The Theory of Everything as a Service (XaaS)

Like Stephen Hawking’s famous musings did for the laws of the universe, everything as a service (XaaS) is about to revolutionize the way you think about the world.

Offering benefits like operational agility and efficiency, XaaS will be the business model for every equipment vendor in the future. And it will be big. According to Fortune Business Insights, the global XaaS market is projected to grow $2.3 trillion in 2028.

This may sound bold but think about it. If you went back 10 years to a vendor selling software via perpetual licenses and said it would be selling its software in the cloud as a service (SaaS) in the future, you would have got a look of disbelief. The fact is, 70% of all software vendors are now offering SaaS.

While previously there were many technical limitations as to why XaaS—or pay-as-you-use models as they are sometimes called—were hard to implement in the real world. How do you communicate with the device during its lifetime? How do you measure usage? How do you bill clearly? Today, all these limitations are gone thanks to the advent of communication infrastructure, IoT, and application integration technologies. 

Smart Equipment Makers

Now that these restraints have been addressed, it is easier to discover what the potential benefits are for “wannabe” smart equipment makers. And to see what is still holding them back. There are some obvious and not-so-obvious ones.

First and foremost, (and this is proven in the software industry where SaaS is now the dominant sales model) XaaS transfers your irregular income stream (which most likely consists of large but hard-to-plan or predict upfront payments) to a continuous one. A continuous and predictable stream—what investor doesn’t like that?

Another automatic consequence of the XaaS model is that stronger customer relationships are built, as there is a natural need for continuous communications. Sales models evolve sales managers to customer success managers, a boon to increased customer retention.

Also, XaaS will increase and protect your aftermarket service revenue. To guarantee the KPIs you signed up for—like up-time and performance—you can require your customer’s spare parts are to be delivered by you. That way you can guarantee quality.

A side benefit from the above is that, by taking better care of the equipment, you extend revenue growth by utilizing the full equipment lifetime. The longer replacement can be delayed, the more profitable the XaaS becomes.

Competitive Advantage

In the end it is always about competition. Will you wait for your competitor to disrupt the market? Because XaaS is an extremely disruptive unique selling point—you’ll want to be there first.

Most of the above points can also be turned into positive arguments for your buyer: Like removing the need for large upfront investments turning from Capex into Opex. And getting access to new insights and services based on the data derived from the equipment.

So, with all these benefits, why are there still so few equipment vendors turning smart? Well, it is not just technical. For one thing, many companies shy away from the greater responsibilities in respect to servicing, maintaining, and repairing. If the equipment fails, what is the impact on production and who is responsible for the loss?

Then there is the financial risk of the customer not living up to the payment expectations. In practice this is where you see financial institutions waking up, smelling the opportunity to sell new financial products and services to mitigate this risk.

The biggest issue when it comes to finance is the impact on your own financial business model. The loss of revenue due to the conversion of large upfront payments to steady but future income stream, coupled with the additional investment to build and deliver these new services can be a toxic cocktail to the company’s cash flow and profit margins. Much has been written about this swallow the fish issue.

From an organizational perspective the real issues are numerous as well, like how do turn yourself into a software company? And you, as a regular reader of Big Data Quarterly, know building software is something completely different from building physical products. On top of that you need a whole new (software) talent stack, architects, developers, security experts, support. Some of these talents are hard to find right now.

So, taking all of the above in consideration, is XaaS going to happen? Yes, it is more or less inevitable. The competitive disruptive nature is just too big. The upside can’t be ignored. Will it be a walk in the park? No way. The challenges are not only technical but also financial and organizational. 

Therefore, here is my tip. Don’t only vet the technology but also the partner that delivers the technology. How much expertise does that partner have in SaaS and can it deliver support beyond the technology in the journey of adopting XaaS?

You choose.


Subscribe to Big Data Quarterly E-Edition