The XaaS Effect Transform your business with A CXO’s Practical Guide to the Everything-as-a-Service Revolution Phil Wainewright The XaaS Effect | Edition 1.0 | Introduction 03 The origins and essence of XaaS 04 Converging products and services 07 How manufacturers blend products and services on the path to XaaS 10 Building subscription relationships that work in a XaaS world 13 A practical XaaS survival guide for CXOs 17 Outlining a technology roadmap to XaaS 21 Final words 23 Credits 24 Why read this d·book? Business leaders are constantly exhorted to get ahead of ‘digital transformation.’ As Paul Hermelin, CEO of professional services giant Capgemini, recently declared: “Digital is the obsession in the boardroom and the C-Suite.” But why digital? And transform how? This diginomica d·book provides an answer drawn from our ongoing coverage of digital adoption in the enterprise. The XaaS effect is one of those big-picture themes that’s all too easy to miss when you’re caught up in the daily grind of keeping up with today’s fast-moving technology and business trends. But as we’ll show, evidenced by real-world examples across a diverse range of industries, it’s a trend that has the potential to either transform your business or enable a competitor to come out of nowhere to capture your market. Introduction Modern digital technology is driving a fundamental change in the way businesses interact with their customers. It’s become so easy to stay connected that businesses can quickly build and develop continuous relationships with their customers. Brands are no longer selling a product or service. Technology is leading them on a journey to provide a more engaging experience – a relation- ship focused on continuously improving customer outcomes. We call this XaaS (pronounced X-ass) because this digitally connected model of customer engagement, monitoring and continuous improvement was pioneered within the software industry, as Software-as-a-Service (SaaS). Today, the ‘X’ stands for Everything. Connected digital technology has become a primary channel for customer relationships and an integral component of business-to-consumer or business-to- business product offerings alike, from razors to elevators, and from home heating to earth moving. XaaS is Everything-as-a-Service What’s notable is that businesses that follow this path are changing internally too, as we’ll show with real-world examples from industries as diverse as manufacturing, insurance and technology. The shift from a purely transactional relationship to one that is more of a partnership focused on delivering better outcomes isn’t felt only at the customer engagement level. It forces an equally fundamental transformation in internal culture and processes. How to use this d·book Now that the XaaS effect is spreading out beyond the tech sector, we’ve prepared this exclusive d·book to give our readers a practical guide that helps prepare for its impact across every industry. We’ve included links back to content on the diginomica website where you can explore more details of the case studies we’ve mentioned here. This is edition 1.0 of a living document and a theme that we’ll continue to elaborate with the help of the diginomica community. We look forward to hearing your comments and feedback, and we’ll send you topical updates as requested. Chapter 1 PAGE 3 Chapter 2 The origins and essence of XaaS Before the Internet came along, customers bought software on disks or tape, which they then manually loaded onto their own computers. Nowadays, if we need software installed, we download it. But at the end of the 1990s, vendors came up with another option, where the supplier ran the software ‘in the cloud’ and people could log on and use it just like any other tab in their browser. This was software delivered, not as a product, but ‘as a service’ – Software- as-a-Service (SaaS). It seems such a subtle change, but this single shift from on-prem- ises to the cloud turned out to be far more than a relocation exercise. Once the product had moved to the cloud, it started to evolve into something new. Software was soon followed by storage and processing, in the form of Infrastructure-as-a-Service (IaaS), and development platforms, or Platform-as-a-Service (PaaS). In the two decades since those early days, the as-a-service model has gradually transformed the IT vendor landscape. It has created new industry giants including $10 billion-a-year Salesforce and $17.5 billion-a-year Amazon Web Services, while leaving other former leaders scrambling to reinvent themselves. Now its effect is spreading to many other industries. Continuous relationship enhancement In the beginning, the argument for running software and comput- ing in the cloud was mostly based on lowering costs, due to the huge economies of scale that providers can realise. Over time, providers and customers discovered that the continuous connec- tion between them realises significant new value, through a virtu- ous cycle of engagement (left), measurement, and improvement. • Measurement The provider can analyse user behaviour, which helps them see which features are popular or not, as well as detect and act on those behaviours most likely to result either in a renewal or in losing the customer to churn. If a customer has a problem, the vendor can easily find the root cause, and then implement the fix for everyone before others encounter the same problem. • Engagement It’s easy to communicate with customers, as they are directly connected to the vendor anytime they use the service. Customers can manage their usage and config- ure functionality through self-service controls. The pay-as-you-go sub- scription model makes it easier for customers to get started and then build up their commitment incrementally. This incen- tivises providers to invest more in customer success, to encourage upgrades and renewals. “Once the product had moved to the cloud it started to evolve into something new.” PAGE 4 • Improvement As the provider controls and manages the software, they can update it with new functionality and better performance any time they like. Since customers are always on the latest version, they immediately get the benefit of new features. Because everyone is running on the exact same software, any add-ons, connectors and templates can also be reused. This in turn makes it attractive to encourage the development of a community or third-party ecosystem. Over time, providers build up a vast store of aggregate data on user behaviour and other metrics. This is a digital treasure trove for the application of artificial intelligence. Some providers are using machine learning to further enhance their offering to customers, perhaps by improving performance behind the scenes, or by providing benchmark comparisons to guide indiv- idual customers towards better outcomes. This is just the start – much more will be possible in the future. The essence of XaaS The essence of XaaS is this connection between the provider and customer, and the virtuous cycle of enhanced value discovery that it enables. The continuous feedback mechanism keeps the provider engaged in improving the outcomes that customers can achieve from using its products and services. While it’s enabled by technology, this essential characteristic of XaaS is applicable far beyond the technology industry. Businesses in every sector are beginning to harness connected digital technol- ogies to add this continuous cycle of engagement, monitoring and improvement to all kinds of product or service. Software surrounds every customer experience, an essential ingredient in sustaining engagement, tracking usage, and enhancing functionality. XaaS requires five core technology-enabled elements to be in place: • Digital connection The customer has on-demand access to the provider’s services, while the provider is able to monitor the cus- tomer experience, or to perform maintenance and updates. “A digital treasure trove for the application of artificial intelligence” “Continuous feedback keeps the provider engaged in improving outcomes.” PAGE 5 • Powered by software The provider’s service includes some element of software automation to help deliver and enhance the customer experience. • Networked resources The provider co-ordinates networked data and other shared resources to provide services to all its cus- tomers. • Constantly evolving The provider constantly monitors its services and customer experiences to find opportunities for im- provement. • Usage-based pricing A part or all of the provider’s revenue is related to usage and is billed on a recurring basis. But achieving the XaaS effect isn’t just a matter of putting in some new technology. It’s what you do with it that matters. Building that continuous cycle of engagement, monitoring and improvement re- quires an overhaul of an organisation’s model, operations and culture. “We’re not in the products business anymore” This XaaS effect has a profound impact on the whole organisation. Oracle, the $38 billion-a-year database, systems and software giant, has traditionally supplied products that customers install and operate themselves. Under that model, once Oracle had sold its products, it was up to the customer to get them working well. When they had problems, they often found Oracle difficult to deal with. In the past few years, Oracle has shifted to provide more and more via cloud computing – across SaaS, IaaS and PaaS. With these offerings, it now takes responsibility for installing and operating its own technology, while customers pay a subscription for what they use. As a result, Oracle has had to focus on the entire customer relationship, not just the sales process. This has meant a complete overhaul in how it does business, as Executive Vice President Doug Kehring, Chief of Staff and Head of Corporate Development, recently explained: “We’re in the service business, we’re not in the products business anymore … Now the way we measure is not about how much [product] do I sell, but what are my renewals? The renewal rate becomes the new indicator of success for a company, which means everything that happened between the time that the customer got interested in the technology to when they renew that subscription contract will play into whether we have a successful cloud business.” With every business taking on elements of the XaaS model, many of the early technology and business model learnings of SaaS and IaaS providers give valuable pointers to others making the same journey. PAGE 6 Converging products and services XaaS transforms the external relationships and internal operations of every enterprise. The engagement, measurement and continuous improvement that stems from continuous connection is equally applicable to companies in traditionally product-centric industries such as manufacturing and consumer packaged goods. Several converging trends, propelled by advances in connected digital technology, are driving this change: • Always-on connectivity and smart automation is making it possible to deliver services alongside products, instead of each operating as separate lines of business. For example, industrial equipment can have built-in sensors and upgrade- able software, so that the manufacturer can remotely manage performance optimization and maintenance throughout the product lifecycle. • Greater sophistication and flexibility in business systems makes it easier to deliver contract-based services with pay- as-you-go and subscription billing. This can be either in combination with, or instead of, traditional product sales. As consumers, we’re all used to buying cellphones on a monthly subscription that also includes our calls and data, and maybe add-on services too. Now the same model is being applied to all kinds of products in the B2B world. • New digital-native enterprises have shown how it’s possible to deliver solutions to customers over the Internet, on demand, as a service. As we saw in the previous chapter, this originally got started with Software-as-a-Service (SaaS). It’s now possible to deliver pretty much anything – or as we say, Everything-as-a- Service (XaaS), from pop songs to accounting. As these trends accelerate and mix, established businesses find themselves disrupted by new competitors. It’s important for the C-suite to make the right choices as they guide their business into the future. But when the world is changing so fast, it’s easy to misjudge the direction and pace of change. Often, one part of the picture can look like the whole story, but miss crucial elements. We’ve identified five distinct trends in the XaaS effect. But it is only by recognising and embracing all of them that an enterprise can survive disruption as the world turns to XaaS. >> Chapter 3 “Often, one part of the picture can look like the whole story, but miss crucial elements.” PAGE 7 1 | It’s more than a switch from products to services Manufacturers first started embracing services in the 1990s, when the rather ungainly word ‘servi- tisation’ was first coined. But back then it usually meant transitioning from a mainly product-based business to one that led with consulting services — for example the huge shift that IBM made from hardware to software and services – or GE’s move at the time into financial services. We still see large enterprises today following this pattern. Network equipment maker Cisco’s recent acquisitions of software businesses and the massive restructurings of computing giants HPE and Dell are attempts to lean more towards software and services. But the danger here is that the objective is seen as merely to add some higher-margin lines of business to counterbalance declining product margins. There needs to be a more fundamental shift from product thinking to an outcomes-based service design mindset, joined up across the enterprise. As servitisation expert Professor Tim Baines from Aston Business School recently told us: “The organisational structures have to be sympathetic to it. You can’t have manufacturing here, and design services over here. They have to have this internal connectivity happening.” 2 | It’s more than transitioning to a subscription model Another fallacy is to imagine that repackaging a product or a service contract as a monthly or quarterly subscription is no more than a financial restructuring of how your customers pay you. This apparently simple change in fact has a far-reaching impact on how the business engages with its customers, as Tien Tzuo, CEO of subscription business management platform Zuora explains: “[Our customers] are not talking about plumbing, or automation – they are talking about re-inventing their businesses and driving business model innovations.” If you think of the subscription model as simply a different way of paying for the same thing, you really haven’t figured it out at all. Once you shift from a one-off sale to a renew- able contract, you enter into a continuous relationship with the customer, where instead of shipping an item, you are engaged in achieving an outcome. As Professor Baines puts it: “With the services, you’re buying an outcome. You’re buying a process, rather than simply buying a thing, which you then want to figure out what to do with.” 3 | It’s more than putting in some new technology When tech is the enabler, it’s tempting to imagine that once the technology is in place, the job is done. But that’s just the starting point. The technology fuels new engagement, delivery, and business models, but these won’t crystallise unless the people and the organisation are ready to deliver them. >> PAGE 8 >> There’s a much bigger transformation of business models, operations and cultural mindsets that has to take place before the XaaS effect can have an impact. When videoconferencing vendor Lifesize introduced a cloud-based subscription service, the new management had to change the firm’s mindset from product-centric to customer-centric, explains Chief Customer Success Officer Amy Downs: “We had to redesign the entire company. Customer support was like a complaints department. A customer-centric approach was not in anyone’s DNA at the company in any way. We had to shift the attitude and culture of the company to think with the end user in mind first.” 4 | Back-office functions become part of the change The customer-centric mindset applies just as much to the organization’s internal opera- tions as it does to its external relations. Being digitally connected within the enterprise is changing the way the back-office functions such as HR, finance and IT itself work with the business. Here too, continuous connection is fostering a virtuous cycle of engagement, monitoring and improvement. Activities that used to be sent off to be done centrally — such as booking a vacation in an HR application or adding a new metric to a dashboard in a financials application — can now be done by the worker themselves, accessing the functionality in a cloud-based appli- cation to complete the task, often on a mobile device. The back-office specialist now be- comes a network resource to call on when something unexpected comes up, or if additional advice is needed. Turning back-office functions into automated services helps speed up responsiveness and encourages cross-functional collaboration across the enterprise. These patterns of work help make information and actions available where and when they’re needed. 5 | It’s about delivering outcomes When you put all of these different elements together — the service mindset, the technology, the sub- scription management systems, and the blend of products and services — what you get is an engage- ment with the customer that’s all about what they’re trying to achieve, rather than what you succeeded in selling to them. This is a continuous relationship where businesses have to keep delivering value to earn a renewal, and where they’re constantly getting feedback and metrics they can use to enhance and improve the service they’re providing. Rob Bernshteyn, CEO of procure-to-pay SaaS vendor Coupa, put all this into a book published in 2016, Value as a Service. He believes this is the inevitable outcome of the XaaS model: “We’re competing in a whole different world here. It’s not just functionality, it’s not just that it’s delivered via the cloud, it’s that it’s clearly delivering business value.” PAGE 9 Chapter 4 In the coming chapters we’ll provide real-world examples of how the XaaS effect has changed businesses as we explore the themes raised so far in this book. How manufacturers blend products and services on the path to XaaS A combination of rising connectivity and more sophisticated auto- mation is bringing the XaaS effect to traditional businesses as they blend products and services in new ways. In product-led indus- tries such as manufacturing, this trend first manifests itself in the growth of services alongside products. But it doesn’t stop there. As enterprises progress along this journey, they discover that sell- ing services in a connected world fundamentally changes how they engage with their customers. They are no longer selling discrete products and services. Instead, the two blend both together to satisfy a customer need within an ongoing relationship that fosters engagement and continuous improvement. Welcome to the world of XaaS: Everything-as-a-Service. Here we’ll explore what several leading manufacturers have discovered as they’ve set off down this path, which business aca- demics often call servitization. Professor Tim Baines, an expert in the field from Aston Business School, says that many businesses begin by adding services around existing products: “Quite often it means moving first towards what we call interme- diate services, which is prepare, overhaul, condition monitoring, help-desk, a bit of training on the side, those type of things. “Ultimately, it moves into these more advanced services, much more of the outcome-type contracts. They’re delivering the out- come, delivering the process, delivering the performance. Changing the relationship Organisations that are already delivering ancillary services can use today’s more agile, collaborative technology platforms to make those offerings more engaging. Hewlett Packard Enterprise, the $50 billion revenue IT giant, retains a significant services capability despite spinning off its consulting and outsourcing business in 2017. Overleaf, Adam Jones, Advanced Planning & Innovation Lead within HPE’s technology services organisation, explains how new technology and different expectations are changing the service organisation’s relationship with customers. >> Prof. Tim Baines, Aston Business School PAGE 10 “We’re seeing our customers wanting to be more proactively, pre-emptively notified of what’s going on. They want to be socially connected to resolve issues and indeed to solicit feedback on best approaches and also want us to understand their social profile and align our engagement with their needs.” Proactive service culture In manufacturing, the ability to add sensors and Internet connections to products helps improve existing field service and customer service offerings, as well as add new outcomes-based services. One example is elevator and escalator maker Kone, which already derives around 45% of its $10 billion in annual revenues from its services business. Kone has used technology to connect its 20,000 field service techni- cians, along with agents in its customer service call centers, at the same time as adding sensors to products in the field. Company CIO Antti Koskelin says this has opened the doors to a more proactive, predictive service culture: “If we’re able to get a better view of what kinds of requests cust- omers will make, what their service needs are going to be and what types of issues they might face with their equipment, then we’re able to react better. And if a service technician arrives at a customer site with more information about the customer, its equipment and its contract with us, then they’ll do a better job. “But it goes further than that. We need to be very good at providing the services that customers say they need, certainly, but our goal is to provide the services that they haven’t recognized themselves yet and point it out to them.” A new service mindset In the mass consumer market, home and kitchen appliance maker Bosch is also shifting from one-off sales to a more connected, en- gaged customer relationship. It has pursued an Internet of Things (IoT) strategy to make its products connected, as a result of which it has to fundamentally change how it thinks about customers. This has meant learning new ways of working that are unfamiliar to product companies, as Stefan Ferber, VP of Engineering at Bosch Software Innovations, explains overleaf. >> Antti Koskelin, Kone PAGE 11 “The company has moved quite a lot over the past few years and with that we have learned what it means not only to be a producer, but also you serve the customer, you have a continuous relationship with your B2B and B2C customer. These are all things that are not so common to producers in that space.” The customer relationship is quite different, because when the product is connected, it means staying in touch with the customer. In the old product sales model, the manufacturer only heard from the customer if they had a problem, he explains: “The story starts when the customer for the first time is opening a box with your product in there. Then you build up a new connec- tion, a new relationship with your customer. From there the real product story starts.” For traditional companies ‘success’ meant the customer got their product, had no problem, job done. If someone is calling, you had a problem. This mindset of course takes some time to change, you need different sales people, you need a different marketing ap- proach, you need a different call center approach. Not just adding services to products These insights from enterprises that have embarked on this journey demonstrate how much more of a transformation it is than merely adding services to the product set. The combination of connected technology and continuous service delivery opens up a new type of customer relationship that combines engagement, monitoring and continuous improvement. Some of the key characteristics include: • Instead of the transaction ending when the customer receives the product, that’s just the beginning of a continuing relationship. • Services delivered alongside the product are designed to help customers optimize the results they achieve. • The vendor proactively engages in dialog and collection of feedback from customers. • Connected products send back data that the vendor uses to improve their performance and maintenance. In the next chapter we’ll look at other aspects of that new relationship, including the move to sub- scription and pay-as-you- go business models.and a more customer-centric service design ethos. Stefan Ferber, Bosch PAGE 12 Building subscription relationships that work in a XaaS world Rapid innovation in connected technology encourages enterprises to re-evaluate how they sell products and services to their custom- ers. These used to be discrete, but businesses are now able to blend them in new ways, transforming their relationships with customers. This is all part and parcel of the trend towards XaaS, when everything is sold and consumed as a service. But the new business models that enterprises adopt to sell these new offerings to their customers are not quite as simple as it might seem at first glance. In many industries, the first step towards converting products into services has been subscriptions. We can see this happening in the automotive industry, where carmakers are teaming up with finance houses to sell new vehicles for a recurring monthly fee. Often that monthly sum also includes servicing, perhaps insurance, even a regular top-up of fuel. All for a predictable monthly sum. In the early days of Software-as-a-Service, software vendors adopt- ed an equivalent model. They would take a traditional perpetual software license, carve up the price into 36 monthly instalments, and add in the cost of hosting it on servers in their own datacentres. Trouble was, they didn’t adapt the software for this new model, so there were few economies of redundancy or scale they could lever- age, and little scope for continuous improvement. The Dollar Shave Club story For a salutary example of the limitations of this approach, let’s turn for a moment to the consumer packaged goods industry, and the case of Dollar Shave Club, which launched in 2012 and which Unilever bought four years later for $1 billion. As Ben Thompson explains in his Stratechery newsletter, Dollar Shave Club had used online subscriptions to fatally undermine the dominant incumbent Gillette model of marketing replacement blades at high margins through traditional retailers. Gillette’s owner Procter & Gamble (P&G) had too high a cost base to respond to this new competition by simply rehashing its retail pricing as a monthly subscription. Chapter 5 PAGE 13 That’s because Dollar Shave Club had eliminated R&D, marketing and distribution costs with a new model that finds customers using Internet word-of-mouth, and then ships no-frills blades in return for a low-cost subscription. The cost base of this Internet-based business model had completely different dynamics than the incum- bent Gillette model. This story illustrates the risk that every established business has to face up to when it shifts to the XaaS model – that some disruptive innovator will use some new dynamic of the model to find a cheap- er way of delivering the same (or better) outcomes to customers. As Thompson writes: “Gillette’s model and P&G’s formula generally cost a lot of money: R&D cost money, TV advertising cost money, and wholesalers and retailers had to earn a margin as well, and that’s before P&G realized the return on their investment. The result was that cartridges that cost less than a quarter to manufacture and package were sold for $4 or more. That worked as long as P&G’s other advantages in technical superiority, advertising, and distribution held, but were they ever to falter, it was eminently viable to sell cartridges for less and still make a healthy margin.” Most chilling of all, at the time of the Unilever acquisition, Dollar Shave Club had already captured 15% of the US shaving cartridge market by unit volume, but only five percent by value. In other words, if it triumphs, the value of the shaving cartridge market will contract by two-thirds, mostly at the expense of the advertising and retail industries being cut out of the picture. This is what many people think of as ‘Uberisation’ writ large – a new business model that threatens to wipe out an existing established business by doing things differently. Delivering enhancements is part of the service But there’s one crucial element missing from the Dollar Shave Club story. It doesn’t factor in the additional step of wrapping software around a physical product. When products become smart connect- ed devices, it becomes possible to deliver functional enhancements as a part of the service, as in the examples of Kone and Bosch in the previous chapter. This ability to deliver functional improvements can be applied to all kinds of traditional industrial products, from electric cars and “When products become smart connected devices, it’s possible to deliver functional enhancements as a service.” Michael Dubin, CEO, Dollar Shave Club PAGE 14 elevators to kitchen appliances – and perhaps even razors. Many manufacturers are already wrapping their physical products with connected software to maintain a relationship with the cus- tomer that’s focused on constantly improving outcomes. This is the essence of the XaaS model. Here, then, is the Achilles’ heel in the Dollar Shave Club prop- osition, which leaves scope for others to win market share at its expense. Rather than delivering blades for the cheapest monthly subscription, a provider could add value by using connected technology to improve the shave over time, and perhaps further enhance the customer experience by introducing optional groom- ing services. It’s all about outcomes Outcomes are the takeaway here. Connected digital technology opens up a new vista of potential outcomes. Mikal Hallstrup, found- er and CEO of the Designit design agency says that whereas twenty years ago an enterprise might sell a thousand products each of which fulfilled a single function, today digital technology makes it possible to ship a handful of products supplemented by thousands of services. What’s important, he says, is to focus on the human need that’s being served: “What a lot of clients are realising is that they are competing in a very different industry than they expected. Design comes in in a very new way. It’s not shaping formats… it’s shaping interactions.” Rather than replacing products with services, the as-a-service model delivers the connected product as a means to the outcome, in return for an ongoing subscription. When UK-based smart home provider Centrica Connected Home introduced a recurring subscription model as an alternative to one- off product sales, the switch turned marketing on its head, says Jo Cox, Commercial Director. Instead of starting by selecting a prod- uct to sell, product marketing for its Hive branded services now starts from the experience customers want, and then assembles the products and functions that bring that to life. She explains: “What our customers feed back to us is, ‘I actually don’t care about the technology, I don’t care how it does it, I just want to know what it does for me.’” “Digital technology makes it possible to ship a handful of products supplemented by thousands of services.” Jo Cox, Centrica Connected Home PAGE 15 One early finding was that customers for smart home technology didn’t want a fixed, 24-month subscription of the type that’s com- mon with mobile phone contracts. Hive therefore unbundled the Hive Live service element of its subscription and switched to a 12-month contract, which covers the cost of its hub and other devices. Customers who want to continue to use the smart home app at the end of the contract carry on paying for just that element. It’s not one size fits all What works for razors or consumer devices doesn’t necessarily work for capital equipment. Connected products and intelligent op- eration are an established part of Caterpillar’s range of earth-mov- ing engines. Its Cat Connect family of solutions combine connected technologies and services that help customers improve in areas such as safety, sustainability and productivity. But that doesn’t mean Caterpillar is becoming a software company, as Tom Bucklar, Director of Innovation & Digital, explains: “Our goal is to still be the leading manufacturer of earth-mov- ing equipment and engines into the industries we serve. But we know that the only way to continue evolving and build more value around those products is these types of site-level systems and services… and so obviously it’s an expansion of what we do.” Rather than bundling its heavy equipment into a subscription, the services are sold as an added subscription alongside the purchase of the equipment, through Caterpillar’s established dealer channel. Caterpillar has also developed new finance and rental packages to support dealers that want to bundle up their own subscription offer- ings, says Bucklar. “We have dealers that work with customers to have more outcome-based contracts … In digital, Cat Connect is what we’re taking through the dealers because we want to enable that dealership that really knows the customer better and lives with them every day, to be able to have solutions to take to that customer and that region.” The Caterpillar story is a useful reality-check on the progress of subscription business models and the XaaS effect. Digital connec- tion is having a big impact on the value of its earth-moving equip- ment to customers, but there’s little benefit in turning the capital cost of these products into a subscription. In Caterpillar’s case, the XaaS effect provides a supplement to, rather than a replacement for, its traditional way of doing business. Caterpillar: Welcome to smart iron PAGE 16 A practical XaaS survival guide for CXOs While technology is driving rapid change in the world of business, it’s often difficult to get the measure of that change or its direction. As tech writer Charles Babcock reminded us in a column last year, software has been a driver of dizzying change for more than three decades, long before tech industry luminary Marc Andreessen de- clared in the Wall Street Journal that software is eating the world. Some, such as Tod Nielsen, CEO of cloud financials software ven- dor FinancialForce, argue that there’s an even bigger trend under way, as businesses shift from owning assets to consuming services: “I think we’re going to be at the point where some day in the future balance sheets for companies are going to be very, very sparse, because nobody’s going to own any assets. It’s all going to be comprised of an aggregation of a whole set of services.” Every business is a services business While I wouldn’t disagree on the rise of services, I see this as an extension of the rise of software and connected digital technologies. You can’t have those services without software, and furthermore the secret sauce of XaaS that makes both of them so disruptively impactful is being connected. Every type of product and service is first being transformed by soft- ware, then supercharged by connections. The end result is XaaS. Connected products, connected systems In a traditional business model, whether it’s a product or a service that’s delivered, the relationship is a simple transaction – money in exchange for an item. In the XaaS model, the vendor engages with the customer to help achieve an outcome. It’s no longer a one-off transaction but instead it’s a continuing relationship. The effect of that change in emphasis ripples back throughout the entire business, requiring a fundamental change in how it operates – not only its IT systems but also its processes and people – to deliver results in a far more joined-up, responsive and iterative pattern. Chapter 6 “With XaaS, the vendor engages with the customer to help achieve an outcome.” PAGE 17 For the CIO and CTO, that change demands a new joined-up approach to IT systems, connecting data and workflows across formerly discrete silos. For everyone else in the CXO suite, it demands a more customer-centric mindset and a new joined-up approach to helping the customer achieve their desired outcomes. When the R&D team at energy management and industrial auto- mation giant Schneider Electric embarked on a proof-of-concept for connected products, it found it also had to connect into product management, field service management and CRM systems. This meant a lot of work on converging the data and the taxonomy so that field engineers and product designers are both talking about the same things when they communicate. The result is that problems the engineers encounter on the cus- tomer site can feed directly back to product designers, so they can iterate on the product and enhance its reliability or performance. But setting this up requires designers to think upfront about what data needs to be collected, says Twila Osborn, Vice President of Information Process Organisation (IPO) for R&D and Innovation Efficiency: “If we don’t have the characteristics and the attributes we can’t build them in. If we don’t think about R&D we won’t design in these attributes that are needed for these new business models.” Electronics and healthcare giant Philips has made a huge investment in building a converged repository for health data as a first step in shifting the healthcare industry towards delivering continuous care and wellbeing, instead of the traditional model of simply responding when people become unwell. The converged data provides the foundation for delivering better outcomes, as Philips CTO Jeroen Tas explains: “What you can see here is that we’re starting to connect these dots which were never connected… It only works if you combine that data and make it actionable. “We want to make sure that everybody in that journey under- stands what the ultimate outcomes have to be and how you can guide every participant to understand how we can optimise to get a better result for the patient.” “For everyone else in the CXO suite, it demands a more customer-centric mindset and a new joined-up approach.” Jeroen Tas, Philips PAGE 18 Philips Lighting, now a separate business after spinning out from its parent in 2016, has transformed the humble lightbulb by making it part of a connected infrastructure, as George Yianni, Head of Technology, Connecting Lighting, explains: “In a lot of cases, the reasons we’re winning the projects is not because of the light we’re selling. It’s because of what we do with the lighting infrastructure. It’s totally transformed the way we conduct our business.” Changing culture and processes Services businesses are being transformed as much as product businesses, again by data convergence that allows them to deliver outcomes in the context of a continuous engagement. As Andrew Brem, Chief Digital Officer at UK-headquartered insurance giant Aviva, explains, this means constantly analysing the data to become more responsive to changing circumstances: “I think our whole industry will gradually be transformed by services that help people make smart choices and reward them for that, and I genuinely think it’s in everyone’s best interest.” Once the systems start going into place, line-of-business executives must lead change in the culture and business processes across functions such as sales, customer service, and operations. At Lifesize, which has transformed itself from an HD videoconf- erencing product business to a cloud-based Conferencing-as-a- Service business, refocusing around customer outcomes rather than product sales has meant re-educating everyone in the busi- ness. Everyone now puts the customer first, says Amy Downs, Chief Customer Success Officer: “Customer success teams are becoming more prevalent. It’s their job to bring the voice of the customer back into the business and to connect the rest of the business to the customer. We do that throughout the lifetime of the customer.” To get this culture right, staff need to feel that they’re more than just another cog in the machine. At IT giant Oracle, that has meant a new emphasis on employee engagement throughout the global organisation, says Chief of Staff Doug Kehring. >> Amy Downs, Lifesize George Yianni, Philips Lighting PAGE 19 “We’re not in the technology business any more, we’re in the service business. If you’re in the service business, how your people feel every day, and wake up, and how they [conduct] themselves in front of the customer will determine how the customer feels.” Suite spot: Surviving the shift to XaaS Properly harnessing the XaaS effect demands attention from every member of the C-suite: • CEOs must take a lead in encouraging innovation and collabo- ration across the enterprise to drive continuous engagement with customers, helping them achieve better experiences and outcomes. • CIOs have a big job ahead of them – the next chapter is dedicated to Outlining a technology roadmap to XaaS. • CTOs must work to align product development with customer outcomes, instrumenting and connecting products to ensure the company collects the data it needs to optimise performance and deliver experiences of value to customers. • CMOs must build feedback mechanisms and customer success strategies to maximise customer engagement and value delivery. • CFOs must get ready to support rapid innovation in recurring- revenue models. • CHROs have to find ways to maximise employee engagement with company goals and foster an outcomes-focused mindset across the organisation. • COOs must co-ordinate digital connections to support responsive, adaptable business processes. “CEOs must take the lead in encouraging innovation and collaboration across the enterprise.” PAGE 20 Outlining a technology roadmap to XaaS Harnessing the XaaS effect goes hand-in-hand with achieving digital transformation across an enterprise. Documenting a complete roadmap would require an entire diginomica d·book all to itself, but at least we can outline some of the essential ingredi- ents in the technology roadmap on the journey to XaaS. These six building blocks ensure the business has the technology in- frastructure to connect to its customers to ensure it can foster engage- ment, monitor performance and deliver continuous improvement. • Engagement layer The business must be responsive to customers, employees and other stakeholders. Therefore it needs a flexible engagement layer that allows for as much self-service access as possible to informa- tion and resources. Today, that means both web-based and mobile. In the future it will also have to incorporate conversational inter- faces via messaging tools, voice assistants and chatbots. • Connected products There are two reasons for connecting products. The first is to keep them up-to-date with upgraded capabilities, which may vary from security fixes to performance enhancements or functional up- grades. The second is to collect data which can be used for moni- toring, maintenance and support. • Subscription flexibility The ability to support different types of customer contract and billing relationship is crucial for providing the flexibility to try out different forms of customer engagement in a XaaS relationship. • Converged data and processes The old days when separate enterprise functions each maintained separate datasets and functional silos won’t support the connect- ivity and responsiveness that the XaaS effect demands. Data and processes have to be standardised as much as possible across the organisation to allow for cross-functional collaboration and information exchange. Chapter 7 “Harnessing XaaS goes hand in hand with achieving digital transformation across the enterprise.” PAGE 21 • API-led connections Having the flexibility to do things differently requires an IT infra- structure that lends itself to rapid reconfiguration of resources and processes. This means moving beyond old-fashioned integration to adopt modern API connectivity. This is especially important in organisations that have to modernise a legacy IT infrastructure, where individual resources or functions can be made available as APIs on a project-by-project basis. • AI-ready infrastructure Properly managed data and an API-centric infrastructure are both crucial ingredients in preparing to take advantage of artificial intel- ligence to help automate and refine operations. PAGE 22 Final words As the case studies we’ve pointed to throughout this diginomica d·book demonstrate, XaaS sets in train a fundamental transforma- tion of the enterprise, encompassing internal operations and culture as well as the underlying technology, business models, product lifecycle and customer engagement patterns. Our aim has been to shed light on the nature of the XaaS effect and how to survive it. But this isn’t the end of the story. We continue to track this continuing theme in our day-to-day coverage online at diginomica. That will inform future revisions to this d·book, which will be available to download subscribers. While we have touched on the organisational impact, we believe there is much more to be learned from those businesses and organ- isations that are embarking on this people, process and technology journey. As seasoned managers know, the journey of change man- agement holds many surprises. Meanwhile, technology is becoming ever more accessible and affordable. The opportunity to test out new ideas is expanding exponentially. Much of what emerges will fail, making it a serious challenge to pick out the long-term winners. By staying close to real-world stories from the cutting edge of enterprise digital adop- tion, we’ll aim to provide guard rails for the informed buyer. With this in mind, we have a whole series of future diginomica d·book titles in the works, on topics such as digital collaboration, frictionless enterprise and many others. As a diginomica subscriber, we’ll keep you informed as we publish new titles and meanwhile we look forward to welcoming you as a frequent visitor to our ongoing coverage at diginomica.com. Chapter 8 PAGE 23 About the author Phil Wainewright has been a recognised authority on cloud computing and its impact on business since 1998. As a writer, analyst, speaker and consultant, he advises enterprise leaders on the transformation of 21st century business through digital technology to create frictionless enterprise. He is best known for his online writing as a co-founder of influential tech media site diginomica, and as an independent analyst at strategic consulting group Procullux Ventures. Twitter: @philww About diginomica diginomica is the go-to tech media site for enterprise leaders who buy or specify technology to transform how their organisations work and go to market in the digital era. We believe that today’s informed buyers demand real insight, not buzzwords. diginomica captures their attention by delivering authoritative, thoughtful reporting and analysis that separates signal from noise, with no interruptions from advertising. Our experienced team of writers, analysts and consultants provides rich, informed reportage and opinion based upon our daily contact with buyers and practitioners. diginomica d·books provide in-depth insight and guidance on emerging topics in our coverage of the 21st-century digital enterprise. Twitter: @diginomica LinkedIn: www.linkedin.com/company/diginomica Web: https://diginomica.com Credits © diginomica Limited, 2018. All rights reserved. Images from public domain sources. Layout Chris Middleton. PAGE 24