Feeling the squeeze? Servitization offers better margins than machinery sales

Machinery suppliers face a tough squeeze on margins, and many of them recognize that focusing more on services can ease the pressure and boost profitability. That’s why services already account for up to half of the revenues of many original equipment manufacturers (OEMs). But even greater rewards are possible by making the leap to a full servitization model.

Margins on services are over 10% higher on average than they are on products. Sales of services are also more resilient than machinery sales when there’s a downturn, with services outperforming machinery by every financial measure during the upheaval surrounding the last big financial crash.

It makes perfect sense, because circumstances may force customers to think twice about making new capital investments but they can never afford to skimp on maintaining their existing assets. Drawing customers into a closer, service-based relationship for the longer term also helps prevent problems such as spares ‘leakage’. Customer retention is better too.

iStock-597246400_low

But OEMs can win even bigger rewards by going beyond the traditional post-sales service approach of regular site visits and emergency callouts and committing instead to a full servitization model.

Servitization means committing to deliver a function, rather than simply providing assets. So a robotics supplier might commit to delivering a certain number of welds per hour for a car maker, or an aircraft supplier might promise an airline a certain number of flying hours per month.

It’s a contractual model that has already taken off in the high-value, high-stakes arena of defense and aerospace, where so called integrated operational support (IOS) agreements are now the norm. But servitization hasn’t attracted the same level of interest in many other industries before now. One reason is that the potential benefits of servitization also come with risks for OEMs. If they commit to delivering a certain level of service, they’re also signing up to potential penalties if things go wrong. In other words they’re shouldering a risk that would previously have been borne by their customer, the end user.

Things are changing, however, thanks to the arrival of new technologies that mitigate that risk and make the margins on servitization contracts much more predictable than ever before.

Predictive Maintenance is the critical difference, and condition monitoring provides the tools that enable it.

Many condition monitoring systems now use the latest advanced machine learning algorithms to take machine data and turn it into valuable information about the state of assets across the customer’s organization. This enables the OEM to monitor assets remotely and predict when maintenance is needed. Ideally, the system provides an alert in time for the OEM to take action and avert any problem before it can impact on the end user.

Effective condition monitoring used to be extremely resource hungry and difficult to scale, but the recent wave of Industry 4.0 innovations have swept these obstacles away. Condition monitoring is now a practical, cost-effective proposition across a wide range of industries.

Senseye PdM is a great example. This cloud-based, fully scalable system can monitor a single machine or thousands. Its unique  proprietary  algorithms can turn data into an accurate prediction of the Remaining Useful Life (RUL) of assets – a technique known as prognostics. Senseye PdM typically reduces unplanned machine downtime by 50%, increases maintenance staff productivity by 55% and boosts the accuracy of forecasting downtime by 85%.

The pressure on machinery sales margins isn’t going to let up any time soon, but servitization offers a fresh, more profitable way of doing business. This means that there has never been a better time for OEMs to consider whether servitization is right for them and their customers.

Find out more by downloading our white paper Servitization helps OEMs overcome the squeeze on margins, or access our recent joint presentation with PTC on  'Capability as a Service'.

New call-to-action