How the Servitization Model, Cloud and IoT Can Aid Manufacturers
by Unmesh Pai May 2021
Unmesh Pai, product management and strategy senior director at Oracle Financial Services, details the importance of embracing new forms of financial flexibility through technology. In this Monitor Exclusive, learn more about how servitization, the cloud and the Internet of Things can assist or improve your business model.
Amid a global pandemic and widespread economic uncertainty, consumers and corporations alike need financial flexibility now more than ever. It comes as little surprise that servitization – the practice of wrapping a subscription to a suite of services around a product rather than merely selling it – has exploded in popularity over the past year with customer-facing industries, such as entertainment and personal technology particularly thriving in the space.
However, while consumers are widely enjoying the benefits of the as-a-service lifestyle, these practices are less common in business-to-business transactions.
But as the world begins to move beyond the pandemic, it’s a critical time for manufacturers to tap into new business models and revenue streams to make a splash in the post-COVID business environment. For example, think of a large tractor equipment manufacturer. Rather than merely producing a piece of equipment and selling it for a one-time fee, manufacturers have an opportunity to generate ongoing sources of income through pay-as-you-go models. The benefits of this approach are not limited to profit margins, either – lending, using, and then re-using equipment as necessary helps prevent wasted machinery and sustain the circular economy. This also ensures the consumers only pay for how they used the asset and avoid any unnecessary excess payments. Overall, it’s a fairer way of doing business!
Unfortunately, many manufacturers lack the financial infrastructure to effectively deploy cutting-edge lending and leasing strategies. Far too many businesses are holding themselves back with plodding legacy finance systems that cannot easily adapt to the needs of modern lessees and return profits. As manufacturers look to upgrade their systems and take advantage of the servitization trend, there are two key technological capabilities to watch: cloud-based service-oriented flexibility and the Internet of Things (IoT).
Flexibility is Key
The pay-for-use system makes financial sense for both customers and suppliers, but it may not make sense to a company’s dated financial software. Equipment leasing in the servitization era necessitates a platform that can accommodate flexible terms, such as pricing per mile or hour, or engine time, or CPU- usage, depending on the asset under consideration. Some arrangements may even include a combination of both rental fees and usage fees. The system must be able to manage a considerable amount of customer information – such as usage statistics, ongoing rentals, and more – without any mistakes.
For these reasons, and with the best results in mind, most manufacturers will want a platform that runs on the cloud. Cloud-based financial platforms have more simplified and cost-effective installs and are untethered from capital expenditure commitments. By minimizing the fixed cost of new hardware, manufacturers can remove some of the uncertainty of whether their technological upgrades will pay off in the long run and get things running with minimal initial outlay. Manufacturers can also reduce risk by starting with only a part of their business on the modern solution, then test it in the market before they launch it fully.
Cloud + IoT
While a cloud-based financial infrastructure can help manufacturers get their servitization practices off the ground more quickly, the key to unlocking the best possible offerings lies in the IoT. IoT technology enables products to automatically share data about their usage, location and performance to all of a company’s systems and devices. For example, a company that leases out tractors or similar heavy machinery could monitor a machine’s mileage or its maintenance needs without any manual work required.
When a financial system is equipped to support and collaborate with the IoT, it allows manufacturers to translate the data from their remote equipment monitoring directly into their billing processes. The benefits of this change include automatic usage-based payments and real-time superior customer services, which can range from planned maintenance to well-timed upgrade opportunities. These advantages make IoT a critical enabling technology for manufacturers who hope to maximize their margins as they explore usage-based lending arrangements.
Benefits to a modern approach
Though cloud-based, IoT-enabled software should be the industry standard for manufacturers, there are still more benefits to implementing modern financial software. Manufacturers can reduce the costs of adhering to risk and compliance regulations, easily view and manage customer information on a single platform, and improve overall efficiencies and adaptability.
As manufacturing businesses work to maximize their competitive advantage in this rapidly changing economy, they will need to embrace the back-end financial technology that can turn their asset-financing business into a cornerstone of what they can offer customers.
Unmesh Pai is a senior director of product strategy and engineering at Oracle Financial Services. Unmesh brings more than 24 years of experience in software engineering to his role at Oracle, with a primary focus on the BFSI sector throughout his career. Through his work, Unmesh has worked closely with banks, NBFCs and asset finance companies.