Innovation through Smart Services

In the world of M2M, every connected product turns its manufacturer into a new kind of service business.By Harbor Research.

It’s becoming clear that machine-to-machine communication, or M2M, will represent the third wave of the internet. Be it through the exploding interest in Smart Grids, building automation, vehicle telemetry, or healthcare monitoring to name a few, we’re seeing that the revolution of intelligent device networking is here to stay.

However, many remain complacent, believing that device connectivity will not do much to change business as usual. Yet hardly any error could be more costly than to underestimate the magnitude, or mistake the nature, of the change that will come as devices and machines – having already outnumbered people as internet users – continue to connect at an increasing rate.

But it is not just numbers or the magnitude of the change that manufacturers need to understand. It is the fundamental changes to business models that will accompany every company’s – or a competitor’s – decision to connect its products to the Pervasive Internet.

Simply put, the new world is one in which every connected product turns its manufacturer, and, in many cases, others along the value chain, into a new kind of service business. It is a paradigm shift that will open bright futures for those who can make the shift, and doom those who cannot. The move to the Pervasive Internet is happening, and the pace of adoption is accelerating.

M2M market trends

Historically, much of the focus of players in M2M and Smart Services market development has been on developing and lowering the cost of the technologies. In the past few years, it has become evident that the technologies for connected solutions are now mature and experiencing robust growth.

Although there is a way to go yet before end-to-end solutions are available without significant tailoring, the technology itself is no longer the main – or even a significant – issue. The market is moving forward into more complex applications where the need for innovation is of primary importance. Suppliers and Adopters must both find ways to embrace the innovation process within their companies if they are to maximize the competitive opportunities provided by the M2M market over the next decade.

The current trend in machine-to-machine communication is increasingly moving away from basic enablement, and towards managed services opportunities, including monitoring, data analysis, and value-added services. We are now witnessing several major trends that have wide-reaching implications for the M2M landscape. Some examples of trends driving this change:

• Technology improvements will continue to make it cheaper and easier to implement connectivity solutions in everyday devices: communications options will increase, have greater bandwidth, and be cheaper.

• Cross network integration (i.e. integration of connected device data across WAN, LAN, PAN) will have a compounding impact on demand and the scale opportunities.

• During the next few years, end users will emerge as a force and place greater emphasis on solutions that readily integrate with enterprise systems, innovative solution design and more effective service and support.

• Demand for adaptability, agility and features will grow. Innovation in product and systems design will be heavily rewarded. Customers will creatively apply and integrate technology in their work and personal lives to unimaginable levels.

• Customers will require a tailored experience from service providers, driving a movement towards “a market segment of one.” Not only do customers expect suppliers to anticipate their specific needs, they will want suppliers to project an experience for them.

M2M market trends

However, there still remain barriers to growth that will inhibit the impact of machine-to-machine communication in the coming years. The following are some of the issues that represent barriers to growth of M2M opportunities.

Standards issues

Machine suppliers typically use their own standards for network and software integration within their products; the methods of interfacing for communication purposes have often not been considered in depth. As a result, solution providers looking to communicate with individual machines usually have an interfacing problem, leading to the need for middleware. This adds complexity, time and cost to products.

So far, standards activity in the M2M market has not been well coordinated. Module suppliers and solution providers are increasingly dealing with the difficulties this creates, but it is likely to prove a troublesome area for some time to come.

Market structure & relationships

The value chain showing the number of parties that need to be involved in the supply of a new solution is long and complex. This means that relationship building and coordination can be a problem, particularly if the main instigator is a start-up service provider with limited funds and limited management resources.

End user impact

Harbor identifies two types of solution providers: end users, who are typically either consumers or corporations using the solutions for their own internal operations; and adopters. Harbor views adopters as typically OEMs that adopt the technology for use in their own products, in order to offer new services integral to their products.

In addition to alliance and relationship challenges outlined previously, end users are going to begin to understand the implications of many machine suppliers each individually offering remote services programs.

The bottom line will be a trend towards end customers forcing relationships between and among machine suppliers in order to bring coherency to the systems management challenge that will emerge in customer environments.

Lack of knowledge

The general lack of knowledge about the possibilities and potential benefits of M2M is probably the single biggest factor acting as a barrier to growth among users. All of the issues identified above emanate from this lack of knowledge.

Market players are unsure of their potential and their own position within the market. And many potential customers of M2M suppliers are not yet familiar with how to use the technologies, how revenue can be earned, and what efficiencies can be gained.

In addition, market players are often unclear of issues surrounding implementation. However, networking technologies are now reaching a point of maturity where they are no longer the issue. Instead, user issues of business justification and implementation are reaching center stage as the key areas thatneed to be addressed.

Detailed cost justifications are often required to demonstrate to users how the solutions will provide benefits to them rather than simply carrying on as before. This implies that a high level of customer support is required, particularly pre-sale. This education of the market continues to be a requirement for all participants of the M2M value chain.

Mobile tariffs

For applications requiring cellular usage, the cost of airtime to service providers has until recently often been far too high to be sustainable in the market. In Europe the situation is now changing, because mobile operators have been able to offer lower prices for GPRS in particular without compromising their ARPU (average revenue per user) objectives for the financial community. In other markets – notably the US – mobile tariffs are generally still too high.

Network approval

Network approval for cellular modules before full-scale deployment is required in all countries. There is a need to ensure that new devices connected to any particular network will not adversely affect the whole network. However, in some countries – again notably the US – this network approval process has suffered from rapidlychanging specifications.

Within the US, approval is required both by the FCC and by each network operator independently. Testing is therefore duplicated and suppliers can find that they are developing for a specification that is subject to change.

Enterprise IT

M2M solutions will generate the data needed to deliver smart services that create profits and customer loyalty. However, automated information-gathering can easily generate millions of data-points regularly for a typical large enterprise.

Each of these data-points may be very small (the torque, pressure, or temperature of a specific component, or the physical location of a product), but they must all be validated and stored, and then subjected to the sophisticated techniques (data-smoothing, datamining) that turn data-points into actionable intelligence that can be shared and leveraged across the enterprise.

Adapting with Smart Services

There is no question that current economic crisis will dramatically alter the M2M playing field, and the marketplace is currently going through dramatic structural changes. There will be clear winners and losers. Executives need to rise to the challenge, and look upon the crisis as an opportunity to transform and strengthen their business model.

Now, more than ever, product companies must look towards Smart Services for a cheap and profitable way to adapt to the changing environment. They must understand that the symbiotic relationship between products and services drives innovation and creates sustainable revenue.

Products and services, while complementary, have historically had opposite strategic goals and divergent operational models. As a result, each function has had to seek out its own distinct strategies. Traditional manufacturing-driven business models defined services and after sale support as subservient to the product, as no more than a “bootstrap” business with little upfront investment. This model is rapidly disappearing. The ability to closely couple products and a wide variety of after market services has emerged as a requirement to stay ahead.

Today, the two thrusts need to be mutually supportive without inhibiting one or the other. However, trying to coordinate and leverage the respective roles of products and services often creates contention. Many leading manufacturing organizations have come to understand that each have distinctive strategies, operating modes and organizational requirements, and most importantly, that services cannot rely on products to be its “role model”.

The best companies have come to see the continuously evolving relationship between products and services as a fertile ground for innovation. The two need to be interwoven and mutually supportive. Increasingly, success in either goes to the company that effectively utilizes the combined potential of both, but only when services has been designed for its own unique destiny.

The electronic linking of users, channels and producers will continue its inevitable march forward, but the value of networking products and automating support functions will always be inexorably connected to how well a company has thought through its services strategy.

As products evolve, so do the attributes of the services required to support the product. Each impacts the other in an ever changing set of relationships. Understanding this critical evolving relationship is the key to effective service delivery. Service business design requires organizations to address several critical aspects of their business, including:

• The overall strategic role of services

• The uniqueness of the business model and the delivery schema

• The required organization structure and skills requirements

Rising to the challenge

The first movers in vehicle telematics, industrial gases, and medical imaging systems have not only brought their connected offerings to market, but may already have locked down lasting dominant positions in their respective industries.

At the same time, technology suppliers have ensured that the tools for device connectivity are in place. Except in the least developed countries, while there may still be infrastructure issues, there is virtually no place where a connected product cannot be deployed to the advantage of both its manufacturer and its users.

Yet many companies will fail to make the shift. Is it because the technology is immature and not to be trusted? No – the market is now beyond that stage. The technology is maturing and reaching acceptable price points. What remains of technological risk pales next to the risk of delayed action.

The key word is risk. The leadership in many manufacturing companies has not been accustomed to the volatile, high-stakes world of business on the Internet, and it is this transition, not the technological shift, that many will fail to make.

These changes come in many areas:

• Internal Leadership: We have already seen and expect to see more cases where many members of organizations have a clear view of where the company needs to go, yet are unable to present the business case for change in a compelling manner.

• Strategic Planning: Companies may not know whom to invite to the planning table, let alone what to do when everybody is there. They may have strategic planning processes in place that are illequipped to deal with major paradigm shifts.

• Business Execution: Manufacturers may have little understanding of the nature of a new, information-intensive offering, or of the needs of a market that will be trained by the companies that have made the shift successfully. Such customers will be far more demanding than in the past.

• Organizational Structure: Companies may fail to understand that the new skills, shifting alliances, and new customer bases that can come with pervasive computing may demand radically new organizational structures.

In short, many companies will fail due to the inadequacies of their leadership to guide their business forward, before it’s too late. And inevitably, companies will fail to understand the disruptive threat inherent in the Pervasive Internet, and a merely defensive justification to network a product may not succeed in moving management. Fortunately, a simple construct of cost justifications will allow most companies to think through the advantages of connecting, and will allow many to find the required motivation.

Still, many companies will be hampered in their thinking by a tendency to assume that the company after networking will be the same company and in the same business as before networking. This is a dangerously crippling assumption in almost every case.

However, there is some hope. Based on our findings from the larger cross-section of manufacturers we surveyed, leaders in many manufacturing companies are only just beginning to understand the opportunities driven by the complicity between service business design and networked leveraged devices and it is this relationship, not the technological shift, that will benefit but also challenge many product manufacturers.

A very high percentage of the companies surveyed have moved forward with remote service and support programs; companies are not failing to respond to the availability of networking technology and remote device management platforms. But many of the survey participants feel their companies are moving too slowly, or worse yet, will fail altogether to make the shift.

Is it because the technology is immature and not to be trusted? In some areas of the technology value chain, the pieces may not be mature. Yet even today, robust systems can be – and are being – built with existing offerings, and what remains of technological risk pales next to the risk driven by the lack of support and understanding from management of the role after-market services can play and the leverage connectivity can add. The rewards of becoming a smart service provider are hard to deny. In our research, Harbor has documented organic growth rates in double digits for many companies that follow this path. The leaders are establishing the new performance benchmarks for their industries, deriving more than 50 percent of their revenue, and 60 percent of their margin contribution from services as opposed to product sales. For most management teams in product-centric companies, numbers like these sound like nirvana.

Joining the ranks of smart service companies is not primarily a technical challenge. The technology, while critical to the task, is well enough established by this point. Rather, in most companies, the biggest challenge will be in getting management to adopt a new perspective on the nature of the business. The companies in the vanguard of remote services think differently about what they exist to do and how they profit thereby – but they have come to that new heading by degrees.

Harbor Research Inc. (www.harborresearch.com) provides strategic consulting and research services on all topics related to machine-to-machine communication, the Pervasive Internet, and associated Smart Services.

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The Evolution of Remote Product Service

Research by Aberdeen Group reveals that companies able to remotely monitor assets out in the field can increase revenues, develop new services, and boost customer satisfaction.

In the current economy, service excellence is not solely measured on the grounds of operational metrics such as mean time to repair and first-time fix. Today’s service organization achieves Best-in-Class status on the grounds of profitability generated through cost control, customer retention, and revenue creation.

These objectives have not only led to the increased adoption of Remote Product Service (RPS) tools, but have also facilitated evolutionary uses of the technology class. RPS tools are no longer just considered to be the enablers of service delivery efficiency and predictive service, but also as the facilitators of intelligence-based smart services.

Benchmark data indicates that firms have slashed nearly US$500,000 dollars of service costs and added an average of $1 million in service revenues from the adoption and use of RPS tools.

In a 2009 Remote Product Service (RPS) Aberdeen Group research survey of approximately 170 service and manufacturing professionals, the three pillars of customer satisfaction, cost, and revenue were highlighted and validated as being the key ingredients driving firms to increasingly adopt and evaluate remote monitoring technology and RPS applications.

As expected (see Figure 1), cost pressures have become more acute in 2009 as compared to 2008, with half of all respondents looking to drive down service-related costs and 31 percent indicating the need to rein in service cost increases. To attain these cost management objectives from an operational point of view, firms are looking to improve diagnosis accuracy and first-time fix rates while improving planning and forecasting capabilities so as to reduce total dispatches.

In addition to cost pressures, responding firms still place a premium on the ability to meet customer demands regarding speed of service, asset availability and asset performance. While the intensity of these pressures has dimmed slightly when compared to costs, it is evident that customer satisfaction and loyalty is not to be sacrificed in the face of rising costs.

To offset cost pressures, 70 percent of organizations indicate that they are actively looking at RPS-led revenue streams during these tough economic times, and 70 percent also indicated that they anticipate this revenue-based reliance to increase in the next 12 months. Two-thirds of polled companies indicate that these RPSled revenue streams are significantly important to the financial and operational performance of service firms.

Remote opportunities

Given the trifecta of cost, customer satisfaction and revenue pressures facing service and manufacturing firms, it is not surprising that Aberdeen continues to track growing interest in remote connectivity, remote management, and remote service, all coined under the phrase RPS.

Essentially, RPS describes the service and maintenance processes (from break-fix to preventive to predictive) that are afforded to OEMs and service organizations from being able to remotely monitor their assets out in the field or on the plant floor.

Aberdeen’s research has not only tracked the growing proportion of remotely monitored assets but also the increasing application of usage information gathered from these assets for data-based “smart services”.

Evidence from this growth in interest can be garnered by examining April 2008 research which found the percentage of assets being monitored remotely, to be 16.5 percent, up from 11.7 percent in 2007, while in 2009, responding firms indicate that close to 28 percent of serviceable assets are now monitored remotely, with expectations of an increase in that proportion to over 40 percent in the next 12 months.

To further highlight the opportunity for growth in the RPS space, firms indicated that a full 60.4 percent of serviceable assets would benefit from remote service capabilities, indicating that at the current level of 28 percent, more than one-half of serviceable assets currently deployed in the field could still benefit from remote monitoring technology.

Maturity classes

Regardless of technology adoption, Best-in- Class service organizations are those that can address the challenges faced in today’s economy and still deliver value to their customers while driving returns on both the top and bottom line of the organizational income statement. As such, Aberdeen’s determination of Best-in-Class resides on KPIs that address:

• Cost management and efficiency - first-time fix

• Customer satisfaction and service operational excellence – asset availability, Mean Time Between Failure (MTBF), Mean Time to Repair (MTTR)

• Revenue - service revenue per customer

Improved diagnosis and first-time fix rates were highlighted as the key areas that firms are looking at to reduce service costs. As such, Best-in-Class firms are significantly more likely than all others (Industry Average and Laggard companies combined) to resolve service issues on a first visit when compared to all other firms.

As a result of higher levels of diagnosis accuracy and improved time to repair, customers of Best-in-Class service firms are significantly less likely to face costly downtime with their assets. For example, these customers experience a 93 percent level of asset availability when compared to a 63 percent level for customers of all other firms.

Improved satisfaction and loyalty rates as a result of superior availability and repair times ensure that Best-in-Class companies are successful not only in renewing their service customers, but also in increasing their service spend over the last 12 months, to the tune of eight percent in terms of service revenue per customer.

Aberdeen’s PACE framework (Table 2) is designed to highlight the key strategies and capabilities employed by firms that attain Best-in-Class status through their excellence in meeting and overcoming internal or market pressures. The framework serves as a roadmap for non Best-in-Class firms to duplicate the strategies enforced and capabilities developed by Best-in-Class firms so as to improve their service performance.

Getting smarter

Revenues from these smart services are primarily generated through three major avenues:

1. Increased contract-related revenues

Asset usage information allows leading service firms to tweak contract offerings so as to meet the needs of their customers. Firms can tailor contract prices and covenants as per the requirements of their customers.

Direct visibility into asset performance also enables the servicing organization to prioritize service resources and needs so to as to increase compliance with SLA covenants. With improved compliance, leading firms are experiencing increased contract renewal and customer retention rates thus stabilizing future revenue streams. These firms are also experiencing increases in revenue generated from existing customers under contract as measured by overall increases in contract sales and total contract values.

The direct capture of asset usage information also provides leading service organizations with the capability to offer pay-peruse options to their customers. These options were previously impossible to administer without direct line-of-sight into usage information. These pay-per-use offerings remove prohibitive upfront cost barriers for potential customers, thereby assisting in new customer acquisition and top-line revenues.

2. Provision of new services

In addition to contract-specific revenue opportunities, remotely captured asset performance data has opened the door for the provision of services which can be monetized.

For example, a third of leading firms indicate they currently generate revenue streams from the provision of process and resource optimization services around usage trends captured from the serviceable asset.

As in the case of a large medical equipment servicing firm, usage information of emergency room equipment revealed inefficiencies in ER processes. As such, the firm now provides ER resource optimization strategies to its hospital customers so as to enable the medical staff to focus on patient care.

Other services that can be monetized include the provision of security services and alerts pertaining to the use of assets, either by unauthorized parties, during unauthorized times or for unauthorized purposes.

Leading service firms are also using asset performance and usage data to help their customers with inventory management issues, essentially assisting them in developing a fix on the optimal quantities of resource and product inventories based on asset usage. In the utilities space, the use of remote connectivity to manage energy transmission and distribution is also gaining traction.

As in the case of a large medical equipment servicing firm, usage information of emergency room equipment revealed inefficiencies in ER processes. As such, the firm now provides ER resource optimization strategies to its hospital customers so as to enable the medical staff to focus on patient care.

Other services that can be monetized include the provision of security services and alerts pertaining to the use of assets, either by unauthorized parties, during unauthorized times or for unauthorized purposes.

Leading service firms are also using asset performance and usage data to help their customers with inventory management issues, essentially assisting them in developing a fix on the optimal quantities of resource and product inventories based on asset usage. In the utilities space, the use of remote connectivity to manage energy transmission and distribution is also gaining traction.

3. Provision of reports

For those firms that are perhaps not in the position to offer services to their clients, the provision of reports gathered from asset usage data is gaining traction. For example, nearly 30 percent of leading firms indicate that they are currently generating revenue from the provision of asset usage and performance reports to their customers.

Trending information contained in these reports can assist customers in tweaking processes and guidelines regarding the use of assets to maximize output and productivity. Nearly 15 percent of leading service firms are cashing in on the provision intelligence to their customer by providing benchmark data regarding the use of assets by peers of the asset-operator customer, while 24 percent indicate that they actually already provide these services, but do not generate revenue streams from feeding this intelligence back to their customers.

Technology needs

None of the improved maintenance processes, revenue generating services, or knowledge transfer capabilities are possible without investments in RPS technology. Leading firms are significantly more likely to either have a stand-alone remote monitoring application, a home grown remote service application or a service management application with embedded remote service capabilities.

These applications support the data captured from the vast network of connected assets for the Best-in-Class and enable key maintenance and other processes leverage by leading service firms.

Remote monitoring and service capabilities require the use of a network for the transmission of data and instructions between the asset and the service organization. Across all firms, the current preference is for tethered broadband or Ethernetbased connections. However, with the proliferation of wireless networks it is not surprising that interest is high in being able to connect to assets via Wi-Fi, satellite or cellular-based networks.

To facilitate improved and expedited decision making based on information gathered from serviceable assets leading firms are also more likely to have service-specific analytics or intelligence in place while making information available to all relevant stakeholders in the organization through the use of knowledge management tools.

In terms of returns, organizations that have implemented RPS solutions have experienced significant benefits in key customer satisfaction, cost and revenue criteria that were highlighted as market pressures (see Table 3). They have seen increases in customer retention and service-based revenues. This increase averages out to more than a million dollars of additional revenues across all firms.

Becoming the best

The Aberdeen survey results show that the firms enjoying Bestin- Class performance are:

• Almost twice as likely as all others (Industry Average and Laggard companies combined) to rely on remote resolution of service issues

• More than three-times as likely as all others to be using remotely captured data for the generation of new revenue generating services

• Three-times as likely to have cross functional teams for the provision of RPS-enabled smart services

• Nearly twice as likely as all others to currently have RPS applications in place

To achieve Best-in-Class performance, companies must:

- Increase organization-wide access to remotely captured service data

- Enhance support infrastructure for the provision of smart services

- Leverage the forecasting and planning capabilities afforded by RPS

- Integrate remotely captured data with enterprise applications

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RPS for Rapid Remedy

Varian Medical Systems manufactures a variety of medical instruments and cancer treatment systems that support leading-edge treatment modalities with Intensity Modulated Radiation Therapy (IMRT) and Image Guided Radiation Therapy (IGRT). These treatment systems are deployed at more than 1,000 hospitals and clinics worldwide.

Traditionally, system and equipment problems required service technicians to diagnose and resolve issues at the hospital site, resulting in higher costs and lost patient treatment time – the loss of one day for a typical treatment device can result in 35 patients missing their treatments. Problem resolution can also be complicated if incorrect or incomplete information has been provided by the operator, or in cases where the problem cannot be recreated once the technician is on site.

Additionally, operators of the Varian Acuity imaging system, an integrated simulator and verification tool for testing patient treatment plans, occasionally require expert assistance to optimize the image quality, solve operational problems, and tune system performance. All these operational issues cost time and money for Varian and their customers.

To better manage these issues, Varian deploys a remote service application for servicing the company’s information system and treatment planning software products, as well as Millennium MLC and Acuity systems. The solution, marketed by Axeda as SmartConnect allows Varian to directly and securely connects to customers’ systems when support is required, providing quick and accurate remote problem resolution.

Varian SmartConnect-enabled systems are now deployed in more than 3,000 treatment centers, where they are used an average of 17,000 hours per month. An average response time of four hours can be reduced to two hours on SmartConnectenabled systems, with estimated savings to a hospital of more than US$2,000 per event.

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This is an edited version of the April 2009 report authored by Sumair Dutta (sumair.dutta@aberdeen.com), Senior Research Analyst, Aberdeen Group, “The Evolution of Remote Product Service and the Emergence of Smart Services”. The report was made available with the support of Axeda and Enfora and can be downloaded in its entirety at www.aberdeen.com/channel/service.asp