Today, 70% of the world economy has become services, and this percentage continues to grow worldwide. As the service shift sweeps across all corners of the economy, it brings both opportunities and threats to companies that produce and sell technology products. Many companies that make industrial equipment, scientific instruments and computing devices are seeing their margins shrink relative to the prosperity in adjacent service businesses. It is no surprise that such traditional product companies are seeking a “service strategy”.
In technology, the boundary between hardware and software is blurring. Software is infiltrating more and more technology products that used to function only by mechanical rules and analog signals. Google has created a driverless car that navigates itself with sensors and software. This trend is not stopping. Hardware-based technology companies often find themselves falling behind their innovative software counterparts in identifying new value for customers. In more dramatic cases categories of hardware technology got replaced by software. No one still buys radio or CD player anymore. Today software is threatening to replace hardware-based networking. The “commoditization trap” for hardware seems impossible to escape without a product strategy backed by software innovation.
The growing dominance of services and the disruptive innovations of software are the two megatrends that will shape all technology businesses in the next decade. To continue their success, hardware-based product companies need software and service transformations. Such transformation requires new approaches in how technology is developed, delivered, commercialized and consumed. This approach, which we call Technology-as-a-Service (TaaS), is the rising future for technology sectors. This model has already been showcased in the computing industry. Today’s most successful companies in this industry are no longer HP or Microsoft, but are companies like Salesforce, Amazon and Google. Salesforce is well known for its Software-as-a-Service (SaaS) success. Amazon has expanded itself into Infrastructure-as-a-Service (IaaS). Google has always made available its technologies as services and are coming out with more services for enterprises.
Simply put, service is economic transactions of value without ownership transfer of the underlying asset(s) from the provider to the customer. TaaS is proprietary technology empowered by software and provided as “services”. Unlike the traditional generation of labor-based services, the services of TaaS are highly software-enabled, on-demand, customizable to business contexts, and often virtually delivered by a system of hardware, software and people. Unlike in traditional product model, TaaS uses technology tools to deliver dynamic functions and solve business problems in close collaboration with customers. A TaaS based business model uses software to increase its functional versatility, and leverages ecosystem to expand the scale of value created for the customer.
There are 10 important characteristics that set TaaS apart from traditional technology products and traditional services.
Technology anchor. Unlike conventional service providers, a TaaS provider develops and owns proprietary technologies.
Maintaining ownership. Services are delivered without fully transferring ownership of the underlying assets.
Customizability. Services should be unique to customer needs and can be customized accordingly.
Exclusivity. Traditionally, obtaining services but not ownership from assets often indicates sharing and the sacrifice of privacy. The printing service at FedEx is shared and non-private. TaaS however provides customers exclusivity without ownership. Exclusive service is a service rendered in a private and secure environment, where a customer has complete control on functions without interference from other customers.
On demand. On demand means a resource or function can be activated and/or scaled whenever the business situation requires.
Consumption-based transaction model. This means services are charged only when used, and the transactional unit can be counted at at micro level of functional usage.
Virtual delivery. TaaS services are often delivered by a system consisting of machines/devices, data, applications, people and processes. Such service delivery assets should be freed from locational constraints whenever possible.
In context. Unlike traditional technology products, which have features fully baked into shape coming out of factory, TaaS needs to deliver functions that are responsive to and shaped by business contexts.
Modular. Modular means a component or function is self-contained with standardized interfaces, so that it can be utilized to build different systems or run disparate processes.
Software-defined functions. Traditional hardware-based functions are fixed once out of the factory. From the customer’s perspective, software-defined technology functions are extensible and programmable; they have the flexibility to serve multiple purposes and create cross-functionality processes.
In the next decade, TaaS will become the dominant model to commercialize technology. Apple transformed its business and then its industry by turning devices such as iPhone and iPad into personalized service hubs, supported by technology systems and business ecosystems. New technologies such as solar power and 3D printing are choosing TaaS models to go to market. Established technology companies including GE and Siemens are turning monitoring and diagnostics technologies into services.
TaaS is a proactive strategy against technology commoditization pressure, but it is also a strategic transition that must be carefully planned and executed. This is because a set of technical, commercial and operational capabilities would be required for TaaS, many of which can be new to product-based technology companies. A three-stepped approach, starting with “asset-based services”, moving to “function-driven services” and then to “business-defined services” allows a company to gradually build up capabilities towards a successful TaaS model. Companies that lead in this transition will create the future prosperity for the industrial sectors and the enterprise businesses.