Business models in the age of the Industrial IoT are changing. We are moving from large capital expenditures to a "pay-as-you-go" model. This is commonly referred to as equipment-as-a-service (EaaS), or “servitization.” This means that risk must be re-negotiated along the value chain and first movers must define their business models with an uncertain outcome. At the same time, large companies have much to lose; profitable service contracts are endangered, and many are making huge efforts to secure their conventional revenue streams.
Companies, such as relayr, an industry-focused IIoT technology solutions provider, offer OEMs and industrial end users a new approach to capital expenditures and doing business.
- Business in the Industrial IoT (IIoT) age is moving to EaaS.
- The end-to-end technology stack in IIoT (edge/device management, middleware, data analytics) is a driving force of the fourth industrial revolution.
- Relayr provides an extensive offering around IIoT technology solutions, from hardware-agnostic edge intelligence to cloud-agnostic middleware, visualization, artificial intelligence, and the support needed by industry users.
- Business outcomes from IIoT projects can be insured with a warranty from insurers such as HSB/Munich Re.
What Is relayr and Its IIoT Technology Solutions?
As ARC Advisory Group learned in a recent briefing with company executives, Relayr provides software and consulting services for the Industrial IoT, including data acquisition, data services, artificial intelligence, and data analytics. This end-to-end technology offering is attractive to those OEMs that lack these skills.
One innovative dimension of relayr’s solution is business model transformation that features a financially-secured business outcome. To achieve this, relayr partners with Hartford Steam Boiler (HSB)/Munich Re to minimize financial risks through insurance and orchestrates financing solutions though its progressive partners.
Business Models in the Age of IIoT Technology Solutions
For many years, some industries have been moving away from the pre-1950s business model of buying and operating equipment and then selling it later at a loss. In that model, all risk was assigned to the equipment buyer. Today, in the shift from capex to opex, asset owners can reduce their risk by leveraging the insurance market. For example, in satellite operations, risk contracts can cover rocket start, solar panels unfolding, and damage from astro-garbage. States can also help by underwriting risks associated with exports, basic research, or new technologies.
Capital-intensive industries, such as chemicals and oil & gas, have been moving to a leasing model in which machinery and equipment is leased rather than purchased. This shifts the risk of the future value of the item from the purchaser to the lessor.
Recently, the leasing business has expanded to shorter-cycle and less capital-intensive industries. Two of the fundamental dynamics behind this are lower prices expected by consumers and the shorter product life of most durables and electronics, which increases the capital risks on the production side. Shorter lifecycles may result in technical obsolescence of the equipment. Yet, leasing is designed for long and fixed-term contracts, with early termination typically entailing penalties.
The next step is clear: renting equipment and equipment-as-a-service. Renting is essentially EaaS with fixed monthly fees. EaaS can also include several other contract forms, such as guaranteed uptime, throughout, speed or quality, where certain KPIs determine the monthly rate. The big differences with leasing are:
- The lender bears almost the full risk of equipment value after the period ends.
- Contracts are easy to extend.
- Equipment providers are responsible for maintenance and repair.
- Billing is based on utilization, rather than a flat monthly fee.
What does all of this have to do with the Industrial IoT? Imagine your equipment is operated by a third party in a remote location and you are responsible for its maintenance. You need remote access to your equipment to keep costs under control. The IIoT is the key enabler of the new business model that makes such service contracts tenable.
The EaaS business model delivers benefits for operators as well as EPCs and machine builders. Industrial equipment manufacturers need to bring predictability back into their revenue streams. According to ARC data, in 2009, many OEMs whose core business relied on capex sales faced a 50 percent drop in revenue. When oil prices collapsed in 2015, some machinery segments experienced a revenue drop of up to 30 percent. On average, around 20 percent of OEM revenues come from services, which are more predictable and depend more on operations and installed equipment base than on the purchase cycle.
To sum it up: the manufacturing industry is heading toward a revenue model in which large shares of the equipment are supplied as a service.
Opportunities with IIoT Technology Solutions
The big opportunities are reducing risk and lowering lifecycle costs for users, which shifting from capex- to opex-based payments can provide.
Depending on the industry, lifecycle costs exceed initial purchasing costs by a factor of four to five. Only short-cyclical industries have smaller ratios. Lower lifecycle costs mean reduced revenue for OEMs/suppliers that are forced to accept an overall shrinking revenue pool, but still have the chance to participate more, secure new revenue streams, and increase their margins. In cases where end users had in-house services, the market may grow.
In addition to lifecycle costs, risk is reduced across the value chain. End customers reduce the risk of technology obsolescence in their plants and equipment. At the same time, OEMs, integrators, and suppliers can remove the volatility from their revenue streams and protect their companies from investment cycle volatility.
The big challenge is to make this a win-win-win situation - not only between OEM and end customer, but also for third-party services and solution providers, which often compete with OEMs for service business. But the OEMs need to be able to offer IIoT-enabled solutions to end users as services, and solution providers often do not have the necessary know-how to build the solutions themselves. As a result, OEMs and suppliers compete on market share in a gradually shrinking market.
Technical Needs and Possibilities
One of the reasons why the win-win-win situation was not created earlier is technology. Imagine an end user that is not responsible for the lifecycle costs of its equipment, but instead pays a flat fee per month. How would that end user run the equipment? If an output rate of 120 percent was needed, the end user would run it at 120 percent, maintenance would be postponed, and the OEM would have to pay the costs in case of breakdowns.
OEMs and users have not solved this dilemma, but now it is possible to create transparency. Transparency needs sensors to collect data, gateways to aggregate and pre-process data, a network to distribute data, and a cloud to share data between multiple stakeholders. The technical possibilities are growing and available at a low price. Sensor and connectivity costs have both dropped. As a result, many factories have a decent network infrastructure in place. On the software side, we’re also seeing new offerings from traditional vendors and start-ups alike.
Founded in 2013 in Berlin, Germany, relayr already counts industry-leading companies such as Aluvation, La Marzocco, and Flanders Electric as customers and partners. After acquiring both Proximetry and the artificial intelligence startup, Neokami, relayr has grown to over 200 employees.
A partnership with the Deutsche Telekom provides further access to small and medium-size enterprises (SME) in Germany. In addition, relayr’s focus on IIoT software solutions allows T-Systems to be a key partner for physical installations and enables them to scale faster. Relayr has strong and growing presence in Europe, especially in the industrial German Mittelstand, and is now expanding to North and Central America.
How relayr Fits In
Initially, relayr intended to provide a hardware/software starter pack for OEMs and other industrial users to use to develop their own solutions. But it quickly became apparent that it was not hardware that OEMs lacked, but IoT skills. Now, relayr also provides consulting services and is technology agnostic, leveraging a complete ecosystem. The challenge is to move from abstract technologies, such as artificial intelligence, to concrete examples and business-enabled outcomes for OEMs. These include:
- Making equipment operation smarter to reduce cost and optimize effectiveness
- Enhancing service models to build new revenue streams
- Pivoting the business to EaaS
The company’s goal is to become an end-to-end solution provider for the IIoT. Technology-wise, relayr offers:
- A nano agent (embedded software) for end devices or sensors
- Vendor-agnostic gateway software with edge intelligence
- Data processing and storage core services that run on most common cloud computing platforms as well on-premise
- Analytics services for data processing, e.g. anomaly detection
- Industry-vertical tools, including specific visualization dashboards, reporting dashboard, asset visualization and more
- Third-party integration, e.g. with ERP systems
In the cloud, relayr can be characterized as “middleware data services.” This means the middleware can run on most cloud platforms and handle, process, and store data from edge devices. Relayr analytics components in the cloud process data using machine learning algorithms for anomaly detection, predictive maintenance, and parameter optimization. In addition, relayr offers OT analytics, such as anomaly detection and predictive maintenance, to support OEMs and OT specialists in becoming a digital enterprise.
As a young company, relayr can grow without jeopardizing existing (service) business for spare parts or service contracts, which rely on man-hours.
In brief, relayr can deliver an end-to-end IIoT technology stack and services to enable EaaS for OEMs. In this process, risk is re-negotiated, and business models change. This would not be possible without data visibility. But, for first movers, even transparency is not adequate to create the needed security and predictability. To solve this, relayr’s approach is to support client’s success by scaling up in business outcome. This can be by installed machine rather than connected device or storage in the cloud. That means that relayr only gets paid when the customer is successful in selling its machinery.
To further reduce risks for the customer, HSB/Munich Re, a leading global company for reinsurance, insures an agreed upon business outcome, such as lowered costs or increased revenue. This is a key differentiator, as many suppliers still hesitate to guarantee business outcomes.
This approach frees relayr’s advantage of any technology. In most cases, traditional vendors support EaaS with their equipment and cloud platforms, charging for hardware and collecting a flat fee later. ARC research shows that 66 percent of end customers preferred business models with guaranteed outcomes.
Shifting to an as-a-service model is a big change for companies as their relationship with customers intensifies and they need to guarantee operational services. To reduce the financial exposure that comes with this change, relayr orchestrates, together with Munich Re, service-level warranties for these offerings.
In our discussions with many different companies, ARC has found that the change necessary to adopt new business models is more of a cultural, rather than technological one. The challenge here is that culture is significantly harder to change than technology. To get to quick results and give companies a guiding star in uncertain times, relayr has a strict process for implementing its solution.
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