Product-as-a-Service – is it only really rental by a different name?

Nov 22, 2020 • Features • The View from Academia

Software-as-a-service has become well established, and recently a trend to sell Product-as-a-Service has emerged. PaaS is often sold in a similar way to products with limited additional services provided. From our perspective, this makes PaaS a rental service rather than a new form of servitization with value co-creation, as it reinforces an arm’s length relationship, Dr Christopher Ganz and Prof Dr Shaun West share their analysis...

Servitization and the concept of ‘Product as a Service’

Servitization is a current trend in industry, which aims to increase the service business volume in companies by offering their customers more, particularly more advanced types of services. Digitalization goes hand in hand with this trend and supports these innovations. Many of the benefits of digitalization come from collecting data that offers insights into the customer’s needs. Such insights and resulting actions can be beneficially offered as services. The links between servitization and product service systems (PSS) are not new and are shown in Figure 1.

Figure 1: The degree of servitization increases as we move to product-service system [1]

As part of servitization, many companies are currently advertising a variant they refer to as ‘Product-as-a-Service’. This is a machine rental agreement where the supplier keeps ownership of the asset and rents the machine to the customer. The customer is obliged to pay the 'rent' but not obliged to use the equipment. This analysis is similar to a real-option contract based on the "take or pay" concept. It means that the maintenance costs (and risks) are transferred to the provider, however, it lacks many of the aspects of advanced services associated with servitization. PaaS also keeps the relationship between customer and provider at arm's length and therefore does not align with the value-cocreation (and delivery) as defined by Service-Dominant logic. When we consider Tukker’s Product-Service System (PSS) framework (Figure 2), the positioning is within the "product-oriented" position, one step from the pure product although it does lend itself to positions further to the right.

Figure 2: The PSS continuum [2]

PaaS can’t be discussed without mentioning Rolls Royce’s ‘power by the hour’ concept. Apart from the fact that this concept dates back two decades, it is not example of PaaS as the asset is actually owned by a bank and leased to the airline that uses it. It is a way to buy the maintenance based on operational hours consumed on the machine and often includes value-adding aspects, such as swap-out engines and operational advice for the turbines.

Financial optimization

While a PaaS model is easily advertised, to set up a business model that actually creates value is not a simple task. In its essence, the PaaS model comes down to whose balance sheet the asset is on. In a traditional product sale, the product is owned and operated by the customer. All risks are with the plant owner. In its simplest form, PaaS is a rental or leasing agreement that changes the distribution (or shape) of the cashflows. The customer benefits from an improved Return on Asset (RoA), not by increasing the returns, but by reducing the value of the assets. This optimizes the KPI without addressing its intention, which is to increase the return. Furthermore, the value does not indicate that more can be done with fewer assets (e.g., improvements in operational efficiency), it’s doing it with someone else’s assets.

Such rental / leasing models are mostly done through financial intermediaries because the supplier is penalized in their balance sheet for carrying the customer’s assets. It is to be noted, that these services need to be accounted for financially. While the lower entry cost may look attractive for a customer, the repeated rental payments may finally sum up to far more than what the initial investment would have been. The total cost of ownership over the lifetime is generally required for a customer to decide whether such an arrangement makes financial sense.

Advanced services contracts

PaaS arrangements are cited in the context of advanced services, i.e., predictive maintenance, energy optimization, etc. Since the asset is still on the balance sheet of the supplier, it is in the supplier’s interest to keep it healthy. In fact, it should be in the interest of all stakeholders to run the asset optimally. Such advanced services can be framed as service contracts, regardless of whose balance sheet the asset is on. These service contracts can also be framed as performance-based business models, where the service supplier still has an interest to maximize the asset’s performance, even though they don’t own it.

Other services based on process support can also be integrated. Here, coffee equipment manufacturers have been successful in creating a range of value propositions to improve the availability of quality coffee. In a number of cases, they have done this by creating deeper relationships and partnerships with dealers and coffee shop operators. Other industrial examples have been Caterpillar who both sell and rent machines and support process support, asset efficiency services and, to some degree, process delegation services. Hilti also provides advanced services based on tool-box and Hilti-Connect models

Figure 3: Classification of industrial services can provide hints to how to build advanced services [1]

Pay per use

An expansion of the PaaS model, where the rent is paid by calendar time, there are other models that tie the payment to operation. Pay per use, pay per kilometer, pay per products produced are things being discussed. It is to be noted, that such models move part of the operational risk to the supplier without any influence on the operational decisions. It is of course in the interest of the customer to outsource some of the operational risk, but it is questionable whether the corresponding remuneration to the supplier is factored into such contracts. If not, this is surely not a commercially successful model for the supplier.

Xerox introduced the concept when providing copiers to companies, at a ‘per page’ expense. Customers bought the contract when photocopies were slow, low quality, and expensive. The rapid development of copiers led to a massive increase of photocopies over more than ten years. Swapping printers for more performant models was seen as a benefit by the customers, while the increased capacity of these machines led to more copies being made. While a customer may not have bought a new machine if they had owned it, Xerox benefitted greatly from providing the capacity to increase their own revenues by copying more.

Utilization sharing

One area where PaaS models make a lot of sense is when the utilization of an asset can be increased. A pay per use model makes sense if several customers can use the asset. A good example is cloud computing: a cloud provider can offer the infrastructure or platform as a service by giving a number of customers access to the computing infrastructure in a data center. Computing or storage capacity that is not utilized by one customer can easily be re-allocated to another customer. The utilization of the data center infrastructure is much higher in such an arrangement than if every customer buys equipment that covers their maximum capacity requirements.

For example, GE Energy offered a rotor access option to their advanced Planned-and-Unplanned maintenance agreements. For a fee, the customer gained access to a fully bladed rotor; this had significant value following a rotor failure, in effect providing a real-option contract to the customer. Additionally, taking the access agreement reduced the cost of insurance for the power producer.

Summary

Many PaaS approaches in the industry have failed, or do not provide a breakthrough in service revenues. We claim that this is mainly due to the misinterpretations we have explained above, that do not result in a positive business case for the supplier. Nevertheless, PaaS can offer advanced service delivery bases when integrated with other service-based concepts where use- or result-oriented value propositions are factored into the PSS continuum. Alternatively, it allows more creative value propositions based on process support services, asset efficiency services, or process delegation services.