The concept of servitization is one you'll often hear from digital technology vendors. It's commonly used to highlight the blurring of boundaries between products and services, but we've also seen it used to describe a more service-oriented approach to delivering functions within an enterprise. At its EMEA conference in Amsterdam last week, field service management vendor ServiceMax invited servitization expert Professor Tim Baines from Aston Business School to provide an authoritative perspective.
Digital technology is certainly an important enabler, he told me, because it's able to provide so much more information about how products behave in the field and how people are using them. But social change is equally important, with services now representing such a huge part of the economy in industrialized nations. Those forces are combining to change the way people think about manufacturing, he says:
That shift really does move away from, 'It's simply about product and the ownership of a product.' It moves much more to, 'What it is that we're trying to do with things?' And that moves it much more to a conversation about services.
With the services, you're buying an outcome. You're buying a process, rather than simply buying a thing which you then want to figure out what to do with. We're moving to this world.
Baines sees companies taking one of three paths to servitization:
- Some are pulled into it by customer demand, he says. "It's not a debate whether you should do it or not, you have no option to do it."
- Others follow a technology pathway, instrumenting their products so that they can collect data. "You just try to get the data and then figure out later how you're going to make some money out of it."
- The third is a middle path, where an organization takes the initiative to find potential for change. "We're going to look if we can stimulate opportunities with our customers, we're going to look if we can exploit technology."
Steering customers towards that middle pathway is ServiceMax's current pitch, says CEO Dave Yarnold. It's a strategic conversation that takes the company beyond merely finding more efficiencies in field service, he explains.
Job number one, as it related to the [customer's] relationship with ServiceMax, was to automate the field service function. I think everybody is reaching well beyond that now and thinking about completely changing their business model as a manufacturer, or as a servicer of capital equipment. Nobody is pushing back on the idea of servitization as the ultimate goal.
It's pretty interesting to have seen that mindset change within the last five years. We haven't seen wholesale adoption of that, but the early signs are there, that it's just a matter of time.
ServiceMax can point to proven bottom-line impact that its early customers have achieved using its platform, he adds, citing a recent survey that found some had achieved double-digit revenue growth in their services business. That's a message the company is keen to take to chief financial officers (CFOs):
We have to change our approach now to make sure that CFOs get it, that this is real opportunity, the tools are real, the results are credible and it's something that they ought to be elevating to the top of their priority list. It is going beyond just the field service teams.
Evolution of servitization
That's in line with the evolution of servitization as Baines describes it. The concept first emerged with examples such as IBM, which during the 1990s transitioned from a mainly product-based business to one that led with consulting services. Nowadays, the concept is less about a shift from product to services, more about fusing the two in a hybrid model. Companies begin to deliver services alongside their products (which is where ServiceMax plays today), until the product becomes an integral part of a complete offering that delivers a specified outcome for the customer (a future that ServiceMax wants to help enable). Baines explains what he's been seeing in his work with high value-add manufacturers:
When I work with businesses, I see companies that are looking to expand what they're actually doing.
Quite often it means moving first towards what we call intermediate services, which is prepare, overhaul, condition monitoring, help-desk, a bit of training on the side, those type of things.
Ultimately, it moves into these more advanced services, much more of the outcome-type contracts. They're delivering the outcome, delivering the process, delivering the performance. Those are, to my mind, the crown jewels.
The argument isn't that you've got to shift from production to just doing these things, the argument is that, isn't it a good idea to expand your business by investing some time and effort in developing these advanced services? And what you may well find over time is actually the basis of your competitive strategy becomes focused on these advanced services.
The transition towards a more outcome-focused approach goes through four phases, Baines explains.
You have exploration, where you're thinking about it; traction, where you're testing, it's getting traction, it's building it; acceleration, where you're building more and more money out of it; and then ultimately exploitation.
In this four-phase view of servitization, moving to a subscription-based consumption model is one example of the traction phase. It enables the manufacturer to stimulate product sales with a different financial model, and it puts them on a pathway to bundling other services into the proposition, before transitioning into a more outcomes-focused model.
Baines cites the example of new car sales, where increasing volumes are being sold through innovative finance models, and where manufacturers are starting to explore pay-per-use.
Ultimately, as a user, if I'm now paying monthly for my car and everything's bundled in there, it's not a big step for me then to almost become pay-for-use. The car sits there, I pay for it when I jump into it.
When it gets to pay-per-use, the manufacturer's thinking to themselves, how can I start to make sure this asset is well and truly resourced and share it around the place? De-personalization [ie allowing other drivers] comes from the electronics, and then you're moving into this world where actually you're selling mobility. And that's real exploitation.
Incidentally, manufacturers have an in-built advantage over pay-per-use intermediaries such as Uber and Lyft because of their ability to bring appropriate innovation to the underlying product — which is why shifting entirely out of product into services, as in the IBM model, is not necessarily the right path. It also demands internal collaboration across different functions, adds Baines:
It makes an assumption that you have sufficient internal connectivity to exploit that, which then means that the organizational structures have to be sympathetic to it. You can't have manufacturing here, and design services over here. They have to have this internal connectivity happening.
That line of argument brings to mind a recent talk at another vendor event, when Nathan Furr, professor of strategy and innovation at INSEAD, told delegates at NetSuite's recent EMEA conference in London how hybridization could be a defense against uberization. One of his examples is German handtools maker Hilti, which has introduced a service for tradespeople where, instead of buying tools outright, they pay a monthly fee and the manufacturer undertakes to keep the tools maintained and up-to-date. This shows servitization as one of the most obvious hybrid strategies for fending off digital challengers.
Moving up the value chain
Another way of looking at this is to observe that services are a growing sector of the economy and typically have higher margins than products. What better way for product manufacturers to sustain or improve profitability than to share in the margins currently being earned by third parties in its value chain? Whether that's done by partnership or by competition will vary by market and individual companies.
One difficulty of moving up the value chain is that it changes who your competitors are — instead of competing with foreign car manufacturers, for example, a carmaker begins competing with domestic taxi firms. The picture's even more confusing if the competitive landscape is distorted by technology innovations or digital disruptors, such as ride-sharing startups. Sometimes it's simpler to just go back to making products and let someone else worry about the value chain, says Baines:
Some of the companies I've worked with, they've just given up. It's too complicated, it's too risky, they can't do it.
One of the ways to defuse risk, ServiceMax would argue, is to leverage the relationships field service engineers already have with customers. Few companies make full use of their potential as brand ambassadors, as Yarnold explains:
In the B2B market, those relationships that you develop with field service engineers are priceless, and companies are now recognizing that is a really valuable relationship to the company.
We don't want to turn them into sales people, but you want to recognize and leverage that valuable position that they are in. They've established trust with the customer based on their competence, based on their ability to solve problems. If that person believes that they can take the relationship to another level and it will benefit the customer, they're going to do that. The customer is going to buy in, the company is going to benefit, it's a virtuous cycle.
ServiceMax believes that, for many companies, empowering field engineers to do more than simply fix things gives enterprises a convenient first step on the path towards a broader servitization strategy.
Servitization is one example of the convergence of different capabilities and functions that is a characteristic of what diginomica calls frictionless enterprise. It's enabled by connected digital technologies because they make it so much easier to bring together the right information and resources to deliver a better outcome. The discussion above exposes several different threads:
- Joined-up data that's made available across different functional silos makes it possible for a field engineer to become a point of customer engagement, not only delivering more effective service but also introducing upsell opportunities.
- Connected products provide better instrumentation of how they're used, which allows an enterprise to adjust them to make a better fit for customer needs, whether that's through improved maintenance of the installed equipment or better product design in future iterations.
- Greater flexibility in billing and finance relationships makes it easier to deliver products bundled with services or on pay-per-use terms.
- A collaborative, services-oriented internal organization can be more efficient in itself and more agile and responsive to customer needs.
- Improved engagement with customers and the ability to monitor usage allows vendors to align their offerings more closely to what customers are actually trying to achieve.
- Digitally connected ecosystems make it easier to co-ordinate networks of services that are delivered around products and which combine to deliver an outcome of value to the customer.
All of the above are implicit in servitization, although individual vendors tend to emphasize particular aspects that are most relevant to their offering rather than the entire picture. The reason they want to speak to the big picture is because this is what will motivate enterprise leaders to make the investment in the vendor's products.
It's difficult to persuade an enterprise to invest in automating field service simply to save costs. It's a worthy aim, but there are many other strategic claims on the budget. (The same is true for vendors trying to sell more flexible billing systems). But wrap it up in a strategic mission to enhance revenues and profits through servitization and suddenly you can turn heads in the C-suite.