Servitization. Servitisation. Servicization. Regardless of your preferred spelling, the expression perfectly encapsulates a concept of immediate urgency and opportunity for global manufacturers: transforming their business model from being a product-dominant to a customer-centric organization in order to maintain or recover competitive advantage.
Servitization is, in fact, becoming a major strategic driver of manufacturing innovation today. It’s one of seven transformative forces identified in this ebook. Business models and organizational cultures will fundamentally shift. Traditional product lines will rapidly evolve to deliver integrated value-added services at every stage of the customer’s value chain. It starts by putting yourself in your customer’s shoes – asking how can new products and services help them better achieve their business or personal goals? Then how do you design, produce and support those offerings to yield a sustainably profitable business model? And how can you implement new technologies and best practices – such as remote monitoring and performance-based contracts – to continuously enable higher customer value and at the same time improve your bottom line?
By focusing on the outcomes of their products and services, manufacturers can “servitize” their business – and thereby create whole new systems of value for customers that help lock in long-term relationships and lock out the competition. It’s key to competitive advantage, especially in markets where product differentiation is blurring and customer expectations for product and service performance are expanding.
So how to optimize the servitization opportunity? Let’s look to an expert for guidance.
Have you read Made to Serve by Timothy Baines and Howard Lightfoot? One of my colleagues calls this book “the Bible of servitization.” It’s a must read for manufacturers on how to create a roadmap for servitization and product service systems. Professor Baines, from the Aston Business School in Birmingham, U.K., is recognized as a leading authority on servitization.
In a recent article featured in The Sunday Times of London, Baines covers the past, present, and future of servitization. But even better, he provides specific examples of major manufacturers creating major new value for their customers – and even for whole countries and continents – through their servitization strategies:
- Working with Xerox’s Managed Print Services, reports Professor Baines, customers get “document solutions” – not just printing equipment. He writes, “Contracts are based on pay per use, over two years or more, with risks managed by the manufacturer, and a commitment to rolling process improvement and cost savings.”
- Rolls-Royce’s TotalCare service plan guarantees product performance by taking responsibility for it. Rolls-Royce doesn’t simply sell an airplane engine – they sell the hours they keep the engine up and running. This not only increases customer intimacy and service revenues – it has identified new market opportunities. “Services such as TotalCare,” writes Baines, “have supported the creation of new low-cost airlines.”
- By improving customer-centric service offerings focused on passenger travel experiences, Alstom Transport of France is helping raise standards of rail travel on Britain’s West Coast Main Line. Passengers are up by more than 30 million per year. Costs of maintenance, meanwhile, have been cut by as much as 30 percent.
- The environment can also benefit from what Baines calls “manu-services.”
Servitization approaches at MAN Truck and Bus UK have helped cut customers’ fuel consumption by at least 10 percent and CO2 emissions by up to 15 percent.
All of these create intertwined relationships between manufacturer and their customer and transitions the relationship from a sales transaction to a mutually beneficial partnership that continues to add value for both parties throughout the entire lifecycle.
“Servitization,” Baines notes, “is not a new phenomenon brought about by the recent recession.” The origins of “power by the hour” – as well as the term “servitization” itself – date back to the 1960s. But the economic pressures of late have certainly shined a spotlight on servitization. It has been shown to give manufacturers an effective hedge against market downturns. And it can create high barriers of entry for competition.
Customer Experience Is Key
At PTC Live Service Exchange in Anaheim, CA last June, Professor Baines participated in a panel discussion on servitization with service leaders from Electrolux and Renault. Something he said at the very beginning of that session left an impression with me. Roughly paraphrasing him…
The practice of servitization is shifting the manufacturer’s primary perspective from the product or service itself to the overall customer experience. Everything a manufacturer does to develop a product or deliver a service must ultimately pay off in providing the customer with the right experience they need or anticipate from the use of the product or the service outcome.
It’s precisely this customer experience-driven value proposition that a manufacturer committed to servitization should sell to customers. The promise of adding value through servitization holds continually, throughout the product’s useful life. Ideally the manufacturer will, at every stage, over-deliver on the servitization promise, providing a total experience that delightfully exceeds the customer’s expectations for value.
Need more proof of servitization’s rise? Consider that, by 2015, the share of worldwide manufacturers using performance-based service contracts will jump to 65 percent. By that same future date, over 70% of manufacturers will be relying on services as a key product differentiator. These are significant increases over current numbers and early findings in future research coming out soon will show these numbers increasing even more. My source: Oxford Economics’ Manufacturing Transformation Report. It presents major findings from their 2013 survey of executives from 300 global manufacturers.
The Service Council’s 2014 Service Outlook tells more. Per their survey, nearly two-thirds of manufacturers report that their profit margins are as high or higher for service than for product sales. Increasing service revenue is manufacturers’ top service goal.
Yes, “servitization” will probably continue to drive this blogger’s auto-correct function to distraction for some time to come. But that’s just wordplay. The much bigger truth is that a focus on servitization could very well be critical to a manufacturer’s successful future.
For more insight on Servitization, check out Professor Baines’ presentation “Made to Serve” from PTC Live Service Exchange 2013 in Anaheim, California last June.