Interview with Timm Christoph Voigt

Danfoss went from offering products to PSS. How would you describe the transition?  

It was a gradual progression that started from the question that has always been at the heart of our activities. ‘How can we leverage our deep application knowledge and domain expertise to create new value in light of the trends that are shaping the industries we are operating in?’.  

In a traditional sense, Danfoss is a component manufacturer, which is a very transactional business, and services were limited to what you would expect from a component manufacturer. Driven by the rise of IoT and analytics capabilities, different teams across Danfoss Climate Solutions started to investigate what else we could offer on top of all the devices we sell and have installed in the field. These teams started to develop digital services around our core knowledge domains that we can now sell to our customers. 

What else prompted Danfoss’ digitization?   

The realisation that we needed to differentiate from our competitors. ‘If other people produce the same components, what can we offer in order to distinguish ourselves from the competition?’ As well as the push from customers towards buying solutions and not just components. And that’s how, about two years and a half ago, after seeing good traction in the market, we decided to create what is today the digital service unit. It was basically the result of bringing together many different pockets in the organisation to create one stronger muscle focused on creating digital service solutions. 

Was that a tipping point for Danfoss? 

It was in the sense that it recognized the different needs of a digital business compared to a component business. The unit requires a different setup, talent, processes and ways of working.  As I said, we were used to building hardware components and selling them in a transactional business, but now we’re developing cloud-based digital services which we integrate deeper into the day-to-day operations of our customers – and that requires a very different way of doing business.  

Which challenges did you face? 

There were and still are challenges on different levels, starting with the shift towards customer centricity and solution thinking. The first thing you need to do when moving towards servitization is to be super customer centric. Customers will pay you for the value you deliver to them on a continuous basis. If you don’t understand the customers’ pain points and what is important to them, you will not be able to develop a product that the customer loves. This way of thinking required a change for our organization, to not only think about individual components but towards solutions for entire systems and the outcome they create. Once you have a relevant product you need to be able to bring it to market. 

And what did this mean for the sales team?  

New skills were needed to sell digital solutions, as well as different stakeholders to potentially interact with, and also the right incentives to ensure digital service sales gets prioritized. And when you make your first sale you might realize that the existing systems don’t fully support recurring revenues and subscription models, as they are designed around a transactional business model. How do you set up for subscriptions? How do you manage these customers? How do you book the revenue? Very basic ERP/CRM questions, that can however create big challenges.  

How do you make sure everyone gets on board?  

Your focus continuously changes along the journey towards servitization, so one of the most important things is change management, and helping people understand why adjustments to the traditional ways of doing things are needed. You won’t succeed if you don’t have the organization with you and for that you need to help them change perspectives: whether it is to switch from a siloed component view to a holistic solution perspective or from one-time transactions towards recurring revenue business models.    

How do you now measure success?  

I believe there are different levels of success. The first would be customer adoption of your products. ‘Did we actually create something the customer is using and that creates value on the parameters that are relevant to him (e.g. energy savings, food loss, or asset uptime)?’ A direct result from that will be the commercial success of the service, which in our case allowed us to double our business in the last three years.  

But there are also softer factors such as reaching internal tipping points, when people who were once sceptical become fierce supporters of change. Or when the challenges you have been working for years become key industrial trends, or main topics at conferences.  

Will servitization become the norm in the future? 

Yes, value added services sold on a subscription base will become an absolute normal way of doing business across industries. And we can already see peers making recurring revenue a key part of their company targets (e.g. Schneider Electric), and the growth of startups with business models focused on servitization is another great indicator that it is here to stay. We are seeing combinations of new technologies with business models popping up that offer entirely new value propositions.  

Which other shifts might we expect?   

We are also seeing more companies that offer everything as-a-service, as opposed to selling products. This can range from full SaaS (software-as-a-service) models to models in which hardware and software are combined. In this case, the components never change ownership. So in the future you could have a situation whereby component manufacturers or companies continue owning their products instead of selling them, and charge the customer a monthly fee for a combination of software and hardware. You thereby move away from actually selling what you produce to selling a value that you can create with your hardware and smart solutions around it. I think that's a shift that we will see in some parts of our business, not everywhere. But it’s definitely happening and changing the way that the industry is working.