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November 29, 2021

IoT-powered aftermarket services: from threat to opportunity

Using IoT, manufacturers and service providers can compete in the aftermarket with a flexible, forward-thinking experience.

Recently, in the maintenance room of our office building in Durham, NC, we came across the elevators that had been in service for over 50 years. The dusty old logo printed on the controls panel stood in direct contrast to a series of shiny service tags from a new provider, a competitor to the original vendor. 

The tags included information on who serviced the elevator, what was tested and the date of inspection. Although the original vendor had sold the equipment in the late 1960s, it was clear its competitor had been servicing it for several years.

The question is, who will be the next name to appear on the box? Because just as the new provider pushed the original vendor aside in that key role, it’s only a matter of time before someone else — using Internet of Things (IoT) and smart sensor technology to add intelligence to those metal tags and the assets themselves — could disrupt the aftermarket services industry yet again.

However, while this metal service tag might now seem like some artifact of a bygone era — a time pre-dating sensor-equipped objects to transmit vital information — it’s not. According to our Work Ahead research, less than half (43%) of businesses globally say they have fully functional IoT implementations in place. That means there are still a lot of companies operating without meaningfully connected assets, like elevators, in their environment.

So, the maintenance tag represents the state of operations and a competitive threat for a lot of companies today — and a big opportunity for both manufacturers and the aftermarket service organizations ready to take a piece of their business.

Catalyst: connectivity and commoditization

From what we’re seeing, it’s a promising business to be in. Across the industry, greater competition in new equipment sales and tighter margins are pushing manufacturing-intensive organizations to find revenue elsewhere, whether through upsales, cross-sales or aftermarket parts and service. McKinsey & Co. research reveals that aftermarket service margins are often a multiple of new equipment margins. For many industrial companies now, as new orders decrease, maintenance volumes can potentially represent over half of their profit margins.

Inspired by Industry 4.0, manufacturing-intensive companies are increasingly connecting their assets, which has changed the aftermarket service game. In our Work Ahead research, companies that embrace IoT demonstrate superior business performance compared with companies that do not. This makes sense given that smart connectivity makes it possible to do many things, like monitoring, controlling and optimizing services throughout the value chain, in a way that unconnected assets do not allow.

Connectivity also enables companies to move from a preventive maintenance to a predictive maintenance posture, where maintenance is triggered by real-time collection and analysis of operational data drawn from sensors to identify issues before the equipment malfunctions. Advanced organizations are using analytics, AI and machine learning to model equipment failure and develop algorithms that can predict potential issues based on the equipment’s history. McKinsey contends that predictive maintenance can increase production line availability by up to 15% and reduce maintenance costs by up to 25%. This represents substantial savings and increased capacity for equipment users.

The battle for the customer relationship

In addition to asset connectivity, other factors have upended the aftermarket services competitive landscape. Components, parts and even whole products can be sourced from an array of providers, whether traditional competitors, counterfeiters, entrepreneurs or those who service and maintain equipment. If genuine parts can’t be procured due to supply chain disruptions, or rising costs for parts and service have been passed on and are no longer as tolerable, who will customers turn to for alternatives? And if the service provider has intimate knowledge of a product’s composition and the array of alternative parts, then what is to prevent them from assembling and delivering a product using components from the OEM’s competitors?

Further, with the ability to monitor equipment remotely, what is to stop them from simply purchasing the equipment and then leasing it to the customer as a service — at a lower cost and with less commitment — through a subscription or utility arrangement?

This leads to an important dilemma and sizable threat for original equipment manufacturers: Who owns the customer relationship? In addition to the disruption spurred by connectivity and parts commoditization, burgeoning consumer movements such as “right to repair” are also eroding the OEM stranglehold, and nudging the market toward a more democratic footing.

Two ways to evolve

Consider the case of a Fortune 500 company, which has evolved from being just another provider of janitorial and window cleaning services into a global leader in facilities management services. Automation of what were once manual services required the company not only to acquire and deploy automated equipment but also understand the service and maintenance requirements of that equipment.

The company was able to apply this new operational knowledge to its parking management business, which now uses electronic ticket machines, automated gates and payment kiosks. Further, the facilities services provider now also designs, builds and specs many of the products that will be used, which it selects based not just on their initial cost but also on their long-term cost to service. The barriers between owner, designer, builder and operator have all become blurred as the services provided now drive the actual product.

On the flipside, consider our client Shape Technologies, which makes industrial waterjet equipment. With new aftermarket dynamics taking hold, the company’s service providers had begun competing directly with the manufacturer on parts and service and ultimately began making forays into assembling and developing competitive products.

To reassert itself in its customer relationships, Shape introduced an extended, comprehensive warranty to replace its basic product warranty, which allowed it to credibly back up a major product selling point: durability. By leveraging its customers’ asset connectivity through remote monitoring, the manufacturer can now collect data — including temperatures, pressures and cycle counts — which enables it to initiate product service before a breakdown occurs. This not only increases customer productivity, but it also reduces service cost for the manufacturer. 

Seizing the opportunity

Clearly, aftermarket competition is rapidly evolving, presenting traditional manufacturers and service providers with a choice: They can provide their customers with a flexible, forward-thinking experience that disrupts the competition, or they can have their customer relationship redefined by new market entrants exploiting this new aftermarket opportunity.

As lean manufacturing guru Dr. W. Edwards Deming is often quoted as saying, “It is not necessary to change. Survival is not mandatory.”

Eddie Gotherman
Senior Director, IoT & Engineering Services
Eddie Gotherman

Eddie Gotherman is Senior Director, Cognizant IoT and Engineering Services. With 15+ years in business & tech roles creating industrial connected products / solutions at enterprise scale, he help clients embrace transformation through IoT.

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