By Neil Tumber, Relationship Manager, Advanced Services Group
Just like data, automation, Industry 4.0 and the Internet of Things (IoT), servitization has become something of a buzzword – and for good reason. Servitization and advanced services offer the potential for organizations to significantly transform their business models to deliver even greater value to customers while also increasing their own profitability. But what do we mean by servitization, and what exactly are advanced services?
In this post, we will explain everything you need to know.
What is servitization?
Servitization is a term used to describe a journey of transformation, specifically: 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 that deliver a desirable outcome for the customer. So, for example, instead of manufacturing and selling a machine tool and ending the transactional customer relationship there, a business instead might produce and sell the machine tool as part of delivering a contracted support and maintenance service.
Servitization: a practical example
An example of servitization is Koolmill, a business in the UK that works with the Advanced Services Group at Aston Business School. Like several manufacturers, Koolmill was originally set up to produce and sell machines – in Koolmill’s case, rice-milling machines. However, much of its customer base is in low-income regions of countries such as China and India, where the price associated with milling-machine ownership is considered prohibitively expensive. To overcome this challenge, the business transitioned to a servitized approach, offering rice-milling-as-a-service.
Essentially, this means that Koolmill, instead of selling its customers a product, now provides the milling machines to its customers for free and offers a guaranteed number of hours and uptime each month for an agreed fee. For Koolmill’s customers, this subscription-based service means that they are able to pay according to the value the milling machine delivers to them. Rather than having to find the money to buy the machine itself, Koolmill’s customers can pay as they earn money by selling the milled rice. For Koolmill, the agreement delivers guaranteed cash flow over a period of time, rather than from a single one-off transaction. It also helps build a long-term partnership between the companies that is not always possible when simply offering for one-off services.
Is this the same as advanced services?
Advanced services are a key enabler of servitization strategies, which are often delivered in the more sophisticated stages of servitization. We use the Servitization Staircase as a model to help business practitioners and executives understand and gauge the level and positioning of their services.
Advanced services staircase
When thinking about your customers and their use of your product, there are three broad categories:
Base services: the provision of the product itself and associated spare parts. These two allow customers to do things for themselves.
Intermediate services: the provision of services with the aim of enabling the customer to get more value from its ownership of the product. These services are for customers who are asking you to work with them by providing a fast response to failure (“break fix”), improvements in uptime and performance (“assured maintenance”) or guidance on how best to use the product (“performance advisory”).
These intermediate services work best when enabled by IoT monitoring, which gives you the opportunity to see how your product is being used by your customers in order to predict when maintenance will be needed and to advise on product use. As such, being competent in intermediate services opens the door to advanced services.
Advanced services: the provision of guaranteed outcomes. These services are for when your customers want to focus their skills and resources on what they do best and invite you to deliver the desired outcome – whether this is based on the use of the product itself, the process in which it operates or on the platform which your product enables.
Advanced services are propositions, where the provider (for example, a manufacturer) engages in an in-depth customer interaction with an extensive capability integration in a process of co-creation that creates a service to deliver functional value to that customer.
The focus with advanced services is on delivering “outcomes” for the customer, rather than services that are based around product ownership, condition and performance. For example, a jet engine delivers thrust, a truck delivers the movement of goods, and a tire delivers safe and economic travel. A move to develop advanced services requires a shift from product-centric thinking to customer-centric thinking. It is not about moving to providing services only but rather about using the product as an enabler of services that ensure your customer is successful.
What are the benefits of servitization?
There are several benefits to servitization as part of a progressive, disruptive business model. The first and perhaps most obvious is for the supplier, who is able to better respond to the specific needs and requirements of a customer, beyond merely offering a one-off product. It enables the manufacturer to offer a subscription-based service, benefitting from regular income and cash flow.
For the customer, they only pay for the value they receive. This kind of relationship can result in greater customer loyalty over time.
Servitization also enables manufacturers to gain useful insights into future R&D processes by analyzing the performance of a product sent to a customer and using this information in continuous improvement strategies. For example, a manufacturer may supply a new cutting machine that is fitted with sensor technology and telemetry as part of the agreement. The technology attached to the device sends real-time information to the manufacturer about machine performance and uptime, enabling the business to adapt future versions of the machine according to the data they receive.
All of this enables you as a supplier to strengthen your relationship with your key accounts as the services you provide to them (or to their customers) over time enables them to succeed.
The Advanced Services Group has a depth of experience based on the world’s leading research into what is needed to achieve a successful transformation to advanced services.
To explore how servitization can lead to greater value for you and your key accounts, contact Neil Tumber n.tumber@aston.ac.uk Cell +1 314 229 3360