Manufacturing is under pressure. Increasing global competition and the need to reduce manufacturing costs are putting pressure on companies to find new ways to produce products. At the same time, customers are demanding ever-higher quality products with shorter lead times. Digital transformation is on everyone’s mind in the manufacturing business and companies are looking at how to meet these challenges head-on. While digital transformation is a common trend, the devil is in detail. The disputes about what is actually a new digital world of manufacturing will look like and how it will impact the manufacturing business model and business processes are all over the place.
In my blog today, I want to talk about Inverted Business Models and how they will impact product lifecycle management, product data management, supply chain management, and business systems in the overall product value chain.
From Licenses to Subscriptions and Services
Manufacturing companies and software vendors all together were discovering new business models and how to switch from selling licenses to selling services (or subscriptions). SaaS was introduced without any connection to technology and provided software vendors in CAD and PLM domains to switch from charging companies “by time (monthly, annually, multi-annually)” instead of traditional software licenses. Although some of the customers are still nostalgic by the time when you could buy CAD perpetual license, but most of the firms are adapted to a new subscription business model.
The subscription model is widely adopted these days, but I can see the next opportunity on the horizon that can fundamentally turn the existing PLM system business model upside down. I’m talking about the transformation of traditional PLM software into new digital web services. This model is still new and sometimes is not very clear. The difference is in the fundamental way how PLM systems are used and what role they will take in the business of the new manufacturing economy.
Inverted Companies and New Business Value Model
HBR article Digital Transformation Changes How Companies Create Value describes how value creation was changing from internal (value) to external value creation process. It brings a few very profound examples of how companies can switch the value creation process. Here is the passage to check it out:
Yet, amidst all this transformation, something novel — and perhaps fundamental — has changed: where and how companies create value has shifted. More and more, value creation comes from outside the firm not inside, and from external partners rather than internal employees. We call this new production model an “inverted firm,” a change in organizational structure that affects not only the technology but also the managerial governance that attends it.
The highest value digital transformation comes from firm inversion, that is, moving from value the firm alone creates to value it helps orchestrate. Cultivating a successful platform means providing the tools and the market to help partners grow. By contrast, incumbents typically use digital transformation to improve the efficiency of their current operations. New revenue projections typically focus on value capture. Of course, digital transformation can and should support operating efficiency, and this often comes first, but it cannot stop there. Digital investments must set the firm up to partner with users, developers, and merchants, at scale, with a focus on value creation, which is the foundation of firm inversion. Unconstrained by the resources the firm alone controls, inverted firms harness and orchestrate resources that others control.
I think the majority of PLM business was focused on how to improve operational efficiency until now. Nothing wrong with that btw. It was a legitimate way to build a PLM business until now and it won’t be disappearing. But something new is happening. Let’s talk about digital services and new products.
Digital Business and PLM Web Services
Manufacturing businesses are transforming. Moving from products to services is one of the most visible transformations. The earlier examples of the service model were to sell tires based on the miles, turbines, and equipment by running hours. But a lot of products are becoming connected and it opens tons of new opportunities for industrial companies and for companies that are building software to support them. This is an opportunity for a new generation of PLM systems. Here are two places where I can see PLM providers can become a part of the product.
Product delivery infrastructure
To deliver digitally enabled products and services manufacturing businesses need to have a digital infrastructure to support it. Let’s take as an example product that is built under different conditions from different components and raw materials. The costing model for such products requires deep knowledge of the product Bill of Materials, suppliers, and material vendors. By providing an online web service to calculate the cost PLM software can give a source of information that can be used as part of digital infrastructure to deliver physical products.
Mass customizations and online configurators
There is an increased interest to deliver customized products. To deliver such products, manufacturing companies need to have deep knowledge about product structure dependencies and how to build these products. The complexity and features are growing and new features can be now delivered to the products already after these products are provided to the customers (eg. new car feature enabled by software). Which raises many requirements about managing of the product lifecycle in the maintenance and support stages. To deliver so, the As-maintained Bill of Materials needs to be connected to the infrastructure delivery product features. PLM web services can play the role in building these solutions.
PLM web services and new business models
A new generation of PLM systems will become a part of new technologies used to deliver product and maintain it during the entire lifecycle starting from the delivery to later maintenance and support stages. This creates an opportunity to use PLM software beyond the point of organization engineering process improvement. New PLM web services are becoming part of the utility and can be monetized differently because they create a new type of value for manufacturing companies. Manufacturing companies will be using these PLM web services to build new capabilities for their products. And it will enable new subscription and licensing models for PLM software as a service similar to what the internet and other computing utility companies are using. Such as consumption-based models.
What is my conclusion?
Digital transformation and new digital products have created a new business opportunity for software vendors to make their products part of the digital product lifecycle model including product service delivery. It brings different business models to enable digital transformation. Such an “inverted” business model will make PLM web services part of the product. As such PLM web services will be used by companies to deliver products and used during each step of the product lifecycle – engineering, usage, and maintenance. So, manufacturing companies will be using digital technology such as PLM web services and will turn into service providers of combined digital technologies. Just my thoughts…
Disclaimer: I’m co-founder and CEO of OpenBOM developing a digital cloud-native PDM and PLM platform that manages product data and connects manufacturers, construction companies, and their supply chain networks. My opinion can be unintentionally biased.