Service Innovation; An Overview of Servitization

What Is Servitization?

Service innovation, in the form of Servitization, is the future of OEM manufacturing companies.

The first order of business here is to define the term servitization, which has been used since 1988. However, the definition has changed frequently since then.

Here are three of the most important definitions:

1. In 2009, Cranfield University defined servitization as “the innovation of an organization’s capabilities and processes to better create mutual value through a shift from selling products to selling Product-Service Systems (PSS), i.e., integrated offerings of products and services.”
2. In 2013, a new concept was introduced into the servitization discussion: service infusion. This concept is “the process whereby the relative importance of service offerings to a company increases.” In this definition, services are not necessarily integrated with product offerings.
3. Dr. Tim Baines and others at Aston University have coalesced around this simple definition: servitization is “a process of building revenue streams for manufacturers from services.”

Why Servitization Is Important

OEMs need help growing or maintaining product sales profits and margins. This challenge results from products becoming commodities. To counteract this problem, OEMs shift from selling products to selling products + services (integrated or not). This strategy works because most services are manufactured with or in front of customers and are always unique. Over time, most services maintain or increase their price while their margins improve.

Here are four statements from a 2019 IDC Report, “IDC Servitization Barometer: Charting Your Path to New Revenue Streams,” that should help increase your interest in exploring servitization:

• “Success in transforming production-oriented businesses depends on developing a much stronger service value proposition. IDC recommends that every company implement a servitization strategy as soon as possible.
• 82% of firms are actively exploring or moving to servitize their businesses.
• <5% of companies reached servitization nirvana in 2019, and 34% joined their value chains. >60% are at an immature stage.
• Servitization adopters show service revenue 30% larger than peers and 5X more opportunities to accelerate top-line growth above 5% yearly.”

Why You Should Start or Accelerate Your Servitization Journey Now

Since no one has yet commercialized a time machine, we can’t start or accelerate our journey in the past. Because servitization is happening worldwide by companies of all sizes in most industries, now is the second-best time to start. Starting in the future will take more time.

The Types of OEM Products Trigger Above Average Use Cases for Servitization

The best opportunity for servitization is for companies whose:

1. Products have a long service life. The owner expects to use “capital equipment” to create significant value for 5+ years.
2. Products either require or significantly benefit from the availability of complex services.

Simple Services

Simple services are not easy or trivial, but they are fundamental to most industries and have been provided for many years by the OEM, the channel, or the end users. Examples are:

• Installation
• Spare parts
• Warranty repairs
• Telephone support
• User training
• Software upgrades
• Depot repair

Complex Services

Complex services require new business ways and may depend on digital infrastructure for success.  Examples include:

• Support for emerging maintenance models (for example, usage-based, outcome-based service, equipment as a service)
• Preventive, proactive, and predictive maintenance
• Real-time technician collaboration
• Knowledge management
• Mobile platform and app extensibility
• Support for complex or regulatory mobile forms
• IoT data orchestration
• Subcontractor enablement and management

If you imagine a product continuum with one end being a storage shed and the other a passenger jet aircraft, the closer your product is to the airplane, the more likely your customers will consider buying a serviced solution.

Even with this simple guideline, another factor is whether your product is used alone or integrated into a product much closer to the aircraft.

If your customer is building a relatively complex product, there may be a way to provide extra value and earn additional revenue. For example, you may be making an inline scale integrated into a complete food processing and packaging line. In that case, your customer, the systems integrator, will undoubtedly want to be able to collect data from your product since the data plays a prominent role in your customer’s outcomes.

Segmenting Capital Equipment Markets by Regional Demographics

Another element to consider when considering servitization opportunities is the global areas where you do most of your business. The world market for capital equipment is divided into three major segments:

1. Developed countries like the United States, UK, Japan, and Australia
2. Developing countries and regions like China, India, Latin America, and parts of the Middle East
3. Underdeveloped countries and regions like Africa, parts of Asia, and some countries in the Middle East

As far as developing and underdeveloped areas are concerned, they frequently skip the recent and past generation products when they start implementing innovative technology and jump straight to the “latest and greatest.” Here is an example of this phenomenon for telecommunications: At the end of 2019, China had 110.9 million landlines, and India had 21 million. At the same time, China had 1.5 billion mobile phones and India 1.2 billion.

As India and China expanded their telecommunications infrastructure, they skipped over the broad deployment of landlines and moved directly to mobile phones. A comparable situation occurs in most countries, although developed countries must abandon (and probably write off) much of the copper telephone cables as subscribers shift to wireless telephones. Likewise, when these countries began to add scheduled commercial airline flights, they always started with jet-powered planes; propeller planes are reserved for wilderness and water locations.

Developed and some developing regions are more likely to purchase serviced products than underdeveloped regions. However, as these underdeveloped regions move up the ladder into developing and then developed countries, they will likely be ready to purchase product upgrades to use their “older” purchases still and enjoy many of the benefits of your servitization efforts.

Complex Generic OEM Servitization Journey

The Cranfield University definition of servitization is still the best one we can use. It notes that servitization is:

“The innovation of organization’s capabilities and processes to better create mutual value through a shift from selling product to selling Product-Service Systems (PSS), i.e., integrated offerings of products and services.”

Another way to say this is that the servitization journey is about creating incremental revenue by combining revenue from intangible services with tangible product sales, such as manufactured products. Servitization attempts to increase total revenue by selling services in all ways that ultimately add value to customers by helping them achieve their desired business outcomes.

Here is an example:

You buy or lease a new entry-level luxury car. Compared to even 10 years ago, the car includes many new built-in services, such as Waze navigation, Bluetooth mobile phone connections, ApplePlay or Android apps for who knows what, and so on. Some are included in the car’s price, and some, like Sirius XM radio, are billed monthly or quarterly. The cost may also include all scheduled maintenance for 36 months, again prepaid.

The Difference Between Servitization and Digitization

We are all inundated with articles, webinars, podcasts, and cold emails about digitizing our businesses. While this activity is becoming critical for most companies, it must be servitization. However, enabling technology frequently allows businesses to start growing service revenue. Simply put, servitization is all about the what, and digitization is about the how. 

Where Is Your Business on Your Servitization Journey?

For OEMs, there is a logical progression a business goes through as its level of servitization matures. This chart exemplifies the progression, but remember that each company makes unique products for unique verticals in unique geographies. This means that your competitors are likely to follow details different from yours. And if they do, they will surely be at a different pace than you or your competitors.

Although a full servitization effort will affect every part of your business, we only focus on three areas because we believe the customer must be at the center of any change effort. We should always keep this in mind:

1. Sales
2. Post sales services
3. The relationship with the customer

Sales

As the degree of servitization increases, the sales group will react to the increasing complexity and deal size. They should deploy inside salespeople for a commodity product to reduce costs and increase productivity. At the most significant degree of servitization, the customer will work with a senior sales executive to ensure the buyers understand how important you view each potential sale.

Post-sales Services

Services move from totally reactive to primarily proactive. Employees and their tools maximize the customer’s value from the relationship by charging based on the customer’s outcomes rather than just owning the equipment. Of course, this shift significantly impacts the business’s financial results and key individuals’ compensation, but we will not discuss these here. It is too big a subject.

Your Relationship with the Customer

When you are “just” a manufacturer, your relationship may not even exist. You may be selling through a channel, and your aftermarket service might only consist of providing parts. The rest of your customer’s interactions around the products you supply may be between the end user and the channel. If that happens, you are usually cut off from learning what your “customers” think of your company, products, functionality, price, delivery, and all the other aspects of an actual relationship.

If your name is not marked on the product, the user may not know who made it! This is bad because I know the best definition of brand reality from a white paper, “, ” which I co-authored with my friend Harry Klein in 2012. In it, we explained,

“Brand reality is the feeling and opinions of prospects and customers about a business because of any interactions with it and its products and services.  What exists in customers’ minds is the brand reality.”

If they don’t interact with you, they have no opinions about your business, and thus, you have no brand equity. This is irrespective of all your marketers’ work in “branding” because no one knows who you are!

You and your customers are in a tight relationship at the other end of the spectrum. You are considered a partner, and your business and theirs depend on the outcomes you help create. Because of the mutual trust, you are creating high-quality brand equity, which will help you land and grow new customers without spending much on customer acquisition.

How to Start Your Servitization Journey

As you go through this journey, remember this quote: “Technology should enable servitization, not drive it!”

Going through all four servitization stages will take years because it involves many changes. However, as soon as you get organized and begin your journey, you will see benefits.

The Journey

1. Create a strawman use case

• Appoint a senior project sponsor and form a small cross-functional team
• Brainstorm potential use cases with key employees and other knowledgeable people
• Identify the product(s) you all think would be the first candidates for servitization
• Test the idea with a limited number of actual customers in one or more verticals and geographies
• Summarize the results and select one use case to prototype the servitization use case

2. Create a value proposition

• Identify and guesstimate all the business outcomes your customers will receive
• Guesstimate total cost, selling price, annual market size
• Assuming the numbers indicate potential viability, refine these key numbers as the project progresses

3. Product development

• Is the concept technically feasible?
• Can it be developed in-house?
• What new skills and tools will be required?
• How long is the development cycle – workforce and calendar time
• Impact on the existing product roadmap
• Availability of beta test site

4. Manufacturing

• Impact on production
• Cost of product
• Can we meet or exceed our current Quality levels?
• New skills required
• New capital equipment
• Can we afford it?

5. Marketing

• Make sure Marketing is onboard
• Impact on website and sales tools
• Decide if the rollout will be a phase-in or all out
• Impact on existing quote forms and price lists
• Does Marketing or Service set the price?

6. Sales

• Can the existing sales team sell the new service(s)?
• Identify training requirements
• Impact on quotas and compensation plans

7. Service

• Processes – what will we have to implement or change?
  • Call center
  • Installation
  • Repair
  • Depot
  • Remote support
• Products
  • Impact on existing contracts
  • Can we sell it? Impact on compensation and quotas?
  • Change website?
• Relationships
  • Will existing customers trust us to deliver and support what we roll out?
  • Will existing relationships help sales?
  • How will this product impact NPS, CSAT, and Effort scores?
  • Can we expect customer recommendations?

8. Competitors

• Will they be surprised?
• How will they react?
• When will they roll out a competitive service?

9. Shareholders

• How will they react?
  • Emotionally
  • Financially

In other words, this is a mental exercise and a roadmap to a high-leverage business decision… so take it very seriously.