Product-as-a-Service, multiple revenue models, switching from CAPEX to OPEX — are all different ways to describe the popular trend among industrial manufacturers of transitioning from a single sale to recurring revenue models by renting or leasing products.
The circular economy and digitization fuel this trend, and the pivotal question for industrial manufacturers is — How do I adopt Product-as-a-Service in my business?
Product-as-a-Service (PaaS) is a business model that helps industrial manufacturers deliver products and rental support services as part of long- or short-term subscription contracts. You can offer your equipment to your customers for a fixed period and gain periodic payment for the equipment used.
But how do you implement PaaS so you can begin renting your equipment and add new revenue sources to your business in a sustainable manner while retaining equipment ownership?
With almost two decades of experience in the rental and manufacturing industries, we at To-Increase have a global presence in empowering companies to adopt the right technology by leveraging the power of Microsoft Dynamics 365 Finance and Supply Chain Management.
This article is a guide for manufacturing companies looking to provide their equipment as a service or expand their product portfolio through renting. You’ll discover the impact of PaaS, the best practices to adopt it, and the potential software solutions.
What is the impact of PaaS on an industrial manufacturing business?
Making a small change in business, such as new technology, can have a significant impact on your entire business. So, you can just imagine the impact of remodeling your business processes could have on your manufacturing company.
There are three ways that the Product-as-a-Service model can impact your manufacturing business:
1. Cultural impact
2. Business process impact
3. Technological impact
Let’s look into each impact and some helpful pro tips:
1. Cultural impact
This includes the shift in the mindset of everyone involved in your business, from the executive team to the frontline customer-facing employees. Everyone must see and understand the value in transitioning to the PaaS model as it will influence the way work is done.
Pro tip: To be proactive and make the transition seamless, begin having conversations with the executive team and recruit a change manager to give necessary training to your teams so that everyone is on board and excited about the new business model.
2. Impact on business processes
The core of your business processes may not change, but you may be required to make certain alterations and fine-tuning which will shift the way you do your business. It can be further categorized into:
- Financial impact: Since the way you conduct business will change, your finances, profits, revenue generation, and asset management will differ.
- Sales impact: As a manufacturing company in sales, you will be introducing another model to generate revenue for your business — rental. The sales team must be given the relevant training to handle the business’s selling and renting aspects.
- Operational impact: The shift in the business strategy will impact all your current operations. Additional operational processes must be defined to include the PaaS model and identify the movement of your asset from inventory to the ‘selling’ or ‘renting’ path.
Pro tip: Embrace the concept of cross-functional teams (CFTs) in your business to get all the expertise and increase communication among your team members to enhance your business processes with PaaS.
3. Impact on software
The most crucial impact you’ll face is on the type of technology you’ll invest in. Changing business processes also means finding the right technology to successfully support and execute the business process, which in this case is PaaS.
While the internet of things (IoT) is empowering many companies to leap toward PaaS, there are many other components regarding the technology you’ll have to consider, which we will discuss further in this article.
Pro tip: Assess your technology options after clearly identifying your needs and gaps. Explore software solutions with IoT that can help you make the transition with minimum operational hindrance.
How to successfully adopt PaaS in your industrial manufacturing business: 8 step guide
1. Assess the investment and return
While this is self-explanatory, the first step is to assess the ROI you’ll gain after incorporating PaaS into your business. If you have a steady flow of inventory and identified a strong market interested in leasing or renting your product, you could consider expanding your business horizons.
If you’re still new to the selling versus renting model, do thorough market research before venturing into PaaS.
Additionally, it's helpful to know that the transition will not incur huge profits at the very beginning, so have a well-thought-out, long-term strategy in place before implementing PaaS.
2. Carry out an in-depth product analysis
The PaaS model comes with multiple benefits for rentals, suppliers, and end customers.
Once you’ve realized PaaS is a fit for you, you need to identify which of your assets has a higher probability of being rented out.
It would be good to have the list of rental assets and your go-to-market strategy ready, before making the shift.
3. Plan your revenue models
The PaaS model brings several types of revenue streams with it, and you’ll have to plan which ones your business can include in a way your customers will utilize it. You’ll have to decide on the revenue streams such as single revenue or revenue over time — subscription or rentals and have plans in place to manage multiple revenues.
Additionally, you will have to define how you want to price your rental products and the associated revenue components attached to those rental products. For instance, you could offer a rental product — inverter, with consumables attached, such as the inverter batteries. The associated revenue component for the rented inverter is the sold inverter batteries.
4. Initiate product redesign with IoT
IoT and sensors are essential components of the PaaS model. When renting or leasing your products, there will be upfront costs involved in adding sensors to certain products to measure usage by your customers; for instance, the number of hours an inverter runs.
You’ll have to connect your product design to manufacturing by integrating your engineering systems and manufacturing system. One way to do this is through a PLM-ERP integration to reduce any production errors and ensure that correct data moves from product design to product manufacture in near real-time.
5. Define logistics and operations
With PaaS, you can establish multiple revenue streams and define the path of each asset in your portfolio. There could be pure-sales assets, pure-rental assets, and assets that could be used for both. You also need to define the steps after a rental asset’s end of life — repurposing, recycling, disposing, or selling.
Additionally, you need to define the channels of order fulfillment that may change with the PaaS model, from inventory to customer and returned to your asset inventory.
6. Prepare your business for impact
As discussed earlier, the impact of PaaS is threefold on your business. You’ll have to factor in your financial planning, business plans, and strategic plans so that the implementation of PaaS is fruitful for your business.
Plan well in advance on how to address future challenges, hire the right people, and adopt the right technology to make the transition seamless for your company.
Make sure the digital transformation you’re implementing aligns with your organization’s culture and set examples through the right guidance and leadership, throughout your company.
7. Ensure you have the right technology to support PaaS
Implementing a new business process while adopting the right software must go together. You must identify and invest in software that supports you in the initial data gathering process, product analysis, and all the above steps.
PaaS will impact your overall assets, liability, customer support, revenue, accounting, taxes, sales procedures, and business value. Therefore, having the right software is crucial to getting the whole transition to PaaS right.
8. Implement the PaaS model
Once you’ve defined, identified, and decided on all the above, you can go ahead and implement the PaaS model into your business.
As a best practice we would recommend you take things slow and have a pilot study done before scaling up your operations, so you can learn from your experience and rise as a strong differentiator in your industry.
Don’t forget to create a buzz around the inclusion of PaaS in your business to your customers and present them with the benefits. Also, review and revise your business processes to stay updated with any local regulations.
What software options can support PaaS?
There are a few software options you could consider that support you with your transition to PaaS:
1. Local software
With an already existing manufacturing business, you could have certain software that supports your industrial manufacturing processes. You could add another pure-play rental solution to this and manage operations.
The limitation of this solution is you’ll have to maintain two different software systems, and this could result in disparate data across systems, with a higher total cost of ownership (TCO).
2. Cloud-hosted software
There are many ISVs that offer cloud-hosted software that can support your PaaS model. However, private cloud subscriptions could be a higher cost for your business, and you must invest in cybersecurity to ensure your company data is hosted on a secure platform.
3. Customized software
You can always opt to build or develop a software solution to support your PaaS model. This is usually done if your business is unique and if you have the right expertise and time to develop the software. However, developing custom software is time-consuming and, on average, costs more than buying off-the-shelf software.
Also, with PaaS still in the incubation stage of the manufacturing industry, you’ll have to identify the right resources from a manpower and technology perspective to get the development correct.
4. ERP embedded software
There are multiple ERP providers such as SAP, Oracle, Infor, Microsoft Dynamics, and so on. An ERP embedded software can take care of your end-to-end business needs and can manage financial, operational, and human resource management in a single system.
5. Combination solution
A combination solution would refer to combining any two different software solutions you choose. You could combine a local solution with a customized one or have a best-of-breed solution. The only limitation here is the multiple points of contact to maintain and utilize the software. If any of the software you opt for is discontinued, you’ll have to re-invest in another software, costing more to your business.
What can you do to become PaaS-ready?
Now that you’ve understood the steps you must take in implementing PaaS and the significant role technology plays, your next step is to assess where you are in the transition journey and begin analyzing the different software options you have.
If you’re looking for an end-to-end solution that addresses your entire rental and manufacturing lifecycle from lead to cash and recognizes multiple revenue streams, then you could consider the option of rental ERP software.
You could explore more about the offerings of rental ERP software by viewing this checklist, which will provide you with information on:
- Benefits of the PaaS model
- Selection criteria to find the right-fit ERP solution
- The ERP essentials for industrial equipment manufacturing and distribution companies
If Microsoft Dynamics 365 as an ERP has your interest, or if you’re an existing Dynamics 365 user, then you could explore our cloud-based, rental-specific software – DynaRent, embedded in Microsoft Dynamics 365 Finance and Supply Chain Management.