Equipment as a Service Improves Shareholder Value

During an analyst event given by Infosys, Rajiv Puri, VP Manufacturing Strategy, Solutions and Partnerships, and I had a chance to talk about the market dynamics in the manufacturing industries. The discussion honed-in on an emerging market discontinuity for Original Equipment Manufacturers (OEM).

Aspire to the Shareholder Value Obtained by the SaaS Suppliers?

OEMs who make intelligent equipment – from lamp fixtures to mining machines – must be looking at the Software as a Service (SaaS) companies with aspiration for their high price to earnings (P/E) ratios. Fortune 100 companies, like John Deere and Caterpillar, have P/E of 20 to 21. Meanwhile, SaaS companies, like Salesforce, run about 120, and Adobe is about 55.

Regardless of economic conditions, SaaS provides a consistent high margin revenue stream that the financial types on Wall Street love. When times are tough, people and companies delay the purchase of new equipment and earnings tank. In general, Wall Street hates this uncertainty.

Some companies have separated their product lines into businesses that take advantage of this type of diversion in P/E ratios. AVEVA and Schneider Electric is an example. The recent announcement by Emerson (P/E of 24) and AspenTech (P/E of 32) is another. What can an OEM do?

Equipment as a Service

A simplified view of Equipment as a Service (EaaS) can be bundled renting, remote monitoring, and services – sometimes called Servitization. This involves a shift from selling a standalone machine to offering solutions that combine product and services.  This approach adds value with services and has a range of approaches.

On one end of this range, an OEM sells the equipment and provides an aftermarket service for monitoring the condition of the equipment at the customer’s location. With EaaS, the OEM also provides the services needed to prevent unplanned downtime and improve operational performance.

On the other end of this range, servitization involves the OEM charging the customer based entirely on usage. For example, charging for cubic feet of compressed air consumed rather than upfront for the compressor equipment. 

Internet of Things (IoT) and analytics enable remote asset health monitoring and predictive maintenance (PdM). Thought leading OEMs are transforming from reacting to a service request after their equipment fails to a proactive repair approach that prevents unplanned downtime, improves reliability, and extends asset longevity.

Software is Today’s Product Differentiator for Equipment

Software has become the key differentiator for intelligent products. OEMs used to focus on hardware design, capability, and speeds (many still do). But the selection criteria that matters has shifted to software. A couple of examples from personal experience:

• My brother recently purchased a Tesla Model 3 and gave me a ride. He was wildly enthusiastic about the car. All the features and functions that he enthused about involved software. Frankly, the car itself – interior, dashboard, exterior design – were not impressive.

• The printer I had been using at home came with software that was dumbed down to the point that it interfered with my use of the printer (and maximized ink usage). An alternative supplier had similar hardware and printing quality. I switched, because it came with software that gave me a bit more control with a nice user interface.

The software associated with equipment now goes well beyond the user interface and extends to condition monitoring and support during operations.

Lower Lifecycle Costs and Improved Uptime

In the traditional business model after an OEM sells its equipment, the maintenance and associated costs are incurred by the user. The OEM has little financial incentive to drive maintenance costs lower. With EaaS, the supplier becomes responsible for maintenance and has a direct incentive to reduce total lifecycle costs including repairs.

After offering SaaS, the software suppliers made design changes to reduce the costs for maintaining the software including ease of maintenance for the support technicians. The OEMs are expected to make design changes to reduce maintenance. This includes the obvious, like mean time between failures. It also includes activities, like changing filters and ease of disassembly and assembly during a repair.

Conclusions

Our expectations are that a few thought-leading OEM executives will gain an understanding of P/E ratios achieved by the SaaS suppliers. This provides an incentive for the leadership to move beyond their comfort zone with the traditional business model for selling equipment and aftermarket services and adopt EaaS.