Software Monetization Featured Article

Servitization and the Path to Success for Industrial Automation

May 15, 2017

As the manufacturing and industrial sectors move toward automation and a software-centric approach to delivering solutions, the concept of “servitization” has emerged. Encompassing much more than a technology trend or movement, servitization describes a wholesale change in business model and practices. Vendors in the industrial space that once subscribed to a one-time transactional hardware sale to generate their revenues are moving to a services model through which customers pay based on outcomes or based on the amount of services they are using.

This paramount shift is what servitization is all about, and the concept comes at a critical time for vendors in the industrial automation arena. Traditional hardware players are experiencing hardware commoditization, overall dwindling profit margins and greater customer demand for value-added services and innovative business models.

 Servitization can be realized in many ways and we expect the following three servitization business models to impact the IA equipment space. The first is the pay-per-use (PPU) model, which is only just emerging in the manufacturing and industrial sectors. Flexible pricing is something customers are demanding, however, and as servitization takes hold we can expect to see the PPU model become widespread in industrial automation equipment sales.

The second business model to impact the industrial automation equipment sector is a preventative maintenance and OEM parts enforcement. While 76 percent of manufacturing facilities maintain a preventative maintenance strategy, according to a recent Plants Engineering Maintenance Study, many of those programs have not been updated in the past 30 years. Robots’ safety complicates things in an industrial automation setting, and the U.S. Department of Labor has a list of requirements for sites that use robots.  In light of increased lawsuits over equipment defects, failure with PM programs and the trend toward predictive revenue, we are beginning to see more and more IA equipment vendors embracing the preventive maintenance and OEM parts enforcement business model.

The third business model implies charging a relicensing fee when equipment is sold on the secondary market. There is currently a large market for old and refurbished industrial automation equipment that includes embedded software. However, when this equipment is resold, many equipment vendors are missing out on revenues from the embedded software components. By locking equipment to a specific serial number and customer, vendors will be able to generate new sources of recurring revenue when that hardware is eventually sold to a new customer.

 Servitization redefines the traditional manufacturing business model. Servitization also presents new recurring revenue opportunities such as preventive maintenance service, replacement parts, and software relicensing contracts. To successfully embrace and launch emerging Servitization business models, industrial automation equipment manufacturers will need to heavily rely on licensing technology. By using this strategy and technology combination, they’ll be able to address the opportunities presented here and achieve even greater success with their efforts.