Servitisation can be beneficial for manufacturers and their customers since it enables manufacturers to deliver outcomes that act as critical inputs to their customers’ operational processes. Take for example the widely known ‘Usage-by-the-hour’ concept through which Michelin sells flight hours rather than airplane wheels.
To develop this concept, Michelin determined the input that is most critical to the operational processes of airline operators. Having determined that maximizing the number of flight hours is critical for airline operators to optimize their operational processes, a product-service bundle was created focused on delivering flight hours.
This means that the main advantage of servitisation for customers is that manufacturers are incentivized to deliver equipment/product performance that is central to their business.
Servitisation can be a valuable strategy for manufacturers since product-service bundles can be sold at a premium and thus offer higher margins than selling products. In addition, servitisation offers the opportunity of long-term customer relationships through multiyear service agreements. Due to the increased closeness to the customer, additional products and services can be sold over time.
What are other great examples of servitisation in practice?
Industry statistics reveal that about one third of manufacturing firms are in the process of adopting servitisation. There are many examples of servitisation in practice, some more successful than others. Academic literature has identified three main types of services: basic services, intermediate services and advanced services.
Basic services are focused on product provision. For example, selling access to equipment. Intermediate services are focused on delivering a capability based on product performance. For example, selling uptime for of equipment, and advanced services are focused on delivering a capability based on product performance. For example, selling product performance.
Most manufacturers are focused on complementing their offering of basic services with the delivery of intermediate service. For instance, industrial manufacturers such as John Deere (Manufacturer of agricultural machinery), Atlas Copco (manufacturer air compressors) and Siemens Automated Services (Manufacturer of Commercial Boilers, compressors and Air Conditioning Equipment) bundle their equipment with maintenance and monitoring services to focus on maintaining equipment condition.
Another example of a manufacturer that has ventured into selling advanced services is Xerox. Xerox is focused on selling office printer performance by selling copies/prints through its pay-per-copy service.
Putting Servitisation into place is however no easy task. It requires a considerable change process to optimize business models and financial operations. What are the most important steps to take?
To sustain financial margins of selling servistization, manufacturers need to undergo a considerable change process to optimize operations such that financial obligations tied to servitisation can be minimized. These financial obligations arise as manufacturers become responsible for covering maintenance expenses and fines specified in risk sharing contracts.
In this organizational change process, three steps are identified. First, financial obligations tied to selling intermediate and advanced services need to be assigned to business functions by adopting relevant KPI’s throughout the organization. That is, system reliability should become a core objective for all business functions. Second, maintenance operations need to be optimized by implementing predictive maintenance. Third, financial obligations need to be (partly) transferred to the manufacturer’s supply base by designing contractual agreements that formalize reliability and quality requirements.
Subsequently, performance management processes need to be implemented to ensure that suppliers adhere to the formulated requirements. Where necessary, suppliers need to be assisted in improving their operations such that reliability and quality targets can be met. By increasing supply chain management through these operational changes, financial rewards that can be extracted through servitisation can be maximized and captured through price.
How far should companies go in their servitisation offerings? Is there an ‘optimum’ defined for suppliers and customers?
The ‘Optimum’ level of servitisation is company and sector dependent. When considering the adoption of servitisation, it is utmost importance to determine the financial obligations tied to servitisation and a customers’ willingness to pay for defined services and benefits. Once an analysis of the financial obligations and price opportunites tied to a specific service offering has been conducted, an organization can determine which type of service can be delivered in a feasible manner.
How do you expect the concept of servitisation to evolve as technology-driven opportunities emerge in time?
Siemens Automated Services is proving out a model using predictive maintenance. Using predictive maintenance, Siemens estimates the time at which equipment components will fail. When these predictions are accurate manufacturers can deploy service technicians and engineers to replace a component before it breaks down. This does not only decrease the downtime but also streamlines maintenance processes. When abnormalities are detected in component performance, Siemens schedules maintenance with manufacturers.
Finally, using economic value estimation models, manufacturers can qualify and quantify the benefits they deliver to customers from their services, while charging some degree of fees against the enhanced productivity of a customer’s operations.
