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Four Strategies for the Age of Smart Services

by Glen Allmendinger and Ralph Lombreglia

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If you’re like many product-

centric companies, you’re

scrambling to grow your

revenues from services. The

best ways begin with making

the products themselves

smarter.

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by Glen Allmendinger and Ralph Lombreglia

harvard business review • october 2005 page 1

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If you’re like many product-centric companies, you’re scrambling to

grow your revenues from services. The best ways begin with making

the products themselves smarter.

Any industrial manufacturer that has notawakened to the fact that it must become aservice business is in serious peril today. Sadly,there are many such businesses—companiesthat still think of themselves as builders ofthings and that state their gross margins, oper-ating profits, and other measures of successsolely in terms of “the product.” But even theirmore enlightened competitors, the oneswho’ve begun to wrap valuable servicesaround their products and, in some cases,profit directly from those services, are enjoy-ing only a temporary advantage. They may beimproving their customer relationships by tak-ing on various burdens such as maintenanceand replenishment of supplies, but that willget them only so far. A select group of compa-nies is already upping the ante. Soon, it willnot be enough for a company to offer services;it will have to provide “smart services.”

Smart services go beyond the kinds of up-keep and upgrades you may be bundling withyour products, both in their value to customersand in their cost efficiency to you. To provide

them, you must build intelligence—that is,awareness and connectivity—into the productsthemselves. And you must be prepared to acton what the products then reveal about theiruse.

Consider Heidelberger Druckmaschinen(commonly known as Heidelberg), a maker ofhigh-end printing presses. Throughout its his-tory, the company has offered repair servicesto its customers. Several years ago, when it de-veloped the ability to monitor its equipmentremotely, Heidelberg found that it could pro-vide maintenance much more cost-effectively.Now with its machines communicating contin-uously over the Internet, relaying informationabout their status between the print shops andHeidelberg’s regional and global technical sup-port specialists, the company has the accessand insight to optimize printing performancein customers’ shops. The total product supportthat Heidelberg now offers—which extendseven to removal and resale of the machines—represents a whole new level of value for buy-ers. The network context has made the differ-



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Glen Allmendinger

([email protected]) is the founder and president of Harbor Research, a strate-gic consulting and business develop-ment firm based in Boston and San Francisco.

Ralph Lombreglia

is a vice president at Harbor Research.

ence for Heidelberg and has allowed the firmto achieve true intimacy with its customers.

The rewards of becoming a smart serviceprovider are hard to deny. In our research,we’ve documented organic growth rates indouble digits for many of the companies thatare following this path. The leaders are estab-lishing the new performance benchmarks fortheir industries, deriving more than 50% oftheir revenues and 60% of their margin contri-butions from services as opposed to productsales. For most management teams in product-centric companies, numbers like these soundlike nirvana.

Joining the ranks of smart service organiza-tions is not primarily a technical challenge. Thenecessary technologies, while critical to thetask, are well-enough established by this point.Rather, in most companies, the biggest chal-lenge is getting senior management to adopt anew perspective on the nature of the business.The companies in the vanguard of smart ser-vices think differently about their purpose andhow they make their profits—but they havecome to that new heading by degrees.

What Makes Service Smart?

Smart services are a wholly different animalfrom the service offerings of the past. To beginwith, they are fundamentally preemptiverather than reactive or even proactive. Pre-emptive means your actions are based uponhard field intelligence; you launch a preemp-tive strike to head off an undesirable eventwhen you have real-world evidence that theevent is in the offing. Smart services are thusbased upon actual evidence that a machine isabout to fail, that a customer’s supply of con-sumables is about to be depleted, that a ship-ment of materials has been delayed, and so on.

For customers, smart services create an en-tirely new kind of value—the value of remov-ing unpleasant surprises from their lives.Meanwhile, because the field intelligencemakes product performance and customer be-haviors visible as never before, manufacturersgain unprecedented R&D feedback and insightinto customers’ needs and can provide evengreater ongoing value.

Finally, because it is impractical to deployhumans to gather and analyze the real-timefield data required, smart services depend on“machine intelligence.” In a smart services en-vironment, reliable and blindingly fast micro-

processors do what they are very good at do-ing: digesting billions of data points, talking toone another about the data, controlling oneanother based upon the state of the data—allin a matter of nanoseconds. Humans cannot dothis, nor should they; this incessant stream ofbusiness information should be invisible topeople. At the same time, all this backgroundactivity gives managers and decision makersmuch more visibility into a business’s assets,costs, and liabilities—precisely when they needor want it. (See the sidebar “What a ConnectedDevice Can Do.”)

This is not dazzling futurespeak; for manycompanies, smart services are already reality.For many more, it’s a matter of reaping the har-vest of seeds sown. For decades, businesses havebeen steadily building electronic intelligenceinto manufactured objects by means of sensors,controllers, and microprocessors. Today, virtu-ally all products that use electricity—whetheryou’re talking about toys, coffeemakers, cars, ormedical diagnostic machines—possess inherentdata-processing capabilities. Each has a wealthof information to offer about its current status,usage history, and performance. So if a manu-facturing machine, consumer product, or build-ing is not presently monitoring every detail thatits creator might wish to extract, it can easilyand cheaply be made to do so.

Learning from the Vanguard

If some companies are further ahead thanothers in offering smart services, it’s for goodreason. Manufacturers such as Honeywellwith its aerospace equipment, ABB with itspower plant equipment, Siemens with itsmedical equipment, and GE with its jet en-gines and locomotives all produce assets socritical to customers’ work that, for years al-ready, they’ve been using various kinds ofnetworking to perform remote monitoringand diagnostic work. Meanwhile, as theforces of competition and commoditizationrelentlessly assault their product lines, mostof these manufacturers have made it an ex-plicit goal to change their business mix andincrease the margin contribution from theirservice activities. As a result, they have al-ready pushed themselves further into the lifecycles of the products they sell—beyond pur-chase and installation and into customers’ongoing use. A favorite example in the busi-ness press is the industrial gases business.

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Companies such as Air Products and Chemi-cals and Air Liquide, because they provide ex-pensive components of critical processes,have traditionally needed to offer customersperformance-based service contracts. Evenwhen this meant having “human sensors” sit-ting at clients’ sites 24/7 watching everythingthat went on, it was worth it: The companiesnaturally learned more about their custom-ers’ problems than the typical manufacturercould have, and they converted those issuesinto business opportunities.

“Chance favors the prepared mind,” ob-served scientist Louis Pasteur. In the same way,emerging technologies favor prepared compa-nies. When a global data network—the Inter-net—arrived on the scene alongside rapidly ad-vancing technologies for large-scale storage anddata mining, most management teams in theworld were not thinking about the implicationsfor device networking. But prepared compa-nies, like the asset-intensive businesses citedearlier, spotted the shift in the economics. Nowproducts could be wired throughout a business,and the connectivity was cheap enough to per-mit continual monitoring of them. Even a com-pany like General Electric, already the posterchild for downstream service expansion, sawunprecedented opportunities.

Look at GE’s power turbine business, for in-stance. Its customers, major utilities, havegood reason to hate equipment failures. At theleast, any downtime creates huge opportunity

costs for these customers; often it means theyhave to pay hefty regulatory compliance fines.To reduce that risk, GE (and its competition)invests heavily in remote monitoring and diag-nostics so it can deploy a technician or engi-neer ahead of a failure (preemptively) as op-posed to doing so according to a schedulebased upon assumptions (proactively) or, evenworse, after the power has gone off (reac-tively). For one thing, this has a dramatic ef-fect on the profitability of GE’s maintenanceservices. Most manufacturers cannot chargemore than $90 to $110 per hour for their tech-nical support because of price and benefitpressures from local competitors. But GE En-ergy, because of its efficient network-enabledremote servicing, can charge $500 to $600 perhour for the same technician. Even more im-portant, the information generated by its con-tinual monitoring allows GE to take on addi-tional tasks, such as managing a customer’sspare parts inventory or providing the cus-tomer’s and GE’s service and support person-nel with complete access to unified data andknowledge about the status of the equipment.

Customers now look to GE not just for high-quality energy equipment but also for help inoptimizing their ability to supply consistentand high-quality power to their customers. (Infact, GE has created a significant amount ofcustomer dependency.) This has allowed GE totie its pricing to the benefits it provides(“power by the hour,” for instance) versus the

What a Connected Device Can Do

Most companies still view their electronic and electromechanical products as stand-alone objects, not things that could or should be connected. But it’s the networking and management of these devices that will generate the intelligence businesses need to deliver smart services. Con-nected products will be able to perform the following functions:

• Status.

Status applications capture and report on the operation, performance, and usage of a given device or the envi-ronment being monitored.

• Diagnostics.

Diagnostic applications en-able a device to self-optimize or allow a service person to monitor, troubleshoot, repair, and maintain devices.

• Upgrades.

Upgrade applications aug-ment the performance of a given device. They prevent problems with version con-trol, technology obsolescence, and device failure.

• Control and Automation.

Control and automation applications coordinate the sequenced activity of several devices. They can also cause devices to perform one-off, discrete actions.

• Profiling and Behavior Tracking.

Profil-ing and behavior-tracking applications monitor variations in the location, cul-ture, performance, usage, and sales of a device. These applications can create more customized or predictive responses for end users.

• Replenishment and Commerce.

Replen-ishment and commerce applications monitor consumption of a device and buying patterns of the end user. These applications can initiate purchase orders or other transactions when replenish-ment is needed.

• Location Mapping and Logistics.

Loca-tion mapping and logistics applications track and optimize the service support sys-tem for a device. These applications also support supply chain and sales activities.



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products themselves.The same kinds of economics are at work at

GE Healthcare. Its typical customer is a radiol-ogy practice in the market for an MRI ma-chine. In truth, customers have not purchasedsuch equipment in years; given the rapidly ob-solescing technology and quirks of hospital fi-nances, they’ve tended to lease the machines.Now even conventional leasing has gone bythe wayside as companies like GE offer to in-stall the equipment at no up-front cost and in-stead charge for its ongoing upkeep and use.

The wonderful result is a longer-term rela-tionship than a traditional product sale wouldhave yielded. Under the old model, a customerbuys or leases a thing and gets some kind ofwarranty and support package with it—andthen a salesperson is back within a predictableamount of time trying to sell an upgrade or ex-tension. Under the new model, the customersimply signs up, typically for a five-year-plus re-lationship with a major asset. All the supportand replenishables related to that machine arehandled, through individual transactions, aspart of the managed service. By analogy, imag-ine not buying or leasing the car of your choicebut instead paying for its use by the mile.

GE’s ability to price those “miles” right iscritical to its ongoing competitiveness. For anMRI machine, GE must estimate the numberof images that will be required over the life ofthe contract based on the demographics of theserved area. Again, the company can makesuch estimates because of its network monitor-ing. Not long ago, we met with managers in

GE’s industrial capital equipment leasing divi-sion. These are the people responsible forthose leased trailers you find at practicallyevery construction site on earth. We were in-credulous when we heard how much self-awareness the trailers have—even down to thenumber of times a particular door or windowis opened in a given period. Why collect thosedata? “Because,” we were told, “the business isactuarial science now.”

Finding Your Smart Service Opportunities

Thinking about the business opportunities as-sociated with a networked product is a highlycreative process. Often there are no cut-and-dried markets to identify and size. Rather,there are whole new markets that

might

de-velop as networked products are rolled out. Tofind your opportunities, start by looking at thelife cycle of your product. What are the activi-ties the customer engages in to procure, own,use, and dispose of it? Next, check out the ad-jacencies. For each of the identified activities,what else is the customer close to or in contactwith when performing the activity? And whatother activities precede and follow the activi-ties you’ve identified? Finally, once you’ve ex-amined the possibilities offered by these vari-ous activities and adjacencies, bundle themost economically attractive elements into atotal opportunity. Each of these steps bearsfurther explanation.

Looking at the Life Cycle.

The first step in-volves identifying the activities that are di-rectly connected with owning and using yourproduct. (See the exhibit “The Product LifeCycle from a Customer’s Perspective” for thelist of activities one company generated.) Themost obvious activity that a connected prod-uct can streamline, while at the same time al-lowing the manufacturer to intervene, assist,and reap benefits, is maintenance. If yourproduct can detect that one of its parts is ap-proaching failure and can alert you to thatfact, you are in a perfect position to benefitthe customer—and to own the opportunity todeliver maintenance services.

It’s well known that the profit in printers,for example, is in the replenishables, such astoner cartridges. But there are clones of mosttoner cartridges, and they cut into both therevenues and the margins in a printer manu-facturer’s ink sales. Hewlett-Packard has re-

The Product Life Cycle from a Customer’s Perspective

One company we worked with identified the following activities involved in owning and using one of its products. The question then became, “Which of these activities represent opportunities?”

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Determining requirements and justifying purchase of the product

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Finding a product supplier

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Financing the purchase

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Installing the product

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Modifying other products or pro-cesses to work with the product

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Adapting the product to its environ-ment or to a specific use

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Maintaining the product and re-placing parts

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Replenishing materials (for in-stance, paper and toner for a copier)

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Training personnel to use the product

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Using the product

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Upgrading the product

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Disposing of product waste

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Disposing of the product



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sponded by adding a very simple bit of con-nectivity to one of its printer models. Theprinter can detect when its toner is low andcan initiate a just-in-time order for a new car-tridge. By adding this simple new function toits machines, HP has reclaimed ownership ofa high-profit transaction in which it had suf-fered encroachment.

But maintenance is only one activity toconsider; the life cycle of a product has manypockets of value. In their HBR article “GoDownstream: The New Profit Imperative inManufacturing” (September–October 1999),Richard Wise and Peter Baumgartner ana-lyzed the difference between a product’svalue at purchase and its value throughout itslife cycle, for a variety of industrial assets.They found, for instance, that a buyer of a lo-comotive engine ends up spending 21 times itspurchase value to support its use. Our own re-search suggests that any asset that costs morethan ten times its purchase value to use is aclear candidate for networking. At that level,almost anything a company does to learnabout the product and its continual use willoffer opportunities for the business to en-hance its profitability.

Checking Out Adjacencies.

Having outlinedthe customer’s activities in the life cycle ofyour product, you’ll want to take a secondlook, this time studying the adjacencies. Whatelse is the customer close to or in contact withwhen performing each of these activities? Andwhat other activities precede and follow thisset of activities? Sometimes, even when an op-portunity is not directly connected to a prod-uct, the product can serve as a gateway to it.Nearly all digital cameras, for instance, needsome form of connectivity to a computer,where the photos are viewed, sorted, edited,and stored. Kodak has responded to this adja-cent opportunity by closely integrating its dig-ital camera technologies with widely availablePC software and Web applications so it can fol-low those activities and go beyond them. Thecompany has also partnered with specialty ser-vice providers such as Target and Walgreensthat produce quality prints of the photos.

Getting Perspective on the Whole Oppor-tunity.

So far, we’ve been discussing how tolook for opportunities, but, to be precise,we’re actually talking about how to look forelements of an overall business opportunity. Amanufacturer might find that adding connec-

tivity to an MRI scanner, for instance, will helpit in several ways. The connectivity might en-able the just-in-time ordering of replenishablematerials. It might alert the product maker tomaintenance needs and so allow it to lock inservice contracts with customers. It mightallow the manufacturer to perform machinecalibration and validation, functions previ-ously handled by hospital personnel, forwhich it can now receive separate compensa-tion. Each of these services is an opportunityin itself; together, they form an overall busi-ness opportunity.

Four Flavors of Success

HP and Kodak both found business opportuni-ties by looking at their product life cycles andexamining the adjacent activities related totheir products’ primary activities. In HP’s case,a single product (a printer) made by a singlecompany (HP) was the sole gateway to the busi-ness opportunity. In Kodak’s case, the companytapped a business opportunity in which it sup-plies the products (digital cameras) but also re-lies on partners to supply their expertise in userinterfaces and photo processing.

As you look at the opportunities available toyour company, there are, likewise, two possibil-ities. It may be that most of the elements ofthe opportunity are attached directly to yourproduct’s life cycle, so you’ll be able to pursuethe opportunity alone. Or it may be that theopportunity lies mainly in the adjacencies, soyou will have to partner with others. The direc-tion you take will help determine the kind ofbusiness model you should adopt after con-necting your product. If you go it alone, it maybe as what we call an “embedded innovator”or, more ambitiously, as a “solutionist.” If youpartner with others, it may be as an “aggrega-tor” or as a “synergist.” These are the four basicbusiness models available to product makersthat decide to embrace smart services. Let’slook at each in turn.

The Embedded Innovator.

The embeddedinnovator is the most product-centric of themodels. Customers may still perceive the physi-cal product as the source of primary value, andthey will expect to continue receiving the sup-port services they have in the past (installation,warranties, maintenance contracts, and so on).Historically, manufacturers have bundled suchservices with their products to make sales.Thus, embedded innovators that decide to add

Smart services are based

upon actual evidence

that a machine is about

to fail, that a customer’s

supply of consumables is

about to be depleted, and

so on.



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connectivity to their products may have a hardtime levying additional charges in relationshipswhere everything was previously included.

Because the embedded innovator has builtintelligence and communications into its prod-ucts, however, these goods become the com-pany’s inanimate silent partners. The near-perfect visibility of products that can be re-motely monitored greatly optimizes the deliv-ery of services, eliminates waste and ineffi-ciency, and raises service margins. Thus, it islargely in these areas that companies achieveROI on their device-networking investments.(Think PepsiCo’s returns on its vending ma-chines and fountain systems, and EmersonElectric’s returns on its backup network power

systems.) But it doesn’t have to end there. Theembedded innovator can also add new value toits products that could not have been achievedwithout networking—for instance, allowingcustomers to automatically upgrade theirproducts by means of software downloads.Heidelberg is a good example of a successfulembedded innovator.

The Solutionist.

In the solutionist businessmodel, a single product is still the dominantgateway to a business opportunity, but thescope of high-value activities associated withthe product is broader. Think, for example, ofall the activities associated with the life cycleof an MRI scanner:

1. Determining requirements and whether

How Smart Do You Want Your Products to Be?

Obviously, not all devices and subsystems need to be networked. Consider, for example, the difference in value between networking a refrigerator in a small office and networking a refrigeration system in a grocery store, where failure would have much greater con-sequences. In the latter case, a one-night shutdown could cost the store a year’s profits, so the up-front cost of networking is an obvi-ous investment. The decision to network a product will depend largely on how that product will be used and the potential role it can play in a larger system.

In general, a device is

not

a candidate for networking if it:

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Is not mechanical or electromechanical

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Is very simple or inexpensive and thus not worth the initial investment of net-working

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Has no important information to share

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Has no available or reliable network access

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Has a very brief or very long (15-year-plus) life span

The benefits of networking depend on the context, but there are some important issues to consider when deciding what to network:

• The Impact of a Device Failure.

Not every failure is catastrophic. If a key-board breaks in a food-processing plant, production won’t stop. The failure will be confined to one specific computer, and the keyboard can be easily and cheaply replaced. But if the plant’s power system suddenly stops working, the end result

could be vast amounts of wasted prod-ucts and employee time.

• The Value of Device Information.

A scanner at a department store is a good candidate for networking because the data it collects can inform many deci-sions related to customers’ buying be-haviors. Connectivity will deepen the manufacturer’s insight into purchasing patterns, inventory, procurement, and product or store designs.

• The Impact of Networking.

If technicians know in advance that the HVAC system in a commercial office building may break down (because the connectivity they’ve built into the system allows the equip-ment to be continually monitored), they can diagnose and repair the problem be-fore tenants notice any issues. They can eliminate the downtime and the expense of evacuating the building.

• The Cost and Ease of Connectivity.

Most companies can comfortably justify buildingwide networking or device en-ablement because they can amortize the expense across multiple departments and products. By contrast, the initial costs and complications of creating a home network are prohibitive for most households.

• The Device Turnover Rate.

If you add connectivity to a device with a life span of more than 15 years, you will probably create a technology obsolescence prob-

lem—even if the device is designed so it can be updated remotely via software downloads and so on. Meanwhile, a de-vice with a very short life span might be networked only for its content or com-merce opportunities rather than for its performance or maintenance consider-ations, potentially making the ROI harder to achieve.

• The Service Needs.

If a vending ma-chine could notify its owner when it needed to be restocked or repaired, the company could use employees much more efficiently and save a significant amount of money by eliminating unnec-essary site visits.

• The Importance of Information.

Medi-cal devices that need to transmit vital health information quickly to a variety of people and locations are excellent candi-dates for networking.The ability to simul-taneously inform technicians, specialists, primary care physicians, and the patient is extremely valuable.

• The Location of the Device.

Certain de-vices and systems are harder to maintain than others simply because of their loca-tion. If a motor in an offshore oil rig could remotely inform the owners of its health and performance, complicated and unnecessary service visits would be a thing of the past.



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having a scanner is justified2. Financing the scanner3. Installing the scanner4. Testing, calibrating, and validating the

scanner5. Maintaining and replacing parts6. Replenishing materials (gases and imag-

ing media)7. Training personnel to use the scanner8. Determining a patient’s need for a scan

(preliminary diagnosis)9. Preparing the patient for a scan10. Scanning the patient11. Interpreting the scan12. Updating the software13. Upgrading the hardwareBecause of the high value, complexity, and

cost of MRI scanning, nearly all of these activi-ties represent an opportunity for a scannermanufacturer. (Activities 8, 9, 10, and 11 are pri-marily medical matters and thus cannot be theprovince of a manufacturer—but that stillleaves nine activities that are economic oppor-tunities for scanner makers.) This is preciselythe situation GE Healthcare has stepped into,positioning itself as a complete solution pro-vider, or a solutionist.

Along similar lines, consider Honeywell,which makes (among other things) controland automation systems for petroleum refin-ing. Recognizing that the start-up of a new re-finery to process petroleum represents a frac-tion of the total expense associated withmaintaining and optimizing the facility, Hon-eywell developed a new mode of customerservice called Experion Process KnowledgeSystem (PKS). PKS is a collection of embedded-intelligence technologies deployed at a cus-tomer’s refinery and controlled and moni-tored remotely. The system performs a varietyof manufacturing equipment support and op-timization tasks formerly handled exclusivelyby maintenance personnel.

PKS customers typically experience fewerfalse alarms indicating that a process is in dan-ger of failing, less unanticipated downtime,and lower maintenance costs. They can workwith Honeywell to access knowledge related totheir systems and equipment performance.The clear value of the program has allowedHoneywell to charge a premium for the sys-tem, and, in many cases, the company hasbeen able to increase the scope of services andvalue it provides its customers.

Again, the difference in the opportunities fac-ing an embedded innovator and a solutionistis the breadth of

high-value

activities associ-ated with their products. So, between HP’sprinters and GE Healthcare’s MRI scanners,there is a world of difference in the scope ofservices that could be offered with or throughthe connected device. In HP’s case, the changein business model has been incremental; thecompany has remained a manufacturer ofprinters and toner cartridges and has mademoney by selling these things. Connectivitysimply gives it a lock on the toner sales, whichis where the profits are. By contrast, GEHealthcare’s new business model is far fromthat of a simple maker and seller of products.The connected scanner opens up many serviceopportunities, and to tap these, GE has built alarge, well-tooled, complex service infrastruc-ture. What both companies have in common isthat they’ve found and tapped business oppor-tunities dominated by their own devices. Nei-ther organization has been very dependent onpartnerships (although they could use them,and GE certainly does).

The Aggregator.

The two remaining busi-ness models are those in which the businessopportunity cannot be tapped by a single de-vice and a single vendor. There are situationsin which a device may collect data, but the in-formation, in and of itself, may not be valu-able enough to create an opportunity. Instead,several disparate devices may work within anenvironment, and only by connecting all ormost of them can a company create a high-value body of data. An extreme example ofthis is a simple table lamp. It can be enabled tosense and communicate information such aswhen it is on and when it is off, the wattageflowing through it, and perhaps even the ageof the bulb or bulbs it is burning. Of course,none of these data, on their own, are likely tobe of high economic worth. If the lamp burnsa 100-watt bulb constantly in an empty room,the money being spent on the wasted electric-ity will hardly break most families. But thesum of all wasted electricity is worth a homeowner’s attention, and so an application thatcollects and deploys all those data may be ofenough value to represent an economic op-portunity for a manufacturer. And there maybe further value in building remote-controloptions into the lamp and other devices.

In the case of a system that gathers and

Embedded innovators

that decide to add

connectivity to their

products may have a

hard time levying

additional charges in

relationships where

everything was

previously included.



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processes data from multiple devices, yourproduct may play one of two roles: It can becentral or peripheral. The hub or a spoke. Thebrains of the operation or just a body part.This last variable defines our third and fourthbusiness models. When such a system is re-quired in order to define and tap an opportu-nity, then there will be an aggregator, whichcontrols the application’s actual data collec-tion and central-processing power; and therewill be synergists, whose devices contributevaluable data or functions that are controlledby the application.

Aggregator businesses we’ve studied includeEaton Electrical, Gardner Denver, Electrolux,and Rockwell Automation; they all provide re-mote monitoring and related Web-based ser-vices across channel, alliance, and customer-fulfillment networks. In other words, thesecompanies bring their “secret weapon” to bearon all their business relationships, not just ontheir relationships with customers.

Aggregators are still primarily product com-panies and don’t vertically integrate all aspectsof their product life-cycle management. For ex-ample, they tend not to be involved in productrecycling or disposal. Instead, they sell inter-ested third parties smart-information ser-vices—or access to the data collected from net-worked devices—either for a fee or for a share

of earnings. Where aggregators do choose todeliver services directly to the customer, theynow own that relationship as never before,with distinct barriers to competition. Aggrega-tors cannot be cut out of the services loop bycompetitors or channel partners because theirpossession of device-generated data allowsthem to offer services more intelligently andprofitably than entities that cannot see into thestatus of the products in question.

Aggregators will make larger investments indata warehousing and data mining than willembedded innovators, and they will achievesome of their ROI by providing smart servicesto their distributor and system-integrator part-ners. For example, a large percentage of in-stalled uninterruptible power supply (UPS) de-vices contain dead batteries. Unfortunately,users discover this only when these devices failto work during a power outage. In the embed-ded innovator model, a networked UPS devicecould initiate its own order for a battery re-placement from the vendor—in itself, a smartservice. But imagine how an aggregator couldbuild on that opportunity. Eaton Electrical (aglobal leader in circuit breaker technology),for instance, is bringing something calledHome Heartbeat, a home monitoring system,to the consumer market. Eaton has partneredwith companies that sell power-quality devices,

Out of the Basement

If you take only one message away from Eaton Electrical’s Home Heartbeat initiative, it should be that successful product-centric businesses are rapidly transitioning to smart services. The story is all the more interesting because it goes beyond the business-to-business realm, bring-ing the benefits of machine-to-machine com-munication to home owners.

Cleveland-based Eaton started out in 1911 making axles and other truck parts and later diversified into other engineered compo-nents, including residential circuit breakers. As the end of its first century in business ap-proached, it found itself in very mature busi-nesses fighting with established competitors over every point of market share. That’s when a few visionary managers within the electri-cal products division started to think about device connectivity and the broader solutions it could offer consumers.

The system they envisioned, recently launched as Home Heartbeat, monitors the status of a home and alerts the home owner when something is amiss. To do this, it uses water sensors, open/closed sensors, and power sensors, which communicate to a base station over a wireless network. That base station communicates with a key fob device carried by the home owner. The system can also be instructed to send an e-mail or text message to a cell phone if there is a change in the state of a sensor.

Pause for a moment to consider how use-ful this would be. You’re sitting on the train to work, and it occurs to you that a space heater might have been left on. You can check your key fob to be reassured instead of having to turn back. (The key fob device works only within a certain range of distance but does capture data about the status of

your home as you left it.) Home Heartbeat features a water shut-off valve that can be au-tomatically activated by sensors. So if you’re on vacation, and you hear about a cold snap, power outages, and burst pipes back home, you can check your e-mail; in the meantime, you can be confident that if the water needed to be shut off, it was.

Home Heartbeat is a good example of smart service innovation: Eaton built aware-ness and connectivity into the devices it was already selling and, in this way, was able to position itself not just as a product vendor but also as a service provider. No longer con-signed to an obscure corner of the basement, the Eaton brand now stands for total home awareness. And the company is now in the role of aggregator, courting an entirely new range of partners, from wireless carriers to insurance companies.



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such as fire alarms, backup generators, and theUPS devices mentioned previously. Eaton haseven partnered with insurance companies,which would gladly offer Eaton’s customers in-centives for deploying verifiable battery re-placements in their connected devices. (Seethe sidebar “Out of the Basement.”)

Illinois-based Gardner Denver has a simi-larly expansive vision of how it might aggre-gate information from many sources to servebuyers of its air compressors. Compressed air isused in all kinds of industrial processes; some350,000 systems are in place in the UnitedStates, covering 97% of manufacturing plants.As a first step toward intelligent device man-agement, Gardner Denver has enabled itsequipment to monitor and communicate thewear and tear on “expendables” in plant equip-ment, such as piston rods and cylinder liners.As a result, customers can buy subscriptionsfrom the company and can receive perfor-mance trend information and preemptivemaintenance service. But while Gardner Den-ver makes the compressors, any application ofcompressed air calls for a total system that in-cludes components such as air coolers, filters,and dryers. Once Gardner Denver’s devices arein place for its own and its customers’ benefit,it’s a short step to providing other manufactur-ers and distributors with data that could in-form their pieces of the system. The opportu-nity is especially appealing to a manufacturerlike Gardner Denver, which is not the biggestin its industry and must sell through channelsthat are hardly captive to it. If it can use net-worked devices to tie customers, distributors,and other support elements into a closed-loop,asset management system, it can participate inthe highest-value deals instead of being cut out ofthem. That’s the beauty of being an aggregator.

The Synergist.

It is possible to succeed inthe age of smart services simply by providingintelligent devices that play well with others.When you set out to create a product that cancontribute valuable data or functionality toother connected products, you are pursuing asynergist model.

Consider the Dutch electronics manufac-turer Philips, which specializes in lighting bal-lasts and controls. The company believes therecould be a huge opportunity for value creationif complementary manufacturers in building-systems equipment could share their data.That is, if data could be collected from all the

electrical devices in a commercial facility, theaggregated information could then be used tocreate extraordinary levels of customer service.So Philips is helping to build a community ofseveral parallel players in the commercialbuilding-management arena in order to lever-age all the valuable data about usage patterns,potential energy savings, and the like. Centralto this community’s plan is an agreement to gowith the ZigBee open standard for wirelessconnectivity. Through its participation in theZigBee Alliance, a group formed to further theZigBee standard, Philips has been pursuing asynergist model with several important globalpartners.

Your Worst Enemy

What will stand in your way as you try to moveforward in one of these business models? Itwould be irresponsible for us to minimize thetechnology hurdles you’ll face. Automated in-formation gathering can easily generate tril-lions of data points every day for a typicalproduct manufacturer. Each of these datapoints may be very tiny (the torque, pressure,or temperature of a specific component or thephysical location of a product), but they mustall be validated and stored and then subjectedto the sophisticated techniques (data smooth-ing, data mining) that turn them into intelli-gence that can be acted upon. Clearly, such in-tense data processing cannot simply bethrown at today’s average corporate IT infra-structure or application suite. For example,companies pursuing RFID-tagging initiativeswill need organizationwide data standards andnew middleware to synchronize the data fromdisparate sources into compatible formats.

Still, it’s safe to say that IT infrastructure isnot the biggest obstacle for most companies.Much harder to overcome is the product-centric mind-set of most senior managementteams, along with the P&L structure that per-petuates that philosophy. Manufacturing re-mains the basic building block of the P&L formost product companies, and the cost struc-ture of a product business raises all kinds ofbarriers to service-oriented investments.Across virtually every industry, dozens of ex-amples of intelligent device management havesprouted up as technical or functional initia-tives—in R&D, in supply chain applications, orin customer support, for instance. These initia-tives hit a ceiling, though, when the expense of



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implementing them became hard to justify. Of-ten, a smart services initiative will benefit eachfunctional area to varying degrees—either inthe scope of advantages gained or in the timeneeded to realize advantages—making it hardto get everyone to agree that the initiativemakes sense and should be considered a finan-cial priority. The frustration in organizations isimmense, as middle managers who believe inthe potential of smart service try to elevate thetopic to a strategic level.

Senior management, one middle managertold us, “kind of gets it, and kind of doesn’t.”We’ve seen this for ourselves. A different man-ager invited us to his company for a presenta-tion on the need to invest aggressively in re-mote services. The ranking executive in theroom had a predictable response to the pro-posal: “As soon as you lose the line of sight be-tween the product P&L and the plan, you losecontrol of the business.”

What seems to be missing is a good scriptthat communicates the opportunity to seniormanagement in a compelling way. Our re-search regarding smart services is our contribu-tion to creating that script—and it may find anaudience in a competitive context that increas-ingly focuses managers’ minds on the need togrow organically and to do so by selling ser-vice. If not, we expect the script ultimately tobe handed to business leaders by equities ana-lysts. When they start asking questions such as“Are the assets you sell to customers net-worked?” and placing the companies that sayyes in a distinct group in terms of potential fu-ture performance, interest in the topic will un-doubtedly boom.

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Companies such as GE, Heidelberg, Air Prod-

ucts, and others we’ve discussed have under-gone what we like to call the “ubiquity shift.”They’ve perceived that once intelligent de-vices become ubiquitous—as they will—thecommercial context will change, and they’verealigned their strategies to capitalize on thatnew reality. Meanwhile, most product-centriccompanies remain at least a full step behind intheir thinking. They know that their besthopes for growth lie in increasing the servicescomponent of their businesses, but they are fo-cusing on the same kinds of services that havealways surrounded their products. Their planis to capture the adjacent service markets cur-rently owned by other companies and per-suade customers to pay for the (marginally en-hanced) services they used to provide gratis. Inother words, they are moving aggressively toimplement—by about 2010—a 1990s “dumbservices” strategy and are in serious danger ofdestroying value rather than creating it.

Making the ubiquity shift is challenging, butit starts with a simple insight: A device that canreport back to its maker on its status and usagerepresents the foundation for much richer andlonger-term customer relationships. From thatstraightforward proposition spring the fournew business models we’ve outlined. For anygiven company, it may make the most sense tobe an embedded innovator, a solutionist, anaggregator, or a synergist. But woe to the com-pany that takes none of these paths; it willsoon find its best customers locked in—andhappily—to other smart service providers.

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