Command a Premium with the Predictability of XaaS Models
By Ankit Sharma and Torsten Welte
Service-based businesses typically provide higher margins and resilience than product-based businesses.
When companies offer innovative and predictable everything-as-a-service (XaaS) business models, their customers are more willing to pay a premium. Many manufacturers are moving from relying on a single product sale to becoming service-driven, sustainability-minded partners focused on delivering positive outcomes through products and services.
This transformation from selling products to selling outcomes is a result of several factors: continuous disruption in the industry, commoditization of products, years of stagnating growth gradually hurting margins and customer loyalty, and a desire to shift from upfront large capital expenditure (CAPEX) models to recurring, predictable operating expenditure (OPEX) models.
These industry shifts are driving manufacturers to embrace “servitization”: the use of products to sell services, such as subscription offerings for remote monitoring and equipment diagnostics, predictive maintenance, and usage and outcome-based contracts, in which recurring payments depend on the delivery of the service or outcome defined in the contract.
To reduce complexity for customers and deliver on these contracts, manufacturers need real-time visibility into equipment data and other customer operations in order to optimize performance and maximize efficiency. This insight into adoption and usage can drive innovation, so servitization and digitalization are tightly linked. Shifting to XaaS, in which companies offer physical products, equipment, services, and software on usage- and outcome-based models, is the ultimate evolution.
Hewlett Packard Enterprise’s (HPE) Greenlake is a great example of this shift, as it is one of the fastest growing businesses within HPE, with over $4 billion in total contract value and a renewal rate of 95%. HPE now has plans to offer the entire portfolio as a service.
Shifting to the XaaS Model
Although the rewards can be impressive, the path to becoming a profitable, predictable XaaS provider can be challenging.
Manufacturers may have questions before they begin their transformation: If they move from selling complex equipment to selling high-value, personalized equipment and services on usage- and outcome-based contracts, how can they deliver value and stay profitable? How can they ensure predictability and efficiency in their operations?
To answer these questions, particularly about predictability, manufacturers should consider three factors:
1. Customer and Partner Experiences
The transition to XaaS and outcome-based contracts is a major business shift for both manufacturers and customers, so it’s critical to design contracts collaboratively to ensure ongoing customer success. There also needs to be effective communication, using data and analytical tools, on the operational and financial benefits of transitioning to XaaS models.
Partners often play a key role in delivering the performance obligations of XaaS contracts and driving growth. Manufacturers must build collaborative networks, including customers and partners, to ensure access to common data about the equipment and services so more partners can efficiently and effectively serve customers.
Robust revenue-sharing and settlement capabilities are necessary to ensure partners are motivated to support the effort.
2. Business Processes and the Employee Experience
These new business models require a fundamental shift in resources and processes throughout the organization.
Manufacturers require effective collaboration with customers to design offerings that ensure success. Engineering teams need to design for modularity and flexibility to adjust to increased performance obligations. The order-to-cash processes must support complex solution configuration and pricing, including subscriptions, sales, billing, and appropriate revenue recognition. Sales teams need to estimate profitability, demonstrate the total cost of ownership, and be compensated equitably and predictably for the new commercial models.
Post-sales, it’s critical to have visibility into operational and financial performance over the lifetime of the contract to stay profitable and course-correct on deviations.
3. Managing Risk and Thinking Sustainably
One key aspect of these new business models is risk-sharing.
XaaS models often make manufacturers responsible for the equipment’s entire lifecycle, so they need to think holistically about design, manufacturing, operation, maintenance, and end-of-life in the context of the environmental impact by adopting a sustainable, circular approach.
As manufacturers’ compensation is now tied to customers’ business outcomes, factors including performance, the business environment, and unforeseen “black swan” events can affect revenue. CFOs can tackle this challenge by ensuring fixed-plus-variable recurring payments, carving out separate business units, or organizing strategic partnerships with finance and insurance companies that the physical assets could be sold to and then leased back from or that could be used to secure loans to ensure asset-light financial statements.
Traditional business models with legacy systems and operational silos may present significant challenges to transformation. But these revamped intelligent processes, with connectivity within and beyond organizational boundaries, open the door to more innovative and sustainable XaaS offerings. This helps manufacturers differentiate themselves by providing customers with personalized, sustainable, predictable services and costs—and it may enable these businesses to charge a premium for their offerings.
Learn how SAP can help your organization begin its XaaS transformation.
Ankit Sharma is Global Director, Industrial Manufacturing at SAP. Torsten Welte is Global Head and Vice President of the Aerospace and Defense Industry Business Unit at SAP.