Why Servitize Now?

The term “servitization” has covered a broad set of business models that enable manufacturers to transform customer relationships from one-time or periodic transactions to a reliable stream of recurring revenue and capture a larger share of the equipment lifecycle costs.

While not an invention of the digital age, new technologies – such as connected sensors, machine learning, and the Industrial Internet of Things (IIoT) – expand the concept of servitization in scope, scale, and business impact and amplify the strategic and competitive benefits of offering complete solutions to customers.

Best of all, companies, regardless of size, can now leverage this approach as part of their overall growth strategy.

Energize Growth with a Pivot to Services

It is no coincidence that servitization is sometimes referred to as the "cloud business for manufacturers." The software-as-a-service model enabled enterprise software vendors to create predictable subscription revenues and higher customer intimacy. Customers have embraced the cloud for several reasons, including its ease of adoption, pay-per-use options, ability to scale fast, and reduced cost of operations. Today, companies that offer software as a service achieve significantly higher valuations than their on-premise competitors.

Similarly, a product-as-a-service business model has been technically possible for a long time. However, over the past few years, the cost of equipping machines with sensors and establishing connectivity to business systems to give customers a servitization option was prohibitively high. As a result, business innovation was limited to only a few applications from prominent manufacturers, such as Rolls Royce's power-by-the-hour offering.

The ability to design, support, and sell servitization options only became more accessible when sensor costs declined, machine learning applications matured, and connectivity reached an unprecedented level. At SERVITIZE, we believe that every manufacturer (small, medium, and large) should benefit from a new stream of predictable and recurring revenue, stronger customer relationships, and higher valuations. And with thoughtful consideration, manufacturing company owners and business managers can create and capture the full value of a servitization journey.

Choose from a Range of Service Innovation Options

In the context of servitization, we distinguish three primary business models:

• Premium Services
• Equipment as a Service
• Everything as a Service

The models have in common that they open the door to recurring revenue based on long-term contracts with a fixed-fee agreement or performance-based structure (see Figure 1). However, there are key differences that organizations should consider when assessing value creation, revenue-capture potential, and the capability requirements of diverse business patterns. Doing so allows companies to create a tailored servitization roadmap and design relevant use cases quickly and pragmatically.

Premium Services

Offerings based on premium services are an entry point into a long-term servitization journey. Taking this first step, manufacturers provide their customers with a contract that details service levels and specified performance conditions, such as availability and functional expectations as an add-on to the product purchase. Premium services are either bundled with new-build product sales as an add-on or sold independently to complement a previous product sale.

The value of premium services is amplified further when preventive or predictive maintenance is added to the mix. Retrofitting existing products with IoT technology and sensors in combination with machine learning creates the ability to cover the entire installed base.

Lastly, regularly scheduled usage optimization services – like calibration or staff training may be offered to fulfill requirements for optimized product performance and other customer needs outlined in the signed deal.

Equipment as a Service

Equipment as a service ties the contract directly to the product as a single offering. The scenario enables customers to pay for the outcomes they consume or utilize from an installed machine.

Often called “pay per use” or “ pay per unit produced,” equipment as a service empowers buyers to realize substantial benefits from the product without the traditionally high upfront investment. Meanwhile, the manufacturer assumes some of the utilization risks.

Like premium services, equipment as a service can be contracted retroactively for the installed base in addition to the technical foundation. However, it usually requires the involvement of a financing partner that takes ownership of the product, not the buyer.

Everything as a Service

Typically offered by manufacturers with highly mature servitization programs, everything as a service combines all aspects of premium services and equipment as a service – including contracting new build products or product landscapes and applied to existing setups.

But there is one main difference: this scenario virtually removes the manufacturer’s products from the purchase. Instead, contracts are based on the performance of an entire process step or the provision of a defined state, such as air pressure or temperature.

It’s not by accident that everything as a service is often compared to business process outsourcing. Manufacturers become service providers that do not limit the scope of the engagement to their products, even covering third-party equipment in the contract. As a result, they must demonstrate the extended digital dexterity to adapt to the latest technologies.

Excel in Servitization with a Strong Delivery System

All servitization models are delivered through a specific set of capabilities blended into the existing manufacturing value chain. From this perspective, the delivery system enables industrialized services that are standardized, repeatable, and scalable enough to drive service margins.

Service Design

Service design is a discipline that complements the R&D function. It defines the service offerings that the company intends to market and sell based on one of the three main servitization models: premium services, equipment as a service, or everything as a service.

As a result, a service bill-of-material is created, outlining the process for building, selling, and delivering the service. The service design function is also responsible for the service-lifecycle-management, continuous improvement, and the definition of key performance indicators.

Service Sales

Under the responsibility of the sales and marketing functions, the service sales capability considers the substantial differences between selling services and products, requiring the attention and reskilling of the existing salesforce, partners, and dealers.

From a marketing angle, the manufacturer's credibility is a crucial differentiating factor, compared to non-manufacturing service providers. Businesses should avoid the perception of offering the same products with a different payment scheme. Instead, they must ensure the service is viewed as an entirely different offering.

Service System Orchestration

Manufacturers run a supply chain with a continuously coordinated flow of goods. In the servitization equivalent of this activity, inputs and contributions from external and internal stakeholders are orchestrated to optimize service performance by a service back-office or a service control center (SCC).

In the SCC, service performance is monitored and interventions are triggered, internally or externally as required. The function directs the scheduling of interventions and checks to help ensure successful completion. Then, solutions for unexpected issues are defined and communicated to the technicians in the field, while KPIs are continuously measured based on service contract terms.

Front-Office Operations

As the servitization counterpart of the manufacturing area, the front-office operations capability delivers the actual service experience. Front-office teams perform interventions triggered by the SCC – for example, maintenance, repair, upgrade, reconfiguration, and replacement of parts or systems. And the closer they are to a customer site, employees can respond to service response times faster.

Customer Success

Customer success mirrors the aftermarket service function and is the final servitization step. Emerging during the transition from on-premise to cloud-based business models in the software industry, customer success focuses on maintaining high customer satisfaction to drive recurring revenue through contract renewals and increased service usage.

In addition to upselling, customer success managers support customers during service onboarding while closing knowledge gaps through advisory and training along the way. A critical part of this phase is establishing a network inside the customer organization that captures feedback for future improvement of the offering when the process loops back into the service-lifecycle-management function.

Prepare Your Unique Servitization Ecosystem

Besides business model options and servitization capabilities, the ecosystem is the third - and last - foundational element of a servitization strategy. A well-crafted network of partners is advantageous when adopting complementary capabilities that the manufacturer might not possess today – enhancing the speed, scale, and scope of the service offering setup.

The importance of the ecosystem can be illustrated by cross-tabulating business model options with the servitization capabilities embedded into the manufacturing value chain (see Figure 3). Each intersection defines a set of required activities that need to be performed to provide a successful service experience.

For every service capability and activity, one of three choices must be made:

?????Build: Create the capability with existing internal resources.

?????Buy: Procure the capability from an ecosystem partner.

?????Co-create: Develop the capability jointly with an ecosystem partner.

The option selected can change over time and based on different situations. However, companies that aim for a head start in the servitization space typically retain only core activities that necessitate intimate and proprietary knowledge of the underlying product and procure non-core service elements (such as simple maintenance and repair). Likewise, innovation of new capabilities (including a product-specific IoT retrofit) is done in a co-creation approach with partners.

Since an ecosystem strategy comes with critical dependencies, the design of the servitization ecosystem is a vital, ongoing, and strategic task that calls for a strong partner management function within the company. Over and above mutually complementary relationships, manufacturers also need to ensure incentives are set up properly and synchronized with performance metrics promised in the service contract.

Why Servitize Now

At first glance, servitization may seem to meet the requirements of a “blue ocean” strategy that balances the desire for differentiation and low cost to enter a new market space and create new demand. And while that could be true, the approach does not help manufacturers avoid uncertainty.

Manufacturers must also accept some of the business risks previously assumed by their customers, especially utilization and several tasks that other parties once performed. The software industry has already proven a reliable path during its transition from on-premise to cloud-based delivery models – providing value strong enough to bundle services, such as application management, into a single solution offering.

And now, the entire manufacturing industry can transfer the learnings from the software-as-a-service model to explore the relevance of servitization for their business. Not too long ago, the only businesses that sold servitization offerings were a small, elite group of large multinational enterprises that were equipped to address technical complexity, the absence of standardized approaches, specialized ecosystem partners, and the high cost of sensors. Fortunately, all these barriers have all but disappeared, making servitization concepts accessible to companies of all sizes.

Ready to Get Started?

Take the first step toward a lasting first-mover advantage. Build strong customer loyalty and create recurring revenue. Contact SERVITIZE at www.servitize.de or email the authors directly ([email protected]; [email protected]; [email protected]).

About the authors

Marc-Alexander Winter, CEO & Co-Founder, SERVITIZE.

Coming from a strategy consulting and software background Marc blends analytical rigor with contemporary innovation concepts to help manufacturing companies to design, develop and implement service-based growth strategies.

He discovered his passion for servitization during his 18 year stint at SAP SE where he served as Managing Principal in EMEA and Vice President of the service business in Asia-Pacific Japan.

Marc holds a degree in economics and is an alumnus of the FU Berlin and the Hasso-Plattner-Institute.

Steffen Karch, COO & Co-Founder, SERVITIZE.

Steffen has more than 20 years of international experience in the technology and consulting space assisting customers such as Daimler, Nespresso and Goodyear with their digital transformation journeys.

His ambition to not only create but also capture value from digital service offerings has made him a strong advocate of servitization.

Steffen has co-authored three books on innovation and digital services.

Kevin Siol, Head of Services & Co-Founder, SERVITIZE.

Kevin is a consulting professional with extensive experience in digital transformation, business process optimization and project management. He has helped several customers with their digital transformation as project manager and consultant.

As a digital native he has a natural passion for Everything-as-a-Service business models and is keen on evangelizing the concept in the manufacturing industry space.

In his role as lecturer and a scientific supervisor at Duale Hochschule Baden-Württemberg, Kevin spreads the word on servitization in the academic sphere.

About SERVITIZE

Founded in 2020 SERVITIZE is a start-up focused on making the benefits of servitization available to manufacturing companies of all sizes.

We strive to provide our customers with end-to-end solutions for all Servitization business scenarios. Whether your business chooses to deliver premium services or equipment-as-a-service concepts, SERVITIZE can help catalyze new opportunities by blending digital services and capabilities into your value chain.

Our software products and services are focused on defining your Servitization roadmap, innovating or refining your value chain, and creating and orchestrating a smooth-running ecosystem.

More white papers and point of views on servitization will be coming soon. Please follow our SERVITIZE?account.