Building the customer business case for smart services: Starting with Why

In this series of posts, I address service product management topics around building smart services – more specifically remote monitoring/predictive maintenance/prescriptive maintenance services for industrial machinery OEMs. Product Managers, in my mind, are mini-CEO’s of such offers and are expected to think through the full-spectrum of the smart-service business far beyond simply the features and capabilities of their software offer.

The blog post series will cover:

• Building the customer business case for smart services – Starting with Why
• Monetising smart service offerings – What’s in it for me
• Designing effective Go to Markets for smart services

This is the first post in the series in which I share our learnings on the consistent value drivers for smart service offers. Most industrial facilities that are considering connecting their assets are addressing one or more of the challenges below:

The Financial Case

Outages are expensive for any manufacturing company. Not only are there unplanned costs for repairs and spare parts, there is also the loss of productivity in terms of labour as well as unmet production schedules and damages for missed delivery deadlines, goodwill aside. In certain industries, every hour of outage can cost over a million dollars in lost productivity. However, what’s often overlooked is that not every equipment occupies a similar place in the customer’s scheme of priorities.

1.1 Criticality

It is important to approach smart service design with a clear understanding of how critical a smart-serviced equipment is to the customer i.e. what are the consequences of unplanned failure of the equipment? Sometimes, two machines of the same equipment type from the same supplier are not considered equally critical – it would depend on where in the production process the machine is utilized and how much redundancy has been built into the process in order to tolerate such unplanned failures. If a particular equipment is crucial to the customer’s ability to complete his production process, the criticality would be high enough that a smart service offering would be considered favorably, but only at the right price point. Typically, the demonstrable production loss savings should not only be at least a 6-figure amount, but also a multiple of the total annual cost of the service to compensate for organizational inertia.

1.2 Mean Time Between Failure (MTBF)

A robust critical asset that has historically experienced few unplanned failures, would evince much less interest from a customer to connect and monitor. Simply put, it is hard for a customer to visualize the financial cost of an outage that he/she hasn’t experienced in the past. The more recent the failure, the greater the appreciation of a service that addresses such failures. This should be a factor in identifying a candidate to perform customer pilots.

1.3 Mean Time To Repair (MTTR)

The cost and complexity of the repair activity, the availability of the necessary parts, tools and specialized technical skills are all part of the customer’s calculus in determining how long it will take to repair the equipment and therefore the value at risk from an outage. Perhaps the most undersold benefit of condition monitoring is that even if one is not always able to “prevent” an outage, one can make sure that the tools and labour are on standby when the outage does occur, thus reducing the length of the outage and hence its financial consequences.

1.4 Mean Time Between Maintenance (MTBM)

In companies with well oiled maintenance processes, there is a greater risk of “over maintenance”. This not only drives up Opex, but every such maintenance intervention results in unnecessary production stoppage and introduces new risks of down-time from human error, defective parts, introduction of dust and microbes, etc. A smart-service offer that demonstrably reduces MTBM is much easier to sell. While the above 4 are the primary factors that contribute to the financial case for smart service, they are under-written by the overall TCO /Total Cost of Ownership) of the asset itself. Typically, we have seen condition monitoring services offered on assets with Replaceable Asset Value (RAV) of $150 000 or more, receiving a better customer reception than for those that cost less. The rationale is relatively straightforward. Depending on the industry, the recommended maintenance cost to replaceable asset value ratio can range from 3% (in factories) to 35% (mining). In order to price a smart-service offer profitably, coverage for assets with higher RAV is recommended.

QHSE: The other business case drivers for smart services

2.1 Workforce safety

Accidental injuries and deaths in industrial sites are getting much more air-time as consumers are far more sensitized to how workers are treated by brands. There are many factors that affect the immediate safety as well as the long term health of the workforce in an industrial facility: exposure to toxic chemicals, gases, electrical shocks, fire as well as mechanical accidents. While many companies see this topic from the perspective of compliance to standards, there is an increasing number of companies for whom workforce safety and employee well-being are a priority. While it is hard to put a figure on how much this priority is worth to a company, compensations for accidents tend to be insured and far less important than the impact that such incidents have on the brand and image of the company in a very competitive employment market. Furthermore, in countries where worker unions are strong, such incidents can result in extended production disruptions.

2.2 Product quality

The consequences of defective products whether as product recalls or as lawsuits are an expensive affair and in a majority of the cases, equipment performance and related maintenance is a common source of quality issues, especially in the process industry. A malfunctioning cooling system can render as waste, millions of dollars or raw material, a poorly performed cleaning procedure can also result in the introduction of contaminants in a food or pharmaceutical product. A condition monitoring system – even if focused on equipment performance instead of product quality can alleviate the situation and yield a tangible RoI (Return on Investment) in a very short period of time. However condition monitoring solutions in this value bracket must address the production line as a whole or a significant part of it. A piece-meal solution will be very hard to unambiguously attribute any improvements towards and thus, harder to sell.

2.3 Sustainability and environment

Reduced wastage as well as higher product acceptance ratio have a direct and tangible impact on the customer bottom-line. Energy efficiency is another value driver that would be easier to quantify. With environmental damage becoming a criminal offense in several countries, the regulatory impact from, as well as costs of- effluent discharge and other kinds of industrial waste are about to go up. These are all areas where a targeted smart service would find easier acceptance with a caveat – it must be demonstrable, quantifiable and with shorter time to value.

In conclusion, the business viability of a smart service is won or lost in the business case. Building a condition monitoring offer is relatively simple today, technically speaking. But before one even starts with the offer definition, a clear articulation of the intended value proposition is necessary in order to determine the financial case avenues that need to be explored along with pilot customers.