We've become accustomed to certain products as a service – cable and satellite TV, or software for instance. But the flood of data available from Internet of Things connected devices is set to unleash new possibilities for Everything as a Service or XaaS, also known as outcome-based pricing -- that has the power to disrupt traditional business models. The Industrial Internet could contribute more than $14 trillion of global output by 2030, according to Accenture.
Think of warehouse equipment as a service-- a company won't buy forklifts but instead will pay for the number of lifts performed, for example.
Research from The World Economic Forum reveals that disruption will come from new value creation made possible by the massive flow of data from connected products, and the increased ability to make automated decisions and take real time action.
Everything as a service is not a totally new concept at the commercial level. Software, including Microsoft Office, Adobe Photoshop and many enterprise applications, has shifted to subscription-based models rather than purchasing shelfware, or boxes of CDs. But outcome-based pricing is different than a subscription-based business model. It relies on compensation tied tangible results, not simply access to information or software.
Rolls-Royce pioneered the concept for jet engines in the 1960s – with capital intensive goods like jet engines, a user pays for engine operating time. If the engine doesn't work, the airline doesn't pay.
Xerox uses it for document services, with users paying by the number of copies produced rather than purchasing copy machines.
General Electric is in the process of transforming from a classic product company to a service orientation, and has indicated that 70 percent of revenue now comes from selling as a service what used to be sold as products.
Today, online ride services such as Uber and Lyft are shifting the landscape from purchasing a car to only paying for transportation when you need it. Joule, another transportation start up, lets customers lease cars and exchange them when it's time for maintenance.
In the outcome-based world, businesses compete on their ability to deliver measurable results to customers rather than pushing the most product out the door. Consider a warehouse that used to buy lift trucks but instead now pays a fixed fee for 500 lifts per day. Beyond merely meeting the required number of box lifts, the lift truck supplier can use the data collected from daily operations to provide suggestions about warehouse design, product locations and logistics processes. The buyer/seller relationship migrates from a zero-sum price-based relationship to a collaboration based on mutual efficiency.
Outcomes could range from guaranteed machine uptimes on factory floors, to tracking real energy savings in commercial buildings, to guaranteed crop yields from a parcel of farmland. CNH Industrial's precision farming services enables farmers to tap into solutions spanning all crop production phases.
In the UK, Alstom Trains provides the necessary services to regional rail operator Virgin Trains to keep trains running according to service level agreements, including all track maintenance and equipment repair.
Interface provides flooring services to major clients such as HP and Google. If a carpet becomes soiled, Interface replaces the square of modular carpet as part of the service agreement.
Consultants at PwC have identified Everything as a Service candidates as businesses that sell some combination of products, parts, and service. Separate line items for the initial product purchase, any consumables required, and a maintenance contract are replaced with a monthly fee based on negotiated outcomes.
Customers welcome the concept because it transfers risk and capital investment to the seller. Sellers embrace the opportunity to develop deeper relationships by locking in parts and maintenance revenue.
The explosion of IoT connected devices will lay the foundation for data that enables the spread of outcome-based pricing into new industries. According to PwC, the key to success is "the ability to accurately predict a customer’s consumption in order to set per-outcome pricing that benefits both buyer and seller."
For the seller, innovating for efficiency can increase margins, versus competing head to head on price. The buyer can better track return on investment and develop a partner rather than a vendor relationship.
Converting to an outcome-based business model has its potential speed bumps. Consumption of services can vary from the forecast levels – the customer's sales may skyrocket, or plummet. There may be finger pointing over the cause or any contract changes that could result.
The World Economic Forum noted that even the largest companies will plug into ecosystems to enlarge the problem-solving above the level of an individual product or solution. Instead companies must work together to meet customer needs. This also delivers a speed advantage, allowing companies to adapt to external changes while focusing on their core competencies.
In the new outcome economy, businesses compete on their ability to deliver quantifiable results rather than physical products. To achieve outcome goals, companies will increasingly rely on business partners and connected ecosystems using advanced analytics and data streams from smart products to gain timely insights about customer behaviors and requirements.