Digital Transformation Unlocks the Door to Services Revenue in Manufacturing
Digital business transformation is a sometimes-vexing journey, with no shortage of pain points along the way. The rewards, however, more than offset the difficulties. How do I know? Because the transformation that so many organizations are undertaking reflects Cisco’s own, sometimes challenging journey — along with those of our top customers.
This month, our team released a major research study that illuminates the critical need for digital business transformation to address key challenges in the manufacturing industry. In particular, we focused on how industrial machine builders and end-user manufacturers are trying to transition from a product-oriented strategy to a service-oriented revenue model.
The goal is to move from a CapEx to OpEx model, charging, in effect, for business outcomes such as uptime, efficiency, and sustainability rather than one-time product fees. However, complexity — along with manufacturers’ limited digital capabilities — is slowing progress.
In our survey of more than 600 manufacturing decision-makers in 13 countries, we found a clear understanding of what is at stake. Seventy-nine percent of respondents believe that digital disruption will drive a moderate to major impact at their companies in the next three years. Eighty-six percent are basing their future strategies on services; and 93 percent expect that those services will become increasingly digital.
Despite the imperative to act, however, 47 percent still expect revenue from products to grow faster than revenue from services, despite services starting from a lower base. As our study emphasizes, in solving the service dilemma that is plaguing manufacturers, this becomes a digital transformation story. Our respondents placed the highest importance on fundamental digital capabilities such as cloud, machine-to-machine connections (IoT), and data analytics. These eclipsed more manufacturing-centric technologies, including robotics and 3D printing.
To me, this gets to the heart of the disconnect between the desire to expand services and the reality. It is the lack of those fundamental capabilities that is holding manufacturers back. In effect, the services journey and the digital journey must converge for true value to be captured. Those foundational digital capabilities will be critical — not just within the organization but across an ever-expanding ecosystem of customers, partners, and third-party vendors.
Manufacturers have made important strides, for example, by connecting industrial machines on the plant floor to capture data about wear and tear, energy usage, and so forth. However, simply connecting that machine via a cable to a PC is just the start. Great opportunities arise once a more complete level of digital transformation alters the organization and its technology, making it possible to capture and share data insights in a much deeper way.
Some of Cisco’s top manufacturing customers illustrate the exciting service offerings and business outcomes that come with digital transformation:
- FANUC, the industrial robot builder, has built a highly secure hybrid cloud to extend its existing data center to customers’ premises. FANUC can now extract data from its robots to gain visibility into robot performance, thereby predicting an issue, rather than reacting to a problem. Data insights also contribute to reduced cycle times, enhanced product quality, and improved efficiency of processes.
- Benteler, which supplies safety, environmental, and efficiency solutions to vehicle manufacturers worldwide, has fully connected its manufacturing plants. Every tool and part is connected to the network, and every step in the production process can be analyzed and controlled from the cloud.
- Mahindra & Mahindra is one of India’s largest auto manufacturers. In its new plant in Chakan, people, process, data, and things all connect to an Ethernet network. Outcomes include faster changeover to build new car models; better quality; and improved decision making fueled by real-time insight. The company is looking to add predictive analytics.
As innovative as these manufacturers are, I know their journeys have not always been easy, just as at Cisco. Driving organizational change, business model change, and technology change all at once is never a cakewalk. Our companies, however, have one key thing in common: we have begun the journey of digital business transformation. As a result, we are gaining the agility and the technology foundation that will enable us to drive innovation — and competitive differentiation — in the digital age.
Our economic analysis indicates that a $20 billion manufacturers that undergoes digital transformation can expect a 12.9 percent profit upside over three years; 19 percent over 10 years.
I think we would all agree; a payoff like that more than offsets the challenges.