BONUS: What Is Servitization? How OEMs Can Turn Their Installed Base Into Long-Term Revenue with PTC's Sam Neva

0:00That's what servitization in a simple manner means, is I'm no longer just going to give you this pen. I'm going to give you the ability to write in the first place. Welcome to Manufacturing Happy Hour, the podcast where we get real about the latest trends and technologies impacting modern manufacturers. Manufacturing Happy Hour. Each week, we interview industry experts that are at the top of their craft and give you the tools, tactics, and strategies you need to take your career and your business to the next level. And now, your host, Chris Lukey. All right. This episode is for our equipment builder audience, OEMs.

0:47We're talking about servitization. And you might've heard of this before from the context of thinking about like as a service models. This is for equipment builders that want to enhance the way they are supporting their clients throughout their life cycle. And I'm very excited to be joined by Sam Neva, Vice President of Sales for Service Lifecycle Management at PTC for this episode. We're going to be talking about how to get started, hiccups people run into when trying to implement a servitization model, as well as how to know when it's working. If you want to learn more, go to manufacturinghappyhour.com slash servitization.

1:26Now, let's head to Boston to meet up with Sam.

1:38Sam, how we feeling? I'm doing great, man. How are you? I mean, this feels pretty cool recording an episode of Manufacturing Happy Hour from the official PTC headquarters. Not only PTC headquarters, but like the official podcast studio here at Seaport. One that I didn't even know existed before. So happy to be here, first time, just like you. Well, welcome to the Manufacturing Happy Hour family. And as we get started, I am going to ask this first question, manufacturing happy hour style. So I feel like I underserve my equipment manufacturer audience sometimes. And this episode is going to be very much geared towards people that are building equipment.

2:16So let's start off with a quick definition. Servitization. You know, in simple terms, how do you describe what that is as, let's say, we're having beers with one another? Yeah. So I think first it's a term that's evolving, right? There's also a lot of industry kind of specific nuances that come into play. You have things like anything as a service, customer experience, et cetera. The goal of servitization, at least as I see it, is the moving from kind of a traditional OEM style of selling equipment as the first and more or less only revenue stream to selling outcomes that the equipment provides.

2:56And that's what servitization in a simple manner means, is I'm no longer just going to give you this pen. I'm going to give you the ability to write in the first place. As companies have gotten a lot of pressure, I think SaaS is part of the reason that they've gotten some of this pressure, is how do you move to a recurring revenue model? How do you decrease that quarterly performance? How do you have more certainty and more margin? Well, servitization is one of the things that they can do, one of those kind of business models that they can do. And there's, you know, if you're looking at like the elevator industry, if you're looking at printers and scanners, there's different ways companies can do this that are kind of specific to how they do business.

3:39But the overarching goal is how do I make money as the OEM by not just selling you that piece of equipment, that box, but I sell you the outcome of what that box provides you. Yeah, it's funny. Like you were talking about as a service models. I even came across, I mean, this is over like half a decade ago now, but machine as a service, which I think is like kind of synonymous with servitization. Because when I think of an equipment manufacturing business, like you were just describing, I think of a company that's selling a piece of equipment, maybe lots of equipment to the same client over time, right?

4:15There is a lot of repeat business in the equipment building world. But in addition to that, I think there are a number of OEMs out there, equipment manufacturers, that have, let's say, some sort of service model within their company. Correct. It might be more reactive. It might be, I don't want to say an afterthought, but I think that's the case in a lot of spots. So I'd be interested. Let's do a little before and after. Can you paint the picture of what, let's say, maybe a traditional equipment manufacturer business and service business looks like? And then we'll get into one that's like ideal state, one where servitization exists.

4:52Sure. So and by the way, to your point, this has for different companies existed in some form or fashion for a long, long time. Right. You have the ag equipment companies have been selling parts to repair their equipment for basically as long as they've been making the equipment in the first place. But if we're going to say truly traditional, we're going to talk about engineering designs products, manufacturing makes products, sales sells a product. And that's sort of within the four walls of their organization. And that's sort of where the traditional OEM sort of stopped. Right. Right. Where a company moves into more of a servitization model is, and again, I'll kind of, I think it's useful to step back at the market force that's kind of playing up to this, is if I only sell equipment and if I'm only selling you that box or that widget, okay, great.

5:40I have one revenue opportunity with you and you may not need anything for another, what, four, five, six, seven, sometimes 20 years, depending on the type of equipment. But if I sell you the outcome, now I can take advantage of each moment that you need something tied to that box, not just the box itself. So, you know, a med tech company that I used to work for, they sell equipment that do certain types of scans. And previously their business model would have been here is a piece of equipment that does scans. Now it's, we're selling you the ability to support scanning processes, to investigate, you know, biomes in their case, or genetics and biomes in their case.

6:22And so as they dive into a servitized business model, they're not just selling the initial piece of equipment, they are selling the expertise in advance. How does that customer specifically need that piece of equipment to work? So the sales process changes, you have sales and solution engineering and quality engineering tied to the selling process of making sure that what that customer is buying is appropriate to what they need when they receive it in the first place. You then have, you know, the customer receives that piece of equipment. Now you have a number of moments through that equipment's life cycle.

6:58Again, let's say it lasts for five years. You sell it for$100. There's an opportunity for that OEM to monetize and support that customer in the right way over those five years. And every time you have that moment of engagement, you're increasing stickiness, you're increasing relationship quality, you're overcoming challenges that previously were kind of in a vacuum by themselves. So servitization in a new model is really extending and taking advantage of those moments when you can engage with the customer. And one, okay, you have a chance to improve the customer experience. to your providing more opportunities for your organization to make money off of that initial sale.

7:40And so an OEM that's really taking a strong stance and like diving into the idea of servitization, they understand their installed base really well. To your point, some OEMs are selling five widgets per year, but they're massive. You know, think of the semiconductor manufacturing space, massive piece of equipment that costs hundreds of million dollars each time. You're not going to sell very many of them. You might only sell hundreds of them over a given period of time. Those pieces of equipment, though, come with the expectation of immense quality uptime, the result of building wafers, right?

8:15And so a company that leans into servitization is recognizing the scrutiny that comes with selling that asset. And they are providing the infrastructure to support it. Call center, self-service abilities, recommended maintenance procedures, parts availability, technicians and experts to do that. There's a whole aftermarket infrastructure that the company has to build up and support to build out a servitized business model. Yeah. So a couple of key things I'm hearing in, and you kind of answered what was going to be my next question was, hey, you've painted the picture of what OEM businesses have looked like in the past and what does it look like with servitization.

8:53A couple of the key ingredients I heard around a servitization business model is there are more groups involved, right? You were talking about in the past, hey, it's manufacturing and it's sales. Here's your equipment. You know, we're going to support you. But, hey, that was kind of the end of the story in a lot of cases. Now, you bring in more groups, you bring quality, I think is a great example, right? They're now part of that, we'll call it even a continuous improvement process, now that you're deepening that relationship to go just beyond the transaction of the machine. And the other thing that you said that really stuck out, and I know we're going to get into this later, is when you have servitization, you get a really keen understanding of the installed base, what's working, where the squeaky wheels are.

9:37You're able, I assume, be more proactive with that. I'm going to get your take on that. But those are some of the key things that I heard. And given that, like you've said, this has existed in other spots for a while, as service models, printer industry, for example. And I think this is one of the best ways to grow a business, right? You're looking for best practices that have worked elsewhere. And it's like, this is a natural fit in the equipment building world now. So I've got to think a lot of OEM machine building executives have been thinking about this in some way, shape or form. Right. Like, what do we do to build in more revenue streams, even if they haven't been calling it servitization?

10:16Right. They might have been thinking it in, you know, in some other term. But if that's the case, have people been trying to implement these models? And if so, are they running into roadblocks? I'll stop there because I'd like to hear your take on this. So what stands out is, one, depending on the industry, we're at different levels of maturity, right? But what has been consistent for us and what is way more difficult than it sounds to actually do is where is my installed base and what makes up my installed base? How many of product A have I sold to this particular territory? How many of them are still in use?

10:52And how are they being used? Why are they being used that way? just having that basic perspective of what my installed base truly is, is a actually very difficult, challenging question for customers of PTC for us to be able to help them answer and for that customer to answer. So the first question or the first point is, what are roadblocks? Just what makes up my installed base that I need to support? Some products, you know, you sell a widget. There isn't really a support model that's required for that widget. If it breaks, you're going to scrap it. You're going to do something with that. But for other organizations, where is it?

11:27Why is it there? How it's being used? That's level one. There becomes another level of, okay, if I want to sell a warranty and an extended warranty, and it has certain entitlements or customer is entitled and has the right to certain things because of that agreement, is that a good idea? Like, are we giving away margin? Are we being overly exposed? can we even meet that expectation on the first and I always think of yesterday there was an outage and with respect to that carrier I won't say their name but you know my phone wasn't working here and I was trying to get an Uber from this office to a hotel and I couldn't for about 30 minutes and I had to come back inside and I had to like connect to wi-fi and everything like that that was a minor inconvenience but what I appreciated is that the carrier figured out in like 20 minutes and I was back connected and my phone was working again.

12:21Things are gonna go wrong in customer service in the aftermarket. Things are gonna break. Things are not gonna be working perfectly. But you have to understand those things to be able to support that customer in the right way because we've all experienced this in our personal life. Things go wrong, but what really matters and what we say, hey, that was a really good person. I would work with that plumber. I'd work with that individual is they reacted in a really good way and we appreciated how they reacted and it was efficient. we didn't feel taken advantage of. So the second layer of data, after just knowing where stuff is, is if we offer that customer X or Y or Z, whether that's self-serviceability, whether that is a service contract, extended warranty, some type of monitoring service, et cetera, are we actually giving them something that's useful to them?

13:09And is that going to help them meet the outcome of why they bought the product in the first place? You know, air conditioning, being a great example of that, you're not buying an air conditioning unit just to buy the box. You're buying the air conditioning unit for comfort in the building that you and I sit in right now, right, type thing. If they understand how that asset is being used, they understand in Boston in the summertime, it gets sort of humid, and they can consider those pieces, then they can start to offer service contracts that meet the simultaneous challenge of the business is trying to make money and the customer is expecting a good outcome that they feel okay paying that off of, right?

13:48And so that's the second level of that is sort of understanding, I'm going to have all these field service techs or I'm going to have these people in the back office helping customers, et cetera. Am I pricing this out or am I accepting the right amount of cost to provide the service that I've told the customer I'm going to provide? Yeah. Well, it sounds like there's a bit of a two-way street to that second level. Let's go back to the first level. If we're talking about where OEMs get stuck implementing something like this, you mentioned it's like they don't know where the installed base is or what's in it, right?

14:20That's kind of the 101 aspect of, hey, if you're going to create a good service business, probably a good idea to know what's out there. But level two, like we were just talking about, you want to make sure from a service standpoint that the equipment builder is not taking on huge risk at that point, right? Because that is something that in any business you need to be considering. At the same token, what it really comes down to is making sure the equipment manufacturer can service that customer in the right way. You were just giving an example where it's like, hey, you were down for a little bit, but you were working with a company that was able to get you right back up, for example.

14:59And it's about finding that balance, right? What allows the equipment manufacturer to effectively serve someone? And are we serving that client in the right way? One of my follow-up questions to this would be, I'd be very interested in if those are some of the different levels to it, like what is the right way to get started? Yeah. Servitization then, like what's a step one? And we'll probably get more into it later as we get into more of the details of some of the benefits. Yeah. I mean, just the basis of it is competition has probably already forced you to start in a certain way, right? I mean, think of, I'll use the semiconductor equipment example again.

15:40You're not going to sell a piece of equipment for that amount of money without the customer having the utmost confidence that you're going to have people on site ensuring it's operating in the right way. And so if you're talking about the very high-end configure-to-order model, it's now natively part of the sales package that you're selling. You have to have a program built out that can ensure and give the customer confidence that you're going to help them get there, right? And so even if the reality is, even if you don't know your installed base very well, your selling necessity at this point is so high that you're offering these things.

16:15And so now companies are having to backtrack of, well, you know, and if you look at some of the older industries into heavy equipment manufacturing type thing, that's where you get into the, okay, well, I don't even know my installed base in the first place. I need to learn more about it. I need to know where things are, how long they were there for, what happens when they're 10 years old kind of questions. In new sales is a completely different game of you are likely not going to sell someone$100 ,000 piece of equipment unless you have already offered and figured out, well, well, we're going to try to offer this to you, right?

16:49I think probably one of the most well-known is Hyundai's, you know, 10-year,$100 ,000 or 100 ,000-mile warranty kind of coverage thing, right? That's not a service strategy. That's a sales strategy, right? That's how they're catching people's attention of, oh, yeah, sure, I probably will drive about 9 ,500 miles a year. That sounds like a good deal for me. So that's really what's like an impetus that's driving all of this in the first place is competition is forcing you to provide a higher level of service and is forcing the OEM to consider this as part of their business model. Now, to do it effectively, right?

17:23And that's where we're seeing hiccups now, is to do it without overly exposing the organization to make good margin off of it. That's where you have to step back and start to ask some fairly foundational questions, which is, I sold this to you. And at about year one, we're starting to see these challenges across the product level, right? So I've sold 1 ,000 of these. You only have one of them. But at the product level, we're starting to see these issues at about one year worth of use. How do I help you not experience those same issues? How do I give you a better experience of having that than the first 999 that I sold?

18:01That's where hiccups are starting to come through. And that's where I think the market is at this point is we still have base level questions that we can learn from. But how do I get to a point of feeling confident that when I say, you know what, I'm going to cover X, Y, and Z, that X, Y, and Z are not going to be overly punitive on my end. And if they are overly punitive on my end, what does that mean to the rest of the selling process that you have to consider? Do I have to increase prices? Do I have to accept that this is part of the game? And going back to an earlier question, people that are really embracing this idea of servitization, and I've heard this expression of like service flywheel, which I think is a great expression, they're actually lowering pricing on the initial sale of the good because that long tail of an asset, if the asset lasts for 10 years, they're figuring out how to improve their margin and their position on all those different moments of service, how it behaves at one year, how it behaves at two years, five years, 10 years.

18:58And they're taking advantage of more of those moments, which allows them to gain market share. I'm going to sell this for less type mindset. But the hiccup level that we're at now is no longer, should I get started? It's how am I using this to differentiate against my competitor X, Y, and Z? Yeah. One thing I heard pretty early in your answer that I feel like you reiterated a couple times is there's a difference between a sales strategy and a service strategy. Yep. Right? A lot of times a sales strategy can be throwing caution to the wind on what that service strategy is. And if an equipment builder is doing servitization right, they're doing it in a way that, yes, differentiates them, but is not going to hurt them down the line.

19:44And they're aware of the tradeoff. Yeah. Largely, right? So, fine, I might have to win this business, right? But I am going to accept this sort of service profile margin or I'm going to accept these types of commitments. And I can factor that into my plan. in the first place, right? Or I can work with the sales team as a service representative and vice versa. I can work with engineering. I can work with manufacturing. We can put this in, and I think we'll probably touch on this, but we can start to consider what actually is happening after I sell this piece of equipment. And what, you know, okay, we guaranteed that for this pen, we're going to increase the amount of ink that we have over the printer companies.

20:26This is their whole, the whole game, right? Right. Is, okay, great. we are going to sell up front for less because what really matters to us is that people are actually printing things. If they're printing things, then we're going to make money on the long tail of that asset. In some cases, to win the deal, think of the data center boom going on right now. HVAC companies are likely being very aggressive on service commitments and uptime commitments because they need to win that initial deal. The rest of the organization, they need to be aware of that. They need to prepare for it. They have to say, okay, here's how we'll maintain that equipment, we still have to probably do it.

21:00But we're going to collaborate and figure out how it is and what it is that we're willing to accept and how then we're going to support the customer to do that. Yeah. I've got one more question around, you know, what can go wrong? What are the hiccups in an attempt at a servitization model? And then we'll get into all the things that can go right after that. So I'm curious, we've been talking about the installed base, the sales strategy around it, making sure the service strategy makes sense and you understand what you're taking on. Another question is we talked about knowing what's out in the field.

21:36I'm very curious, what would you say the impact is around having disconnected information out in the field, not knowing what's out there, as well as being maybe too reliant on tribal knowledge? Because we were just looking around your customer experience center this morning. And one of the key highlights that came up in that conversation was, I think manufacturers do a really good job of thinking about processes and documentation and SOPs around their manufacturing process. It seems like when it comes to service, that's far more reliable on tribal knowledge. In fact, it doesn't seem that way. I know it's that way.

22:13Yeah, it's a great point. And it's absolutely true. If you're going to talk about an installed base and what we know about it and what we don't know about it, that, and this is sort of a thesis that we bring as a company forward, is if service knew what engineering knows about how the product is supposed to be maintained, right? Theoretically, they could service the equipment better. And if engineering and manufacturing knew about how the product actually behaves in the field, what happens when it's there for four years type thing, theoretically, they could help service do a better job of maintaining in the first place.

22:47They could make better recommendations. They could even design the product better over a certain period of time. They can be more agile in the design process. But if we go into kind of that base level of what do we need to know about the asset and why do we need to know it and is it tribal or not? Well, we'll just go to a couple simple examples. Are there a hundred of this unit in the city of Boston? Okay, if there's a hundred of them, how many people do I need in Boston to support those customers and support those assets? What's the ratio that someone can do if that piece of equipment needs someone doing routine maintenance, you know every week okay well then you're gonna have to have a lot higher ratio of number of assets to people how many parts do they need of part one two or three um off of that to do that routine maintenance type thing and this is of course going to scale the larger more complex more sophisticated equipment is going to need more frequent engagement you know type thing the uh moving towards kind of the the widget replacement style stuff is going to be less frequent engagement or it's going to be a different type of model altogether.

23:47So when you're looking at that tribal knowledge aspect, if you don't have that awareness of, I have 100 of these units in the city of Boston, and if you don't know what those people are doing to actually keep that piece of equipment operating, well, you can't spread that information to the rest of the team. And this is more of a macro level kind of trend that's going on in the space, but there's not as many technicians available to companies. And this is a workforce level thing and I heard it on one of your previous episodes. The workforce itself doesn't have as many people going into manufacturing in the first place.

24:25And therefore the technician world for maintenance doesn't have as many people available. So individual who's been doing this for 30 years and has seen the evolution of the products and knows, hey, when the red light is blinking, here are the two things that I do because that's the highest likelihood to fix it kind of mindset. You need to figure out how to get that type of information back into your organization. Because not only is that going to help you build better products, but it's going to help you overcome some of those gray areas that we were talking about earlier of how do I maintain things?

24:58Why do I maintain it this way? What do I need to maintain it? And if you know those things, then you can get into in the manufacturing world and what I was doing before I was with PTC in the supply chain world. There's this idea of sales and operational planning or IBP, S &OP, right? Well, there isn't really right now that kind of concept in service. There isn't service operational planning. There's this idea of, okay, what is my labor capacity six or so months from now? What is my parts availability constrained by supply chains that are going haywire? If I can bring more of that content, if I know my installed base better, if I know how many assets I have in this region and that region and that region, and I know how long it takes to maintain them and I know what parts I need to maintain them, well, I can build out a plan.

25:42And to your point earlier, being proactive, I can start to be ready six months from now instead of reacting. Fire drills are never gonna go away, but the more you understand about how that asset behaves a year from into its useful life, five years into its useful life, and the more you gather that tribal knowledge of this is how you should maintain it, you can start to operationalize those practices, then you can start to extend that maintenance curve. I can start to do maintenance or planning for maintenance at a relevant time to your organization's, you know, parts acquisition timeline. You know, a jet engine manufacturer, their lead time to get a piece of equipment, the semiconductor example, is probably pretty significant to get some of those spare parts.

26:27Therefore, I need to know, possibly six months to a year in advance, that I need part one, two, three, because I'm going to need 10 of those in this market. And if I need 10 of those in this market, that means I need this much labor hours to support them. So the impact of not having that information is that you can't plan for that. And then you have long lead times. You have customers who equipment is down. They're frustrated because, again, just earlier, most of us are OK if something breaks. We don't like it. But what we really care about is getting to a resolution. and that actually can build brand loyalty and trust.

27:04So that's where you run into the disconnected asset or the lack of knowledge is you're reacting to a problem instead of doing your best to extend and plan that time horizon to prepare for that problem. Yeah, I want to ask you about what this more proactive service model looks like. And I'll recap first. You know, where I almost expected that question to go, what's the impact of disconnected data and not knowing what's out there, relying on tribal knowledge. I almost expected a very service-oriented answer, right? Like, hey, it's going to be very reactive service. But where you really doubled down was you can build better equipment.

27:44You can plan your supply chain better. You can plan with your workforce better. So what I'm learning is the inherent connection. And we know this connection is there. But what's coming across very clear in this conversation is the connection between what you're doing in engineering and manufacturing and how service can impact that along the way. Now, let's go back to basics as we get into all the positives, right? How does servitization create a more proactive service model rather than a reactive one? And I think it's really important just to address this question because when I think a lot of people think of service in the manufacturing space, in the industrial space, they think of reacting to stuff.

28:24How does this create a more proactive service model? And in basic terms, again, as if we're having that beer. Yeah, 100%. So one of the key things that you're looking for in a servitized business model is you're trying to sell parts. Okay? If you can sell parts, those part sales, you've already sold the asset. That's sort of the hard part. Now the customer owns it and they have to keep it working. Parts are high margin. They're consistent. They go back to that point of the kind of the business model de-risking on a quarterly basis, right? you can sell more parts and you can sell more services in that model if you're being proactive.

29:00If you're reactive, well, at that point, you cannot be ready for that particular part sale. And you're not going to have the right part when you need it. And some industries, okay, you can get away with it a little bit more because you're the only one that provides that part in the first place. But in a lot of spaces, they'll just go down the street and they'll buy it from somebody else. They'll find a generic. They'll find one from your competitor. They'll ask your competitor for help in the first place. So the reason servitization drives you to be more proactive is because if you want to take advantage of that, and actually we did a study with, I think it was like four years ago at this point, with Harvard Business Review, and it was how much money can you make over the lifecycle of that asset?

29:44And it was something like 10x or so the revenue from the initial sale of that. You sell it for$100, the lifecycle asset's probably going to be worth about$1 ,000. And that's selling services, that's selling parts. So servitization, the whole goal, is one, sure, better customer experience, stickiness, all of that sort of thing. But the other side of it is, how do I capture more of that$1 ,000 over the course of that asset lifecycle? And the way you capture it is you have to start thinking ahead of, what is this customer going to need next? right and you're planning for um you know again engineering is telling us that two years this is what's going to look like um and this is our experience as well in service this is what that person that's been doing this for 30 years that's what they've been telling us this looks like at at that time if you don't have that kind of perspective if you're not thinking that way then servitization is going to erode you're going to be in that reactive space you're going to be firefighting and your customers are going to start thinking well you're not really giving me what i need, I need to start looking elsewhere kind of mindset.

30:44So servitization as a baseline for you to capture the objective of servitization, which is to get more of that money from the asset lifecycle, you have to start thinking about what is this customer going to need next. Yeah. And what I hear from that is not only does it allow you to look into, hey, how do I better serve this customer? How do I make sure I know what's coming in? Maybe the way I would summarize it is if you have visibility to that data, what you're able to do is say, hey, these are the parts that we need to make sure we have because this is the one that's coming to end of life. And if we replace this part, that's going to give this asset, the overall asset, 10 more years of life, for example.

31:25It also allows you to pass that back to engineering. So you can look at it, it's like, hey, is there a better design? Is there a better supplier we can get for this? So that way, this one part does not cause a hiccup in the future. So again, I'm seeing that connection between engineering, manufacturing, service. One thing I also want to talk about is how that information gets back to engineering, for example. You're doing the service. You're doing all the right things. You're being more proactive because you have visibility. How does that data then get back to make those improvements so the OEM can better serve their end user clients in the future?

32:00Yeah. So right now, this is when we go back to the idea of servitization maturity. This is one of the levels that's probably less mature in a majority of organizations. There's still the engineering designs, and depending on the organization, they may also be tied to, you know, directly embedded or tied to manufacturing. They design and they manufacture equipment, right? And then service is who is responsible for making sure that that stuff actually works. That's probably a less mature part of the market at the moment. How the data gets back and why that data is important. And again, manufacturing is so broad.

32:34You have so many different types of customers. One example of this that I've run into was it's a large kind of configured order OEM who builds pumps, pressure vessels and other things like that that move liquid natural gas around and all this other stuff. When they have a problem, this isn't something like that you or I could even fathom going to work on, right? You have to send a team to figure out what's wrong. And then you have to bring that information back to the engineering team so that they can look and recommend, hey, we think it's this because this is part of big facilities and everything like that.

33:08Right. Well, that engineering group, because of how things are set up, they have like 15 different systems that they have to go reference. And they don't have this true picture of the installed base to our previous point. So right now, in reality, most organizations, it's on a need to know basis. data is flowing back to engineering, service engineering, quality engineering, what have you, of which group it's going to. That is a less mature area that's going on. What we're seeing, though, and what we're seeing increasingly happen is the service teams are looking back and saying, hey, look, we have all these goals that are being put on us, right?

33:45The CEO of the company is saying that we have to find a way to increase contract attach rate and service contracts. And that means we have to do a better job of supporting customers. That means they need to, you know, we have high prices compared to the local mom and pop shop. So we need to provide them better value. Engineering, therefore, you need to provide us with better procedures and better recommendations. And you need to tell us what part is replacing that part, the substitutes and all that come with that. On that front, engineering and response is saying, okay, you then need to like, let us know what's going on.

34:20When you go fix something and you fix the, you know, a thousand things over the course of the month, we would love to have that data. We would love to have that continuously coming back to us so we can not just react to that information, but that we can be constantly analyzing trends in product quality. Why is this breaking down? Again, start answering, what does this product look like after five years of use or a thousand hours of use or whatever the the method is that you track consumption against that asset. So to the direct question of how is the information get back to engineering right now?

34:56Probably in a very manual fashion at the moment, right? How can it get back to engineering? You can have this natural language alignment between an asset, which is one instance of that product, and the product, which is what engineering designs and analyzes, right? And we figured out how to translate those two languages between, you know, discrete maintenance that's happening to the asset one, two, three, against what that means for, you know, thousands of those assets, and then giving the right size kind of data chunk. So engineering can look at the product level impact of that. And it's good to know that that is, you know, that's kind of a next step for a lot of folks, Not everyone has reached that part of their journey.

35:42It was cool because listening to what you're saying, I saw some of that this morning where you can not only look at what the data says about, hey, what part across your entire fleet needs the most replacement right now, for example, but also providing the context that shows, well, it needs this replacement because of this issue. Maybe it's a loose tolerance, something along those lines. I'm just making up one example, but it comes out there in language that allows you to better communicate, like we were just saying, back to engineering, what the issue is when you're in that ideal state of servitization.

36:16Because there's groups within engineering whose job it is. And let's just, again, the red light is blinking. What does it mean? Well, some of those experts in the technician field force, they're going to know because they've been doing it for a long time. A lot of those team members might be newer. They might not have come across this. It might just be a unique situation that hasn't come up yet. Engineering is the team oftentimes when those get significant enough where, you know, service engineering in particular, where that technician or that technician group can't figure it out. That's who steps in and says, hey, we've run some simulations.

36:48We've run some tests. We replicated the issue. Here's what we think you need to do to fix this asset. What should be happening then is, OK, red light was blinking. Now this is what we're going to do. We'll have a procedure. We're going to expand our SBOM collateral, service bill of material collateral. When this happens, here's how we should recommend doing it. That is a connection point that you were alluding to upstairs that we're seeing as a way for companies to take that next step in servitization. Because, again, if you're going to make a commitment, the C-suite saying we want you to drive contract attach rate, basically the amount of the installed base that has a service contract attached to it.

37:28Right. If we want you to drive a higher contract detach rate, we want you to have a 30 % margin on those contracts. Making this up, of course, right? Are you confident that you can actually do that? And that's where engineering and service are starting to have to talk to each other a little bit more is this idea of design for service and engineering. These outcomes that the sales team is trying to sell to the customer that service has to realize in the first place. and that's where these two groups are starting to say, hey, if you give me all that work order data, if you can provide me what it is that you're seeing on a day-to-day basis, I can then aggregate all of this, I can start to expand that portfolio, we can take what that 30-year technician knows and we can make that available for everyone.

38:13And we haven't even said the two-letter phrase that's the topic of the year, or the last five years, in AI, then you can start to use that in a really unique way. Well, tell me a little bit about that, because the last episode that I recorded with PTC was really around your AI philosophy. Let's talk about how AI ties into servitization as well and can help enhance a servitization model. So, and I think that was with Joseph. So the extended use cases that AI can support, we're still figuring out. Everybody is still figuring out, right? I don't think we've seen a technology move as fast as this has, which is cool.

38:54It's a lot of fun. We'll just take a couple quick ones, right? You can have a technician walk up to an asset, put their phone up, look at the picture that's on the asset, the asset tag that it's called. And that barcode or that information, you know, it can read that picture and it can pull you all of the history of that particular asset right there for that technician on their phone kind of mindset. You have everything that's been done and then just off reading that name of the asset, we're going to aggregate all the last 10 years of data for you so that you can see everything that someone's done to this, why they did it, what parts were replaced, how long it took them to do, all that sort of thing on the field service side.

39:30We can then aggregate that level of information after they're done. We can look at that debrief and start to standardize. When someone says, I fixed it this way, you could type that information in 50 different ways. Yeah. Generative is incredibly good at saying, you know, when Sam said this or when Jackson said that, this is what they meant. Right. This is the same effective thing. And now we can start again to the point, bring that upstream for engineering who can consider that information and can say, all right, red light is blinking. This is 90 percent of the time what the resolution is. So when we see this, this is what the data is showing us.

40:09And generative can just do that type of analysis so much faster. And that's really, I think, where we're seeing in service the first impact is just the pace of these things coming together of being able to ingest and consider a lot of unstructured data. And generative can just more naturally structure it automatically and give you a faster starting point. I'm not going to say the answer because someone should look at that data and make sure it's actually useful and it's correct. Hiccups still are going to happen, but it can move you so much quicker. And then every step of that value stream, of that value business process, okay, we're designing something.

40:49We should consider these variables of how this product or the earlier generation of it is performing and how we can consider that. We're manufacturing something. What part should we use that has the highest quality? we are supporting a customer remotely, what should they do first? Before, you know, we spend a ton of money and send somebody out there to support them. Can they try, you know, unplug it, plug it back in, kind of IT level? Are there certain things that we can ask them to do first? Yeah. And then when your own team member's there, what should they do? And you get to the idea of, like, first-time fixed rates or service responsiveness and everything like that.

41:27Well, one, I mean, I don't think it's unreasonable for us to think of a generative AI chatbot engaging with a customer directly or a maintainer of an operator of the equipment and them saying, hey, I'm not sure how to do this. This is just another way that the OEM can support that customer. Hey, you know, first level, we just want you to talk to this robot and this robot is going to give you some answers. And at a certain point, it may tell you, you know what, we don't think you should do this. you're under a service contract or you're entitled to this anyway, we're going to help you directly.

42:00You send that technician out there. They have that information of what was already done. They can start to start at a more mature place. They're not going to do the same thing they already did. So those are just some examples. But I think to the original point, we're still figuring out and customers are bringing those to us all the time of, hey, I think I could do this. I think I could do that. I think where we're at now is we have a very long list of ideas, not how we make it faster for customers to avoid those hiccups. How do we use their data, clean the data faster, get to a point where they can be more trusting of the results and the recommendations that the engine's going to produce?

42:42Yeah. Well, a couple of things I've heard that honestly, I think tie into some themes around AI that our audience hears quite a bit on this show, right? With artificial intelligence involved in service responsiveness, you get better data aggregation that can create some context for what some of the situations you're running into the field might be, and in turn, provide better service back to the clients. Like that would be the way I would summarize that. We've been covering a lot of the different aspects, benefits of servitization. As we get into the final questions, I'm curious, is there any other aspect of servitization that you wish I would have asked you more about, maybe around like parts planning, things along those lines?

43:26I know there are a lot of different things we could discuss, but what's something that's front of mind for you when it comes to a, let's say, the benefits of servitization? Yeah. So the idea, again, of service operational planning, of which spare parts planning is a part of that, right? We were talking earlier about the mix of work ratio being proactive versus reactive. Things are still, and they always will be to a certain extent in service, like, hey, shoot, I accidentally poured coffee on this asset. That's going to happen. It's human nature. We're never going to get over that stuff. But the more that we can move into that proactive nature, the more we can plan how many people Do we need to support this many customers, this many assets?

44:14How many hours of people do we ultimately need? Can we improve that efficiency of the number of hours by giving the customers better recommendations, again, to the point of giving engineering more access? Can we expose them to things? If you zero in on that operational planning lens and just talk about spare parts rep, you know again we talked about earlier a lot of what this comes down to for a lot of different types of oems is they want to sell more parts you know they ultimately and i know you were in el segundo shout out to el segundo i used to live there um but uh you know that's a very high end uh you know some of the companies based there like the boeings and the rtxs and everything like that uptime is absolutely critical for the assets that those companies are manufacturing but you go to someone else like a caterpillar in that world, right?

45:06Parts are high margin, but they're also a working capital cost. So if you can extend the horizon that you're thinking about, what do I need to do to support this individual asset? And that asset is in this location. Well, then you can place your parts better. You can optimize that parts network. You can have the right number of part A in the southeastern US. You can have the right number of part B in SoCal for the El Segundo no customers. And if you can do that, you can lower the parts on hand so you can free up working capital. And you can also start to increase those satisfaction rates where you are capturing that sale.

45:45Because in reality, a lot of customers, there's, again, we said certain situations, they can't get away from it. They kind of have to buy from you. But a lot of companies can look for generics. If you don't have that part available, they're going to go to somebody else. They're going to buy that. Equipment rentals is a great example of that. You know, I need a forklift because I need to pick stuff up. I don't care if I get the forklift from you or from somebody else, but I need it next Thursday. And the ability to be faster, the ability to respond quicker and plan and extend that horizon from both a people perspective and a parts perspective has a significant impact both on your cost position because you're not shipping stuff overnight or you're not flying somebody there on, you know, last minute with an expensive ticket price.

46:30I think that's the main thing to think about for OEMs is what data do I have to start extending the time horizon and just plan a little bit better? You know, they should talk to their supply chain teams. How does the supply chain team get another week of time? Because that extra week, there's cost savings in that week. There's higher win ratios on part sales. There's going in and taking your competitor's opportunity because they didn't have the part, but you did type thing. Yeah. If I'm, I mean, to oversimplify it, which is something I try to do tactfully on this show, you know, if you're able to plan better, you're able to be faster at the end of the day and do it at a way that is not as cost prohibitive as being reactive is.

47:16100%. So let's, one of my last big questions is when done right, how does an equipment manufacturer that's leveraging servitization, doing it the right way, how does that transform their business? Can you paint a picture or share a story? Yeah. I referenced some earlier, that company that makes very large pumping equipment, pressure vessels, right? How do you do it right? they again when they had an issue they had to step back they had to look at 15 different systems they had to consider all of that um and how they respond uh but they have a unique expertise to support those customers no then maybe that's their biggest moat around their equipment is that expertise in the first place their ability to accelerate to your point be more agile on how they respond to customers, in their case, you know, and the price of oil fluctuates like every 10 seconds right now, but their ability to respond faster to a customer literally at times can mean hundreds of thousands of dollars of revenue for their customers.

48:23Yep. Right. And if they can move faster and they can help their customers, in their case, and a lot of times pump more oil, okay, well, their customers will be like, hey, you know what? X company, I trust them to respond when there's a problem. Therefore, this new pump or this new well or this new place that I'm going to do business, I'm going to give them the business that expands the installed base they have. To that idea of the, I said it earlier, but that service flywheel, you provide good customer service, that company is going to give you another opportunity. You're going to win that business.

48:56Now you have another asset that's a part of your installed base. That means you can have more service revenue coming through. So every time you have a good experience with a customer, they will then be more likely to rely on you in the future. That expands your installed base. That expands the amount of revenue you have access to off of that installed base. That makes Wall Street happy because you can monetize that installed base, etc. And so for OEM leadership, that's largely what they're looking for. I have one other, and this is a public story that I get to talk about, but we have a customer, in this case Schneider Electric, and you can go on PTC's website and you can see this.

49:31but they have really leaned in to this idea of servitization. And they're very proud of what they've accomplished off of that. They were able to very quickly simultaneously increase revenue significantly, increase sales rates, sales win rates, contract detach rate, and they did it while also increasing their customer satisfaction scores. So that's the type of impact this can have for leaders is increasing revenue while making customers happier at the same time. That's the unique impact that service has on an organization is increase the total number of at-bats for their sales teams and their services teams while making customers happier that they're working with you in the first place.

50:15Yeah, great examples. Yeah, two great examples on how it can help transform a business. I also heard maybe a type of equipment builder that should really be paying attention to this is if you're providing something like pumping equipment, right? We're not going to call it a commodity, right? But if your secret sauce is in your expertise and your service, that's all the more reason to double down on something like this. And your point goes really naturally into like manufacturers are in different ages of that equipment life. And I just don't mean like the equipment itself, the asset itself. I mean pumps have been around for a lot longer than jet engines type thing, right?

50:52And so the expertise becomes that moat to the point. And, you know, I likely and HVAC is probably the most cutthroat about this on there are hundreds of local, you know, local mom and pop shops that can help you with your home HVAC system. If I'm going to go work with one of the big names, the brands, right, especially in B2B, I better be getting a premium value out of that engagement. And that expertise is really where they, and the ability to plan and the ability to know in advance, you have this issue. That's something that, you know, the local or lower cost vendor is probably not going to be able to compete.

51:34So you have your competitive arm, which is they're down the street. You know, the person next door had a good experience with mom and pop shop one type thing. But you can bring, hey, I know more about your equipment. I installed it. I know why it's working this way. I am analyzing all of the assets that I've sold of this product type and I can bring you a better value. And so that level of expertise, and again, throwing generative at that to accelerate and build that moat even higher, that's something that OEMs can take advantage of. And if you look at the different stages of equipment lifecycle, the semiconductor manufacturers right now, completely cutting edge.

52:11No one can touch them in terms of that expertise because no one else is build that equipment in the first place. Well, that comes with a different obligation because Intel or whoever it is, they're not going to buy from you unless that asset is running perfectly. In the case of the HVAC world, there's a lot of substitutes. So you better use that barrier and that expertise as part of your differentiation. Yeah. And as we wrap this up, I think one of the big final questions I have, Let's say my final two questions are, let's say you're an equipment builder and you are implementing or trying to implement a servitization model.

52:55What's step one and what are signs that it's starting to work? Step one is what does the customer need from you to ultimately the point of service is to support the sale of the asset afterwards. Step one is what do our customers expect from us and why do they expect that? and how can we give them that result in the most, and that's probably a staircase of decisions you have to make, right? Step one, step two, step three. But step one of that is what does the customer need to realize what we are saying that we can provide in the first place? What support ecosystem do we have to give them to do that?

53:33And signs that it's working, well, contract detach rates are improving. The number of repeat customers is going up. Your average cost of providing support is decreasing. You're seeing service engineering have a higher engagement level at a strategic level on that. And then there's some truly strategic level indicators, which is just your aftermarket, your post-sale revenue has become a higher mix of your overall revenue picture. your margin of your aftermarket business is improving. The number of service engagements that you're having is increased in totality. So depending on the discrete type of OEM that we're talking about, like we referenced Caterpillar, the amount of parts that they're selling is going to be a huge strategic driver.

54:28Someone like ASML, they're winning deals on the front end type thing. So it's going to be fairly company specific of the strategic level. But I think for the majority of OEMs, there's some tactical level like year to year percentage of installed base under contract, extended warranty volumes, cost of service metrics, aftermarket revenue. And then you get into a more strategic level of, hey, I'm winning deals, competitive deals more often, or my aftermarket revenue as a total picture is growing at a higher rate and it's becoming a higher mix of my quarterly performance. Yeah. Well, one thing I heard right on the front end of what's step one, it's understanding what your end user customer needs slash expects.

55:18I think that's a really great point, right? Because companies can figure out a lot of different ways to monetize a service model, but it can be pretty self-serving if you're just doing it as, hey, what are ways we can add new revenue streams versus what are ways that are actually going to enhance the end user's experience, our relationship with that. That needs to be first and foremost. And then some really great ways to see that it's working, right? Contract attachment rates, right? Something really early on you can look at. Better engagement from your service engineers. And then, of course, the business metrics, right?

55:50Are we seeing more service margin revenue, et cetera? So Sam, awesome overview today on all things servitization. I'm really glad we were able to do an episode for our OEM audience specifically, because I I know there are a lot of equipment builders out there, folks that are very similar to equipment builders that can take this and look at ways to start implementing their servitization strategies. And I'm so glad we were able to do this at PTC and hear from you as well as we went through all of this. Appreciate the opportunity. It was fun. Yeah. Cheers to everyone out there. Stay innovative. Stay thirsty.

56:25Thanks for tuning in.

56:32All right. Hey, everyone. Thank you for listening. Thanks to Sam for jumping on the show. And thank you to our partners at PTC for making this episode possible. Like I said, for the equipment builders out there, if you want to learn more, go to manufacturinghappyhour.com slash servitization to learn how you can start doing this today and access an assessment that will help get you started. That's it for this week here on Manufacturing Happy Hour. We'll catch you again real soon. Thanks for listening to Manufacturing Happy Hour. Powered by the Industrial Network.