Is Servitization Manufacturing’s Future? For Many, the Answer Is Yes.

Sharon Lindstrom, Managing Director Manufacturing and Distribution Industry Leader

Many manufacturers see “servitization” — the process of moving from a product-centric business model to a bundled product-and-service one — as an inevitable future shift for their organization. What they often have difficulty visualizing, though, is when and how to make that move, and how long they may need to wait before they see a return on their investment from this new strategy.

The latter question can only be answered in time. Servitization, like digitalization (to which it is often related), is a unique and complex journey for any company. Leading manufacturers that were early movers on this front had to wait years and travel a bumpy road before they started generating profits from services. But now, some of these firms are deriving more than half of their revenues from services offerings.

So, the promise of profitability is there, but manufacturers will need to bring a long-term view and a lot of patience and commitment to the shift. As for deciding when and how to embark on this business transformation process, business leadership should thoroughly consider these questions from the outset:

  1. What services do our customers want or need?

It is possible that your business might one day develop a service solution that is the best thing your customers never knew they wanted or needed — and that they can never again do without. Innovation should be a goal of servitization. But a more realistic starting point is to identify what customers already want or need that could help them get more value from your product and operate more efficiently. You should also look to maximize resources you already have in place.

For example, all companies want to avoid unexpected downtime and costly repairs of equipment. If your company makes an industrial machine that has embedded sensors to track performance, you could use the data coming from those sensors to predict when the machine would need service — thereby helping customers to stay productive and protect their bottom line. You would “bundle” this predictive maintenance service solution with your product offering. With a service contract, you can both deepen and extend your relationship with customers long after the sale.

One early mover in the servitization space, a jet engine manufacturer, took a step further and offered its customers “power by the hour,” rather than just selling the engine. Customers pay a fixed sum for service based on how many hours the engine is flown. Through long-term service agreements, the manufacturer provides support, including maintenance, to its customers throughout the engine’s life cycle while also gathering data that helps the manufacturer improve engine performance.

  1. Is our team prepared to develop those services?

Once you identify the services related to your products that your customers want and need and would be likely to buy, you must determine whether your company can deliver them.

R&D departments obviously need to play a central role in helping the business create services for bundling. But if they are a product-focused team, they might not be up to the challenge of working in a service-centric organization. The sales and marketing team, who once needed to channel all their energy into making a sale, will need to become adept at after-sales service and messaging, too.

Servitization demands a whole new way of thinking. It also may require the addition of personnel with skill sets that may not currently exist in-house. (More on both of these points to follow.)

  1. Do we understand how servitization will impact our business?

Servitization, like digitalization, will change dramatically the way that your business operates. To fulfill customer needs and deliver service solutions effectively, the organization will likely need to implement new business processes, rethink its organizational structure, adopt new underlying technologies, and reinvent the way it sells, markets and supports its products.

That’s a lot of change — and even more disruptive if concurrent with digital transformation efforts. So, management needs to be proactive about identifying the key areas of the business that will be affected most by this new business model and then make plans to manage that change effectively. Consider questions such as:

  • Will we need to create new delivery models?
  • Will this move require entry into new contracts and agreements?
  • How would it impact our revenue recognition policies?
  • Will we need to set up a service center to respond to customers’ questions and requests?
  • How can we ensure the integrity and privacy of data underlying these new services?
  1. Does our business have the right mindset — and “people capabilities” — to make this shift?

Once a company decides to adopt a service-centric business model, it is making a strategic choice to no longer focus only on manufacturing physical products and shipping them out to customers. It is also providing solutions designed to enhance the customers’ businesses and help them make money.

This change in focus — and mindset — can be very difficult for manufacturers that have embraced a product-centric model for decades. Business leadership must have a clear vision for how and why the company should embrace servitization. They also must understand how to communicate that vision and build excitement and momentum around the process.

Most important, management must be prepared to invest in the resources necessary to successfully execute this challenging business transformation process. That includes making smart investments in “people capabilities.” Investments in digital technologies, such as mobile platforms and advanced analytics tools, are essential for making the most of data in Industry 4.0 and driving product and service innovation. But a manufacturing organization also must have the right people in place, from the R&D department to the sales and marketing team, to evolve into a service-centric business capable of continuously finding new ways to deliver more value to customers.

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