Manufacturing and making money in the digital age

In this digital age, hardware manufacturers looking to
become intelligent goods manufacturers need to incorporate software licensing
and entitlement management into business operations. Cris Wendt writes.

Driven by a growing ‘intelligent’ economy, where consumers
expect instant, iTunes- style fulfilment of software requirements,
manufacturing is in the midst of a rebirth.

Today, manufacturers require nimbleness to quickly create,
configure and respond to changes in tight timeframes and an increasingly competitive

In this landscape, long design and production lead times,
physical product variants and complex supply chains are no longer tenable.
Instead, to keep up with consumer demands, manufacturers need to circumvent the
physical production process and go to market faster with differentiated product

To do so, they must embed software into their products or
develop stand-alone applications that power the hardware. What we’re left with
are intelligent, easily configurable, differentiated and ultimately monetisable

And this also applies to their supply chain – many
enterprise resource planning (ERP) systems historically used for planning,
production and logistics are inadequate to accommodate products that are
increasingly going to market using a software-focused business model.

The Internet of Things is built on a different paradigm of
product creation, packaging, configuration, monetisation and IP protection,
relying on the primacy of the application, with software licensing and
entitlement management as the mechanism that monetises value, tracks up-sell
opportunities, and protects the manufacturer’s IP from pirates and

In this model, the product of the “supply chain” isn’t a
physical good, but rather a series of usage or access rights (called
entitlements) that are redeemed, updated, and replenished over time. These
rights, when purchased, can expand and broaden the function and access of the
physical devices.

The concept is similar to the iPhone. Simply put, the iPhone
is merely the physical platform for which third party developers write software
programs and thereby expand the device’s functionality.

Ironically, this is already a common model in industrial
automation, where a community of developers writes programs for the embedded
software on controllers and devices to optimise the manufacture of other
physical goods.

Hardware manufacturers looking to become intelligent goods
manufacturers need to incorporate software licensing and entitlement management
into the business operation.

Entitlement management ensures that the software-provided
functions or “entitlements” are tracked, redeemed, updated, replenished, moved
and enhanced within the confines of users’ entitlements or purchased privileges
(often based on software license agreements).

Entitlement management functions must never be forced into
the hardware supply chain or enterprise resource planning (ERP) system. Instead, re-designing select business
processes (e.g. existing “quote to cash” processes) to integrate an entitlement
management system with the ERP system is advisable. This will also enable manufacturers to
provide partners/customers with a self-serve portal to redeem and manage their
“entitlement rights”.

So let’s see how the integration between the entitlement
management and ERP systems works:

As a result of a customer or channel partner order, a
financial transaction is processed in the ERP system where products or stock
keeping units (SKU) that require an “entitlement” to software-based
functionality is completed.

  • This information is transferred into the electronic
    manufacturing services (EMS) via an automated web-services feed.
  • Immediately, an “entitlement” is created in the
    entitlement management system based on the software entitlement rights that
    were ordered.
  • The partner or customer is notified (typically via email)
    by the entitlement management system that their software rights are ready for
    redemption. This notification is often
    the revenue-recognition event when the only deliverable is an entitlement
    right. It is the software equivalent of Freight on Board.
  • The customer is then able to register, download the
    software and activate entitlement rights by downloading it at the self-serve
    portal through proper login credentials, and acquire the rights to use the
    product. Alternatively, the initial set of rights can be installed during the
    manufacturing process.
  • The customer or partner can subsequently return to the
    self-serve portal to view rights, move entitlement rights among devices (if
    allowed by manufacturer’s policy), download updates, or, add-on additional

To ensure that this approach works smoothly, it is
imperative that the manufacturer has the processes in place to package its
software into commercially valuable units, and assign software part numbers to
these units.

By adopting such an approach, manufacturers can tangibly
reduce manufacturing costs and gain higher profit margins. Furthermore, they
can recognise revenue instantly – even when the software isn’t downloaded by
the user.

Critically, digital device manufacturers can future-proof
their businesses by creating a scalable, extensible platform for digital rights
delivery via a variety of methods including Software as a Service, virtual
appliances, enterprise licence agreements or any other proprietary revenue
model too. With the emergence of the Internet of Things, ‘digital’ is the only
way forward for manufacturers.

[Cris Wendt is Principal Consultant with Flexera Software’s
Global Consulting Services Organisation].

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