COVID-19 impact: Manufacturing firms want automation companies to have skin in the game

Mumbai: Technology providers for industrial automation like ABB, Siemens and Capgemini are increasingly signing deals with manufacturing companies with outcome-based pricing models, departing from the conventional service contracts amidst capital crunch due to the coronavirus pandemic.

Since most manufacturing companies are unable to invest fresh capex in new automation projects, technology providers told ET that projects were being signed on a pilot basis and based on the cost savings and efficiency improvement created by the projects, manufacturing companies were then allowing the technology providers a share in the profits.

Earlier deals were signed on a license basis or companies made upfront capital investment on software products according to analysts.

“We have seen that in at least 30% of our discussions, customers are looking to make outcome-based and performance-based contracts,” said Rajesh Ramachandran, chief digital officer at ABB Industrial Automation.

He added that such a business model has made it easier for chief digital officers of manufacturing companies to justify technology spends to the board-level executives.

“In the past, the chief digital officers were given limited budgets to try out different technologies. But to scale it across sites, they always had challenges in justifying the business case. With the new business model, they can relate it to specific KPI (key performance indicator) improvement.”

KPIs are typically cost efficiency and quality improvement, he added.

Sunil Mathur, MD and CEO, Siemens Limited, said that there is higher interest from the company’s customers for digitalization solutions that help reduce capital expenditure requirements, save cash and increase productivity.

“New financing models are emerging, mainly from manufacturing-specialist financiers, to provide commercially sustainable ways of paying for digital transformation,” he said. “These are often aligned to business outcomes, to integrate financing closely with the expected rate of return-on-investment delivered through the benefits of digitalized technologies for a particular project.”

Ananth Chandramouli, managing director of India market at Capgemini, also said that the investment on digital technology tools and products that allow to track efficiencies has become a shared one. “In general, there is an expectation from technology providers like us that there is no capex for projects like this and we come in and show the business outcomes. That we become the opex (operating expenditure) part of their P&L and we put our skin in the game,” he said.

Technology providers said that manufacturing companies in India want to implement technology solutions such as IoT sensors to collect data from machines and assemble it onto a dashboard, or tools to check employee safety remotely, among numerous other use cases.

Analysts said that most technology providers usually have 10-15% of their clients on average with outcome-based agreements and some specialised outliers with more than 50% of clients engaged with this model.

However, there are challenges with the outcome-based approach as well, according to Mrinal Rai, principal analyst at global technology consulting firm ISG.

"Since these types of agreements are done involving many stakeholders from the business side along with providers’ regular audience in operations and IT, there should be an agreed and acceptable definition of what an ‘outcome’ would be,” he said. “Outcome perceived by a provider and that realised by the client could be very different... Also, providers have to showcase their ability to handle large-scale and highly complex projects. What we have mostly seen is providers start following this approach with their most important and large clients. Their ability to win new logos with this approach will be seen as a differentiator."