25/11/2020 | Thomas Costes, Director, Business Consulting Grenoble, Hardis Group

Manufacturers are following the lead of tech companies and switching from a product- to a user-oriented approach by adopting a subscription business model. But as industry seeks to monetize product-related services, organizations will also need to rethink their information systems—starting with the basic system architecture. 

Goodbye ownership, hello subscription and services

The subscription business model has long been a mainstay of sectors like energy, telecoms and media—and with good reason, since revenue is driven by the sale of services or repeat custom. But more recently, the model has taken root outside its traditional sphere, playing a key role in the shift away from the ownership economy and towards the so-called “subscription economy”. 

Of course, the ownership model is far from a thing of the past. Many businesses are supplementing products with a range of associated services, often delivered via connected objects—from corrective maintenance and remote diagnostics, to energy-saving services, bug and security incident detection, and more. But in both cases, the direction of travel is the same: away from products and toward subscription-based services.

For manufacturers, this shift—which ultimately marks a transition from selling products to selling so-called “experiences”—has a number of benefits. Chief among these are better visibility and more regular revenue, especially when it comes to seasonal products. What’s more, this model makes it quicker, simpler and more cost-effective to win new business, because a subscription service implies reduced upfront costs for customers. In other words, the price of entry is lower.

The subscription engine: the new beating heart of industrial information systems

In terms of processes and financial flows, this new business model is upending long-established habits and practices in industry. In the past, manufacturers relied on a largely linear and sequential process: send quote, take order, manufacture product, issue bill, ship product. Put simply, the CRM system handled the first part of the process, and the ERP system the second part. But a subscription-based model requires an entirely different way of thinking.

Although CRM and ERP systems will continue to play a vital role, shifting to a customer-oriented mindset requires a root-and-branch rethink of existing information system architecture. Manufacturers need to automate a whole range of new processes: supporting different types of subscription, making services available instantly, handling repeat billing, managing and tracking subscription life-cycles, renewing subscriptions—the list goes on. And that’s not all, because customers also need an online portal where they can view offers, options, bills, payments, and loyalty benefits.

The upshot is that manufacturers need to build new components into their information systems—starting with the customer portal. Under a subscription model, businesses have to interact with customers a lot more often. And customers, in turn, need to be able to manage their subscription without outside support. This is where the customer portal comes in: as the entry point to this new, lasting relationship. At the same time, manufacturers have to acquire an application to manage equipment or product licenses, as well as user permissions for subscription and payment.

The final piece of the puzzle is the subscription engine. As the new beating heart of the industrial information system, it sits between the CRM and ERP systems, handling the entire process from order to payment: catalogs and price lists, quotes and proposals, subscription management, billing details, and payment confirmation. In other words, the subscription engine is specifically geared toward the new pricing and business practices that are inherent to the subscription-based model.

Rethinking system and organizational models

The “journey” that a digital service takes through an enterprise information system is very different from the one taken by a physical product. Consequently, attempting to use an ERP system designed for manufactured products to manage recurring service sales is akin to trying to fit a square peg in a round hole. Because when it comes to services, there is no inventory, no stock, and no logistics.

Instead, manufacturers need to embrace a specific operating model for digital services—rethinking their system architecture so it’s consistent with subscription-based selling. Here again, the answer lies not in a carbon-copy of the conventional industrial model. In the past, multinationals needed regional entities and local ERP systems. But because digital services can be accessed anywhere, by anyone, this problem no longer applies. 

Instead, a single entity and a single ERP system are all that’s needed to sell these services. Everything can be managed centrally, including accounting, finance, and tax aspects. Gone are the days when catalogs and product lists had to be replicated in separate systems so they could be sold locally. Moreover, because this centralized approach eliminates the need for local administration, it simplifies data management and enhances the customer journey.

In summary, the subscription business model is a win-win for both sides: manufacturers get to know more about their customers who, in turn, receive a better standard of service. But wishful thinking alone isn’t enough. Organizations that are serious about transforming their business model—and reaping the benefits of subscription-based services—need to look again at their systems and organization.