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Business and Technology Insights

Building a Case for IoT-enabled Servitization as a Business Model

 
September 12, 2017

Servitization allows industrial manufacturers to offer their products to customers as a pay-per-use service, in exchange for a stream of recurring income. Although accelerated by the Internet of Things (IoT), servitization is not an entirely new business model. Its something that these businesses have been thinking about for decades: providing additional support and services to increase the value they bring to customers.

In the new industrial age, popularly known as Industry 4.0, customers are responding well to servitization. It is re-defining how they see manufacturers in an increasing number of sectors.

The Role of IoT in Servitization

IoT uses wireless sensors to allow manufacturers capture data from their products after theyve left the shop floor, throughout the lifecycle of the product. For businesses considering servitization, this means they will have more information about when and how their product is being used, and how it is performing probably in real time.

Manufacturers of aircraft engines have been experimenting with this business model for a few decades now. Known as power by the hour since the 1960s, the model provided the use of an engine and accessory replacement services, bundled together for a per-hour rate. Rolls Royce, the worlds leading aircraft manufacturer uses a similar model under the TotalCare Program where they charge a fixed rate per flying hour.

With IoT in the picture, these companies can track how many hours their engines are being used in real time, and monitor their performance to ensure customers get every bit of value they deserve. Customers seem to appreciate the model, its ability to predict costs of ownership, and its sheer ease of use.

Going for IoT-led Servitization
Companies looking to move from making products to delivering services will need to change their corporate mindsets from product purveyors to service providers. The transition is also going to be demanding on resources, and will change how companies plan, strategize, and operate.

The most striking change is the shift of revenues from being realized immediately, to being received as a fee over an extended period of time. That will have a significant impact on how the organization manages its finances. The shift must be modeled carefully to measure and replace the loss of immediate cash flows. You cant tell your suppliers that you are unable to pay them because youre changing your business model.

Finally, to be a successful service provider, you have to maximize client satisfaction. Hence, youll need to re-think how you market, sell, and maintain client relations, and how your business provides on-going support. If youre considering moving to servitization, this is a good time, especially given how IoT can support that choice.

If youd like to learn more about servitization and how IoT-led innovations can help your manufacturing business, read my article The Magic That Happens When Manufacturers Digitally Attach Themselves to Their Products in the latest edition of Perspectives, our management journal.

Sreenivasa Chakravarti is the Vice President with the Manufacturing business group at TCS. He is responsible for driving thought leadership and incubating ideas for strategic growth and transformation aligned to the futuristic business trends in the manufacturing industry.

Sreenivasa has 27 years of experience cutting across consulting, IT & manufacturing industry and cross-functional experience covering strategy planning & execution, innovation, business incubation, sales & marketing, corporate planning, HR, IT & production. He is a Bachelor of Technology in Electronics and holds a management degree from Indian Institute of Management (IIM).