Why servitization is critical
.:: Originally published at http://fieldservicenews.com/why-servitization-is-critical/ ::.
Ahead of this year’s Spring Servitization Conference, Dr Ali Ziaee Bigdeli explores three key reasons why companies should be considering a move towards servitization. One of the questions that keeps coming up when I talk about servitization is “what are the key examples that really demonstrate the scope of this concept?” There are many examples in the B2B world, where the concept originally took hold, but increasingly examples are emerging in the B2C world, and I often find that these examples that touch people’s daily lives as consumers help to make the point.
Examples of servitization first emerged in the development and delivery of Business-to-Business (B2B) offerings. In this regard, debates almost invariably refer to Power by the Hour, the pioneering engine maintenance solution introduced by Rolls Royce in the early 1960s.
Necessitating extensive changes to processes, structures, technologies and personnel within Rolls Royce, this iconic service provides a perfect example of the experiences and ambitions of many manufacturers who embrace a servitization-based business model. It also had a fundamental legacy in terms of altering the way that customers contract with the company, with a move away from the transactional purchase of equipment towards a 10-year contractual relationship.
More and more manufacturers are moving towards this initiative. Other B2B examples include Alstom’s TrainLife Services. In this, French group Alstom provides the train with a bundle of repair and maintenance services and charges the operators (such as VirginTrains) based on the miles travelled through 15-20 year contracts. Xerox’s Print Management system offers a services and copier bundle which charges customers based on the number of papers they have copied or printed, and MAN’s pay-per-kilometre programme does a similar thing based on the distance its trucks are driven.
Most of these are ‘classic’ and very well-known examples now, but just recently Goodyear announced the launch of Goodyear Proactive Solutions. This will aim to use new technologies such as predictive analytics to help truck fleet managers better handle how their vehicles are used. The common thread is that the outcome is not the sale of a product, but capability delivered through the performance of the product. The extension of servitization into a product like tyres, which on the face of it is a ‘simple’ and commoditised product, shows just how widely applicable the idea is.
As I mentioned in my introduction, the concept is also slowly-but-surely getting into the Business-to-Customer (B2C) level too, where it touches our everyday lives. You may have experienced something like it if you have ever gone for a new car on a Personal Contract Purchase (PCP) contract. It is basically a leasing model, in which the car manufacturers charge their customers based on the estimated mileage for a fixed period, rather than just the price of the asset. Repair and maintenance are usually included in these contracts, meaning that the customers would only need to fill the tank and enjoy the drive.
Other examples include Brompton, the British manufacturer of popular folding bikes, now rents the bikes via docks across the UK to provide a more hassle-free option; Daimler’s Mercedes Me platform which remotely notifies drivers if the car requires maintenance or repair work; and OTIS’s Remote Elevator Monitoring (REM), which provides safety and continence 24/7 through the data collected, recorded and analysed from the lift. In this, the manufacturer enables to detecting trapped passengers, collect lift performance data, communicate lift performance data to Otisline, and establish a voice link from the lift car to the Otisline or another manned location.
These examples may lead to the question of why is it critical for manufacturing firms to move towards servitization? I can think of three principal reasons:
1. Growth and sustainability. Through the development and delivery of advanced service offerings, the manufacturer enables its customers to achieve their key strategic aims. This focus on helping customers to achieve their own Key Performance Indicators (KPIs) is how these manufacturers are differentiated from competitors, and delivers business growth and sustainability for both themselves and their customers. For manufacturers it generates long term contracts, closer relationships with customers, new business opportunities and revenue streams, and an enhanced image and market differentiation. The customer is able to realise greater value from its operations, better understand and predict its costs and financial profile, and potentially have the opportunity to scale-up operations.
2. Locking-out competitors. Today, more and more technology-focused intermediaries are moving into the product manufacturing space and disrupting their value networks. Indeed, significant disruptions are already happening in some sectors. For instance, the technology giant Uber is moving into the long-haul transport business with a new division called Uber Freight, in which the shipper directly connects with the truck, challenging the traditional business models of all stakeholders in this network from manufacturer through to user. Servitization strategies push manufacturers to move towards collaboration with other members of the network (e.g. distributors, suppliers, supplier of suppliers, technology vendors, and customers) and this will create a resilient barrier that inhibits the entry of new players.
3. Sharing risks of new technological innovation. Manufacturing firms generally perceive implementation and adoption of advanced services as a high-risk strategy, perhaps due partly to a traditional product-based mind-set. The perceived risks are operational (e.g. capacity constraints, human resourcing and leadership issues), strategic (e.g. decline in competitiveness, reputational issues) and financial (e.g. direct negative impacts on profit, revenue and market share). As with any new initiative, manufacturing firms that start to compete through services must internalise new risks. In this respect, the alignment of the incentive with other stakeholders in the value network enables risk sharing and mitigates unnecessary costs.
There are so many aspects to servitization; the benefits are quite well documented, but the challenges of adopting it are numerous, and our understanding- both as researchers and practitioners in industry trying to make an influence change- of how to overcome these is still developing.
This month I’ll be heading to Lucerne for the annual Spring Servitization Conference. Over the past few years it’s become a key event in the calendar for researchers and thought leaders who want to share and progress their knowledge and understanding of how the theory of servitization can be applied in practice to manufacturing businesses around the world. This year, I’m looking forward to the discussion on research topics such as: The impact of top management team composition and past performance on servitization; changing the revenue model for individual services; assessing your readiness for servitization with a diagnostic tool to measure service capacity, as well as industry keynotes from representatives of Sulzer Rotating Equipment Services, Testo Industrial Services, ABB Turbo Systems and Ali Group.