This IDC Manufacturing Insights blog provides a commentary of a recently published research study that Cisco conducted to better understand what it calls the "service dilemma" and the role of digitization in manufacturing segments.
At IDC Manufacturing Insights, we have spent the past several years identifying the transformation taking place across the manufacturing industry, where companies are replacing traditional product-oriented business models with a mix of product-service systems and, in some cases, a complete move to service-oriented models. Subscribers can view a published report here, while community members can view a previous blog on the topic. As several of the reports we published highlight, the transition to service-oriented business models, driven largely by innovation accelerators like Internet of Things and Cognitive Systems, requires company-wide change, from sales to finance and everything in between. Manufacturers today are well down the path of exploring how to add service-based revenue sources to their existing product portfolios, and many must confront the wider need for digital transformation to achieve ultimate success.
A recent research study published by Cisco reveals some telling details about where manufacturers are with their interest in and transition to service-oriented revenue models. The details about the research effort can be found here. Cisco's research of more than 600 senior manufacturing decision-makers identified the strong intent of manufacturers to shift focus toward more profitable services. According to the report, "86 percent [of respondents] said the transition from products to a service-oriented revenue model is already part of their growth strategies." This aligns with what we've seen at IDC Manufacturing Insights in our discussions with manufacturers – there is palpable activity around exploring how to add services, or in some cases transform from largely product-based offerings to product-service systems offerings.
With this active interest, however, comes some noteworthy challenges that manufacturers must overcome to be successful. Here's what's happening: as a company starts down the path of transforming some of their product offerings into product-service or service-oriented offerings, they quickly realize the extent of the impact to the wider organization and business processes. Suddenly, a different sales approach is necessary, including diverse incentive programs. Finance needs to change as well, often to capture subscription-based or incremental payments rather than traditional lump-sum capital payments. And, the service organization is vastly different, including how contracts and warranties are structured as well as the skill set needed. All of these essential changes are placing increasing pressure for manufacturers to undergo digital transformation across their entire business to support this move to service-oriented offerings.
Cisco calls this the "Service Dilemma," whereby "new services increase complexity, and greater complexity creates profitability challenges." The study revealed a significant gap between manufacturers' intent toward more service-oriented revenue and their ability to capture that opportunity. At the crux of this gap is the immense complexity and necessary investment in digital transformation to support the move to service-oriented revenues.
This is not a dilemma that will disappear easily. While the discussion may start in the product or service organization, it should quickly be elevated to the highest levels of the company. Executive sponsors must execute on the vision through strategic investments in digital transformation throughout the organization. Technology is a foundational part of digital transformation, but it also requires organizational change at every level. The stakes are high. Those manufacturers that are able to digitally transform to support new product-service and service-oriented offerings will move their companies into stronger profitability positions and faster growth. There is no doubt that some will be left behind. How is your organization going to ensure it isn't one of them?