On this special episode of the Futurum Tech Webcast – Interview Series I am joined by Stefan Krauss, SVP, Global Head of Discrete Industries and Energy & Natural Resources at SAP. This is the third episode in a series — done in partnership with SAP — where I will be speaking with advisors and executives across several different industries on the state of their industry and what we can expect in the future.
In our conversation we discussed the following:
- The areas of opportunities for the high tech and industrial manufacturing industries
- A deep dive into how the current market is causing organizations to develop new business models for growth
- An exploration into ways organizations can evolve from product-centric to service-centric
- A look into the challenges organizations will have to overcome during this evolution
The high tech and industrial manufacturing industries, like many other industries, have undergone dramatic shifts in the last few years and many organizations within these industries are still dealing with the changes. My conversation Stefan explores how organizations can navigate these changes and find success for the future. It’s definitely one you don’t want to miss.
If you’d like to learn more about the industries, be sure to check out our research brief How High Tech and Manufacturing Organizations Drive Business Impact from Digital Transformation.
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Disclaimer: The Futurum Tech Webcast is for information and entertainment purposes only. Over the course of this webcast, we may talk about companies that are publicly traded and we may even reference that fact and their equity share price, but please do not take anything that we say as a recommendation about what you should do with your investment dollars. We are not investment advisors and we do not ask that you treat us as such.
Daniel Newman: Hey, everybody. Welcome back to another edition of the Futurum Tech Webcast. I’m Daniel Newman, your host. I’m the principal analyst and founding partner at Futurum Research. Back for another part of our multi-pod webcast series that we’ve done in partnership with SAP talking industries, excited about this show, high tech. In case you haven’t been following me for a while, something that’s near and dear to my heart, and I’m joined today by Stefan Krauss. Stefan, welcome to the show.
Stefan Krauss: Thank you, Daniel. And I’m very excited to be part of this show today. Welcome to everybody. My name is Stefan Krauss. I am 32 years at SAP, so you bet I’ve seen a lot here. I’m responsible at SAP for a couple of industries. One area is district industries where we have industries like high tech, industrial machine and components, automotive, aerospace, and defense. I’m also running what we call energy natural resources, where we have utilities, chemicals, oil and gas, and mill product mining, so everything really which is very much about production. And my team and I are really responsible on the one hand side, of course, to translate market requirements needs from our customers into software solutions. But on the other side, of course, engaging with many customers in the world. A lot of discussions with customers to help them to improve their business processes by implementing SAP, and, of course, helping them to define new business models.
Daniel Newman: Well, Stefan, it’s a big job that you have. Lots of different industries. One of the things I’ve always really enjoyed about interacting and working alongside SAP has been just how much detail your organization goes into when it looks at different industries. Many high tech companies, and we work with well over 100, tend to have 5, 6, 7 industries of focus, and of course at SAP you guys have 25 plus, and it sounds like you have a large number of them under your purview. So all of them, by the way, is very important, whether it’s energy, whether it’s technology, whether it’s manufacturing, many of the things going on in our macro environment focus on those items, so you’re right at the center of it all. So let’s frame the conversation a little bit, Stefan, the industry, specifically high tech, is going through a pretty big transformation.
And of course we’ve been using the word digital transformation for some time now, but beyond just the market architecture of those words, what’s really happening is we’re seeing companies rethinking the way they’re purchasing tech. Of course, we’re seeing the cycle time from software or hardware going from the newest and greatest to being outdated or needing to be utilized for less important workloads happening on shorter and shorter timeline, and this is causing enterprises, this is causing companies to have to think about how they consume tech, how they buy tech. That’s bringing the advent of the everything is a service. We’ve seen public cloud change, the way people consume. We’ve seen companies consuming differently because of SaaS, the ability to swipe a credit card and start using a software, this is stuff that you as a leader of one of the world’s most utilized ERP companies have had to figure out a way to keep up with. So give me your view, what’s happening on a broad basis in the high tech space that’s driving your everyday approach to the industry?
Stefan Krauss: Absolutely, Daniel. And I think for me it’s really important, and as you said, SAP is really looking deep into the various industries. I always translate this we really want to support the core business processes of our customers. And the core business process, and I hope now all the guys in finance and the HR forgive me, I think this is for me the operations you need to have right to, of course, operate your company. A core business process is really about how do you serve your customers in the best way and how do you get the best in most innovative products out into the market. In other word, product is becoming more and more interesting because in pharma times it’s not only high tech, but also when you look to industrial manufacturing, automotive, a product was very often a piece of hardware, a machine, a computer, a car.
But nowadays, of course, we see more and more that companies are offering a combination of hardware, embedded software and services, and I think this is a major shift we see that companies are innovating here also into new business models, not just innovating on what’s my next best product, but really innovation on this business model how they can serve their customers in an even better way. And I think this is very important. A lot of companies say the real margin is not in the sales of a product, it is in the life cycle later on. The margin you are getting out of the surface, you provide through the whole life cycle of a product you offer to the market. And this is of course why many companies in high-tech, but also again in other industries are saying nowadays, “Hey, let’s go broader. We don’t want to stop our relationship with the customer after the point of sales. We want to continue here through a whole life cycle and offer services and upsell opportunities in a nice way.”
Daniel Newman: You covered a lot of ground there and you started to lean into where I wanted to take you next, which is always nice when a guest does that. Because I use the term XaaS. We know SaaS, software as a service, and I think a lot of people now know PaaS and IaaS, because if you’re in the cloud space you understand infrastructure and platforms have become an increasingly important component. But the advent of XaaS has been that we’re seeing more and more companies look at well, how do we take everything we sell and deliver it in a new consumption based model that’s economically speaking, that’s in terms of faster time to value? But I’ve been writing about this for a long time and I’ve been working with the industry and talking about this, but it is really starting to gain traction right now, Stefan. Talk a little bit about your perspective on what is XaaS and what are some of the different models when you talk about what this really means practically speaking?
Stefan Krauss: Like I said, XaaS or everything is a service and there’s a lot of different terms when you also look to the different industries. I think the aerospace and defense, they call it paid by the hour for a long, long time so it’s not a new thing. And again, in automotive, people may call it mobility. And I think this is, again, very much about on the one hand side the customer of those companies are all becoming more and more demanding. They want to be served in a better way and they want to have unique, and I call it solutions, not just products. And a solution, again, is a nice combination of product and services and software, and it needs to be matched very much to the individual needs.
On the other side, and this is also interesting, particularly when we see industries in the economic crisis, we have this many years back in the automotive industries, I think we all see right now what’s going on in high tech and others that, of course, there’s also a need from again, the customers of those companies to shift from CapEx to OpEx models. So they don’t want to really upfront pay for something. They really want to pay as they use it, as it consume it, or as it performs, and now already throwing three different terms. I think there’s not just the one answer how exactly this model can look like, but there is a big tendency to say, “Hey, I don’t want to really do an upfront investment. Let’s see how much I need, how much I consume, and then I’m happy and willing to pay for it.”
On the other side, for a high tech company, a manufacturing company, as I said before, they have a high interest to build a long lasting relationship with their customers. And therefore, again, serve them beyond the point where they have sold the product and really keep engaged with them, which you can do when you then including the services later on is also where I think this topic of predictive maintenance comes up quite a bit because then you want to optimize, of course, how you engage with your customers in service processes, you want to provide your customers with upselling opportunities. For example, by analyzing those products, again, it can be a machine, can be a computer, and offer here maybe benchmarking, comparisons, how others are using it, give recommendation to the customers how we can even run it better to get more output out of this. So I think this is a nice win, win situation for the manufacturers as well as for their customers.
Daniel Newman: I’m looking through some of the notes that we swapped ahead of getting together here, and I do really love seeing the evolution of how the excess is shifting, Stefan, from a way to move typical services to consumption and then moving consumption services to outcomes. That’s really interesting because I think we’re going to see more and more of that. It’s not a slam dunk for every company. It’s not easy for every company to start going to outcome as a service, but I think increasingly as data is widely available and more immediately available, companies are going to start to say, “Well, look, it starts with things like MSAs and SLAs, and what’s our level of expected service and are you delivering, and if I don’t get what I expect, I don’t want to pay what I’ve contracted for.
But then it’s starting the movement in businesses as we’ve heard about it in pro services, we’re starting to see in high tech that not only do I want the outcome, I want to make sure that the actual outcome for our business can be measured, meaning that we get that additional uptime or we’re able to, if you’re manufacturer, build X number of additional widgets. Those are the kind of things that we’re going to start to measure because technology is going to enable it.
By the way, for everybody out there really quickly, please check out the show notes, because there’s a paper that we’re going to be able to offer all of you to read to basically give you more information on what Stefan and I are talking about and what this all really means, so go ahead and check that out, click on that. That’s going to give you an even deeper dive here. But Stefan, I really do like that. And maybe that leads us nicely into the next question about what do you see this whole transition to everything as a service meaning for the processes of the companies you’re working with?
Stefan Krauss: I think very important when we look to the whole company, because a lot of people, when you start talking with them about everything as a service think this is just a sales process, which of course it is not. Of course, it’s a major thing when you really want to sell a solution, it’s a different sales approach than selling a product. And by the way, to a lot of customers I’m talking to, they see this also as one of the biggest challenges is how do I enable my sales force and how do I make sure my sales force starts learning to sell a solution and not just a product. So it really starts by this configure to order process, customize it, make a nice offering, again, a combination of products, software, and service to your customers.
Then of course the whole delivery, maybe implementation process is very important, but it’s also, from a financial perspective, very important. So when you run into a deal where you know as the manufacturer later on need to really see what are my revenue streams I get from my customer, but also what are my costs, because, again, it’s not just the product costs, you have the costs of the services and keep the lights on and that it’s running, you better do upfront a good calculation is that a business model, is that each individual contract you negotiate with your customer a profitable one, that’s the planning side. But then later, of course, when you close this contract, you better also of course monitor all incoming costs.
Again, I think I mentioned predictive maintenance. One of our customers, it’s a germ based company called Kaeser Compressors, and they’re, for example, to a certain part of their business, saying, “We are not selling compressors anymore. We sell compressed air.” So that’s the service. And they start with this process. By the way, also very interesting, they start with this form when there was an automotive crisis.
Like I said before, their customer could not afford to buy now the compressors, but they were fine to buy into subscription and go into a usage based pricing. So they started this process and then they said, “Okay, now I own the service. I own the service costs. So let me see how can I further optimize the services, how can I reduce effort in service.” And this is why then they later on implemented predictive maintenance. The better they know when the service is needed, the less are the costs to get it maintained, the more it’s the uptime for their customers. So it’s a nice and evolutionary process to really think through from sales through service to the whole financial perspective.
And let me not forget to talk about sustainability, because I don’t have one customer meeting right now where customer is saying, “This is now really becoming relevant. It’s not a lipstick on the anymore.” Allow me to say this, but it’s really becoming real. And they of course put a lot of thoughts into what does it mean for my processes, what does it mean for my supply chain, what does it mean for my manufacturing processes. But they also think about the whole life cycle. So the returnable packaging, recycling, waste is all becoming relevant, and therefore I think they also are very interested, as they still own then the products later on, to take it back, if, let’s say it’s end of lifetime, recycle it, or use parts again to the next product.
So this is closing nicely the link to, of course, reduce the raw material hopefully, and get some reuse then build a new product in the future. So therefore, I really love this everything is a service from a overall perspective, because it’s much more than just say it’s a new way to sell something and how you get and receive your payments.
Daniel Newman: I think it’s a balance. Of course, you mentioned a couple things, the pendulum swings towards sustainability and now we need to find the balance of helping companies understand that the things they’re doing are actually making a difference for their carbon footprint. And of course, being able to track data and provide a dashboard and give visibility helps companies then share the fiduciary responsibilities with their shareholders and stakeholders and with the market and their customers, and be able to say, “Hey, we’re doing this and here’s how it’s working, and here’s what’s happening. It’s not just a marketing thing that we’re doing to try to make sure that we’re also participating.” That kind of thing is definitely able to be done more successfully with technology.
And of course, as a service, you mentioned automotive, and it was just interesting, I won’t say names, but a neighbor of yours in Germany recently put out a decision that they’re going to take heated seats and basically make them a feature in every vehicle, but then you have to pay an as a service subscription to unlock. So we’re starting to see this trickle down or trickle across approach of saying, “If a vehicle is basically a computer, a data center, we can put a bunch of sensors and features, and we can basically give you the ability to unlock and lock those features on a subscription basis. And therefore you consume it if you want, and if you don’t…” And by the way, the outcome is you pay, you get heated seats, and so it’s very clear. So we’re starting to see little examples of this though, Stefan, creeping into our everyday life. So I love seeing how this stuff we are doing in tech becomes a bit of a bellwether for things that are going to be done in many other industries.
And that’s, by the way, my opinion, Stefan, we’re going to see a lot more of that from a lot more manufacturers in a lot more technology. I could see at some point having an espresso machine at home that you got to pay like you’re at Starbucks and it’ll make you your great espresso using IoT. This is where we’re heading. But back to a little more of the pragmatic, talk to me about the challenges of this transformation. I’ve been watching companies do this. I’ve saw a few different companies come out pretty boldly over the last three or four years talking about how they’re going to move to everything as a service. Born on cloud companies have had a distinct advantage here, but having said that, there’s a lot of provenance in these legacy and long, historically successful tech companies that are deeply entrenched in these organizations, and that gives them some ability to pivot. What are you seeing in terms of that transformation? I’m guessing both for SAP and many of the customers you’re working for, you’re all going through this.
Stefan Krauss: Absolutely. And you’re absolutely right, SAP is also going through this transformation ourselves here four years from a, let’s say, good oil tradition on-prem vendor into now one of the leading cloud vendors in the world. So that is a big transformation. And I would really say it starts with the people and it starts with the people’s mindset. And this is this caution I have with many customers. When you ask them, what’s your biggest challenge, this is really about how do I get my whole workforce with me on that journey? I think I mentioned the sales guys before, so, again, it’s a very different approach to sell solutions than to sell products. It’s a different mindset you need in development, of course. And so high tech or software it’s product or software development, but it’s same, of course, for engineers.
I think your example with IoT, you have more and more software in your hardware. And sometimes it’s also a challenge for us, and I think many pure software vendors, there’s always a limit on software experts out in the market. Now, we are not just competing about pure software vendors. If you look at the automotive OEMs, machinery companies, they all hire software people. So you need to expand, let’s say, the skills and the portfolio of roles you have in the company to bring really the hardware, the classical engineering, and the software engineering together embedded and provide this.
So I think this is challenge number one. And challenge number two is, again, I think it’s an exciting business model, but of course you want to make sure it’s profitable at the end of the day. And this is what I mentioned before in, again, the traditional times you had your price of the product, it was very, sorry to say, easy to calculate what have been my cost, what have been the sales price. It’s a little simplified. Now, of course, when we look to this new business model, it’s becoming, of course, very relevant to really capture all the costs, also the ongoing costs you have later and really manage them in a way that you still have a profitable case at the end of the day. And this is also what I see many companies starting into this one.
It’s not that you overnight say, “Now I completely turn around my company 100% everything is a service.” Most companies start, let’s say, in a small business unit, in a small area to gain that experience and knowledge, and then expanded as it’s really been adopted in the market. And I think this is also one of the challenges, are you doing this in a separate company? You build a new subsidiary or do you do this in your really core business because you still need to run your traditional processes. So I think this is a discussion not only from how they would then implement, for example, our software solutions we are providing for this process, but also how they organize their company. And also keep in mind that a lot of companies saying, “I don’t want to keep those products in my books.”
So it’s not in the book of the customers. It’s not in the book of the manufacturer. So it’s a third party. It can be a bank. It could be an insurance company. It could be, again, maybe they really on purpose build an independent little subsidiary for risk management, of course, and make sure you are not diluting your traditional business. So I think these are the discussions we are having with many customers. And this is also why I think it really starts to first define why do you want to go in this business model, where to start with. It’s more really a strategic decision, in my opinion, not an IT business project that comes later when you’re clear what you want to do. And then I think we have now really built a lot of functionality to really support those end to end processes, because, again, it’s a collaboration from sales and service falls between sales, and then of course the manufacturing in even tighter way than I think many companies were used to in the past.
Daniel Newman: You hit on a lot of good notes there. We’ve got a couple minutes left, Stefan. I want to just circle back and give you a chance. You’ve seemingly done a lot of this and therefore you’ve probably been able to give some key pointers. I saw that you had a five bullet here are the what you’re seeing are the best approaches to move from product centric to service centric, I love giving people outcomes from these conversations. In just a minute, because you’ve mentioned the challenges, I’d love for you to say, “Here’s what we’re seeing is successful, here’s the bullet points,” so that everybody out there can start to think about this as they’re considering in their businesses where opportunities might be to make this important and difficult shift.
Stefan Krauss: To really summarize it, for me the most important topic is really this is a strategic business decision. This is not some fancy IT project a company should do. It is really about thinking, how can you be innovative in your business processes or business models, not just innovative in the products you’re offering. Second is for me really identify the customer segment you want to serve with this one. You don’t boil the ocean overnight, so define your market very precise and get it started, and then it’s really about the collaborative engagement, as I said before, through the different line of business of your own company to get them all behind this business model and how they work together here in the future. The first topic is, for me, you need to build the right partnerships.
As I said before, it might be a bank, it might be an insurance company who help to get it out of your books and still offer here the right subscription model and funding to your partners. You might also need, of course, to collaborate with service partners. If you cannot provide all the services by yourself to your customers, you better team up here. And I think that it’s for me really getting it started, because I have the feeling, I have a lot of customer discussions who think, let me think about it, maybe we should do it. I think get it up, learn and fail, to a certain extent. But I think it’s the right way to add this as a business model to many of our customers business here in the future, and I think there’s a lot of experience, of course, I think companies can grab also from other players in the market. And also we are happy to share all the best practices we learn from many customer engagement and serve our customers here in the past way.
Daniel Newman: Talking to so many customers gives you great perspective, Stefan. Those are some really great bullet points. Of course, it’s so much more complex than that, but giving some, hey, here’s some starters. I like that you alluded to the fail fast or fail forward concept. I always say no one really wants to fail, but we do know in the process of discovering what’s going to be best, there’s going to be some mistakes and we’re going to identify some things that aren’t going to be the best approach, and so you do need an organization that has the strength in its culture as people supporting the objectives. And then, of course, a lot of ideas getting implemented quickly so that we can figure out what works and what doesn’t. And, of course, I always say let the data support that. And so I’m sure in your world you also share a similar sentiment.
So we’ve got to wrap up here, Stefan. I want to say thank you so much for joining me here. For everyone out there listening. As I’ve said earlier, there is a paper. I will put the link in the show notes. It’s worth reading, dives deeper into all of the things we talked about here today, so make sure you click on that and download it. Promise you it’s a good read. We keep it quick and to the point, but it’s also got a lot of insights to get you on your way. Stefan, thanks for joining the show today.
Stefan Krauss: Thank you, Daniel. It was great talking to you and I hope that was informative for many people listening to us, and if they have questions, I think of course they can reach out to us every time. Thank you so much.
Daniel Newman: Absolutely. Go ahead, click that subscribe button. Join us for our future shows here on the Futurum Tech podcast, webcast. For myself and for this show, it’s time to say goodbye everybody, but we’ll see you really soon.
Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio