The many cloaks of servitization
There is a growing recognition in the manufacturing world that a sustainable future for the industry, in developed economies at least, lies in moving away from concentrating efforts on products and production and toward a services focus. The terminologies used globally for this development vary; in Germany researchers, policy makers, and industry leaders are engaged in a debate around Industry 4.0; in Scandinavia, the term of choice is product-service systems; UK companies focus on servitization and the circular economy; while in the US, industry talks about servitization and service innovation, much of it powered by the Internet of Things (IoT).
Nevertheless, the main message is very clear: innovation of services is becoming more and more important to manufacturing firms worldwide.
The process of servitization (or service innovation) means not only the development of a service offering for the customer, but also the integration of new technologies that enable the offering, and an accompanying widespread organizational transformation. The kinds of advanced services offered by Rolls-Royce, Xerox, and the like incorporate maintenance, repair, and overhaul contracts that link revenue generation directly to asset availability, reliability, and performance. Providing this kind of cradle-to-grave service requires dedication, flexibility, and a will to collaborate across the entire organization.
A key element of the change required to be able to compete through services is a greater customer intimacy. In the traditional manufacturing world, products were designed and produced, then sent to a showroom in anticipation of a sales transaction. Designs were informed by analysis of customer trends, innovation was centered around product features, and satisfaction was recorded by after-sale surveys. To manufacturers in this world, service meant order fulfillment, on time and on budget, and an associated warranty program; customers were remote from the manufacturer and the manufacturer had little knowledge about how the product was being used, and how it was performing, once it was sold.
Servitization, in contrast, promotes close, long-term customer relationships. With advanced services in particular, the focus is on the customer’s internal business processes; the manufacturer goes beyond simply offering a product, to provide offerings that meet the customer’s own KPIs for efficient and effective operations. The manufacturer bundles together products and services to deliver a capability that provides a defined outcome for the customer. Example outcomes might be ‘number of passengers moved on time’ for the Alstom Transport contract with Virgin Trains.
These offerings manifest usually as 10-year service contracts under which the manufacturer takes on some of the risk around fulfillment of the outcome, and the customer pays as the capability is consumed. Another example of such an advanced service is the use by Hoyer, a German logistics company based in the United Kingdom, of trucks provided by MAN on a pay-as-you-go basis. Costs are based on miles driven, so Hoyer only incurs an expense when it is generating revenue; it doesn’t pay when its trucks are out of action, thus reducing hugely the cost burden of asset ownership for the customer.
Although the adoption of servitization is arguably in its infancy in the industry, the ambition is clearly there, and I see it regularly whenever I engage with manufacturers large and small. One of the most reliable studies available is a study by Oxford Economics, which conducted an international survey of almost 400 senior executives from industrial sectors ranging from aerospace to medical devices, all from firms with more than $1 billion in sales. The analysis showed that the proportion of companies competing through services contracts or products-as-a-service is expected to increase by over 150 percent in the next three years.
I see my role as an academic as being to help manufacturers understand the phenomenon and its many benefits (as well as the potential pitfalls) and examine the many practices and technologies of servitized and servitizing companies to piece together and share a picture of how companies successfully adopt servitization. This will lead to a platform of knowledge that will truly enable a revolution across industry sectors.