Product as a service: will this become the new normal for equipment and technology manufacturers?

The ‘product as a service’ trend (XaaS) is gaining ground around the world. Customers are increasingly asking for service over ownership, while the growing world population and pressure on natural resources are pushing the industry in this same direction. Should manufacturers consider this as a temporary trend or is the service-based business model becoming the new normal?

Changing customer needs
Not too long ago, consumers were primarily focused on owning assets. Ownership allowed for a certain sense of control over their project and needs. However, today’s new generation wants access to equipment and technology without the burdens of ownership. This generation prefers easy, accessible, fast and flexible services over ownership of an asset. They don’t feel that leasing or renting puts them in a more precarious position than owning an asset. Rather, leasing or renting gives them flexibility, convenience, and peace of mind; that is what this generation in general is looking for.

The role of the manufacturer
You would expect that since the new customer base is increasingly asking for it, the full supply chain is preparing for this transition, including manufacturers. In an interview with Leasing Life Magazine, Frits Engelaer, VP Servitization at DLL, explains what he is seeing from manufacturers:

"Still, today the business models of the majority of OEMs (manufacturers) are still primarily driven by hardware sales – maybe with ancillary service products, but still a sale. Product as a service and rental business models are no bigger than 10-15% of their P&L. If a manufacturer decides to suddenly shift to the XaaS model, the inevitable redistribution of revenues across a longer period would look like a loss in the eyes of shareholders. The more long-term-oriented an OEM’s (manufacturer’s) innovation strategy is, the more it facilitates lifecycle management, because one would expect the designers and marketers to think of an asset’s second- and third-life market," explains Engelaer. "In a perfect world, you would see manufactures redesign their equipment the moment they start contracting hardware as a service."

The deterrent effect of legal challenges
Although the market seems to be gradually moving towards this usership model, the industry appears to not yet be fully equipped to answer this need. Engelaer adds in the interview, "A lot of players refrain from offering or funding services or managed contracts, as they are not really sure how a dispute around the service offering will be treated in court. The legal challenges involved in ‘XaaS’, have a dire effect on market offers: since few players – either on the lessors’ or customers’ side – have the budget to hire a legal team to look into a prospective contract and make sure it is dispute-proof, XaaS is still too risky for smaller lessors, and unaffordable for most SMEs."

Engelaer further explains, "Bigger companies have the opportunity to play a role in creating a more transparent legislative environment for service contracts. They could by pushing more and more of these service disputes to reach a court ruling, so that we at least make it transparent which type of language holds up in a given court and which does not."

To learn more about the requirements for a service economy, please read the complete interview from Leasing Life (PDF).

For more information on the servitization trend, check out our latest Whitepapers and Reports.