simply supplying hardware, manufacturers and field services organizations are needing to adjust their processes and adapt to changing customer demands. Under these new business models, the up-front CapEx revenue is replaced by a monthly service fee as customers purchase access to the technology rather than purchasing it outright. The installation, maintenance, and operation of the system falls to the supplier, which is performed by field service technicians.
Under these outcome-based business models, techs who initially provided reactive “break/fix” support must now adopt a more proactive support role. They also perform adoption services that better facilitate customer outcomes and ensure they receive value from their purchase. However, a number one requirement of them is to be more efficient and keep costs low. So, how can they meet this expectation with added responsibilities added into the mix?
Making the Move from Cost Center, to Profit Center, to As-A-Service
Traditional CapEx models offered support and maintenance contracts as equipment became more complex. The supplier's primary financial focus was to control cost and to get a desired return on that cost. As a result, field services organizations were set up as cost centers and pricing was primarily “cost plus.” Based on TSIA benchmark data, we know that 33% of today's field services organizations still run as a cost center where their main goal is to keep the equipment running while keeping costs low.
Based on TSIA benchmark data, we know that 33% of today's field services organizations still run as a cost center where their main goal is to keep the equipment running while keeping costs low.
As support and maintenance offers become commoditized, the ability to maintain a desirable gross margin is hampered by constant price pressure while increasing customer demands require new capabilities and additional costs. A focus on the value created by these skilled technicians, and assuming responsibility for the top line, has led to 54% of field services organizations now operating as a profit center.
The remaining 13% of organizations have embraced as-a-service offers and are leveraging the field service engineer's status as a trusted advisor to deliver, and get paid for, improved customer outcomes.
These changing offers and unrelenting cost pressures on field services organizations are the catalyst for serious strategic discussions. To effectively make this transition from cost center, to profit center, to as-a-service requires organizational alignment and convergence. Here's a look at what to take into consideration when making this transition:
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Source: TSIA State of Field Services 2017.
Learn More About Convergence
For even more about how organizational convergence is impacting the industry, be sure to check out other posts in this blog series by other TSIA research experts,