Servitization is not a new business concept in the tech and machining industry. On the contrary, first examples of servitization are from the 1960’s. Nonetheless, in many technical and engineering companies the servitization is journey is started but halted too soon. This phenomenon is the Service Paradox.
Yet, servitization should still be a strategic priority for the manufacturing industry today! Why? Because digitization is the Service Paradox synthesis.
Simply said, servitization is delivering more customer value by providing proactive services besides the product itself. The ultimate example of servitization is offering the Product-as-a-Service or Output Services. Yet, this value proposition may not always be the Holy Grail in the B2B tech and machinery industry.
The optimum B2B service value proposition depends on a number of factors. These include the:
- positions on the value chain of both supplier and customer;
- differentiation strategy of the supplier;
- business strategy and sourcing policy of the customer and last but not least;
- problems the supplier will solve for its customer by sharing its knowledge: the essence of service in technical B2B markets.
Service classification framework
The B2B Service Classification Framework from Ulaga and Reinartz (2011) is a great model to describe the four key service value propositions:
Tech and machining industries can develop customer value-add services in all quadrants, whatever makes sense for them and their customers.
There are well-known successful examples of servitization like the power-by-the-hour concept of Rolls-Royce Aerospace, document management by Xerox, MAN’s fleet management, Caterpillar remote tracking and monitoring services, and Alstom with train-life services. What they have in common is to reduce the Total Costs of Ownership (TCO) of their customers.
Nevertheless, the question is: are these cases the rule or the exception? Many manufactures limit themselves to focusing and delivering Product Life Cycle Services only while much more value can be offered. Why?
The Service Paradox
In 2005, Gebauer, Fleish and Friedl explained why manufacturing companies find it extremely difficult to exploit the financial potential of an extended service business.
They describe three cognitive phenomena that cause this Service Paradox. All three can still be observed in many tech and machinery industries today.
1. Service is intangible
First of all, manufacturing industries struggle with the intangible character of services compared to products.
As a result, they tend to focus (and cherry pick) on what is closer to the business practice they understand: supplying parts, offering product modifications and modernizations. Transactions based on clear specifications and described functionalities.
As they have difficulties understanding and leveraging the value of sharing knowledge, which is intangible by nature, the development of advanced services stalls.
2. Service economic impact is different
Secondly, business leaders in tech and machining industries do not recognize the economic potential of services.
Especially for capital goods, the order value of parts and service orders is much lower than the contract value of initial new build projects. Management attention is easily prioritized to high risk, capital intensive new build projects. While the value of high margin parts orders is nurtured, the business value of service contracts (with customer attachment as a direct spin-off) is not understood.
Consequently, aftermarket business is lost to local service companies and copy cats. And typically, this happens soon after the expiry of initial warranties.
3. Service transformation is risky
Finally, managers in manufacturing companies tend to avoid the risks they see attached to developing services.
To further grow their service business, manufacturers need to invest in developing competencies to design, sell and deliver new services. And to improve processes and IT structure to enable and scale this.
A service is as good as the organization is
Moreover, manufacturers will have to change the organization to create the structure and management capability that is required for offering and delivering advanced services and achieve sustainable and scalable growth. A capability that is required to transform from a product supplier with basic lifecycle services to a significantly more pro-active service- and customer-oriented business.
Such transformation is not without risk. And the supply of basic parts and installation services is an important contribution to the profitability of the business.
The will to persevere in the servitization journey dies in short-term management logic
How to change this short-term management reasoning? This logic to avoid risking what you already have, blocking the development of more advanced customer value-add services and long-term sustainable growth?
Managing transformation and servitization
To transform a business and realize long-term objectives, you need:
- a dominant coalition of power,
- with top-down support,
- and a shared sense of urgency.
First of all, a significant change cannot be achieved without a dominant coalition of power. In a company, such coalition will be the employees, managers, business partners and customers who believe in the business logic of servitization. Believe in the long-term benefits for them and their customers.
Next, the coalition of power needs to be supported by the top: new value-add services or servitization will not be the result of an internal revolt. The top also needs to acknowledge the benefits that a growing service business will bring: customer attachment, better insights in customer needs, stable revenues and high margins!
Finally, the coalition and to need to share the same sense of urgency, making servitization a business priority because of the opportunities or threats they all see and all believe are real.
Digitization: opportunity as well as threat
Today, digitization seems to drive a revival of the long-sensed need to servitize the business. Digitization and servitization are often mentioned together. In fact, digitization is the synthesis of the Service Paradox. Why? Because it is an opportunity as well as a threat. Disruptive technologies that cannot be ignored.
New communication technologies and concept like the Industrial Internet of Things enable new ways to capture, analyze and use big data as well as new methods to share knowledge. Artificial Intelligence (like Machine Learning and Speech Recognition) helps to find relevant knowledge much quicker and efficiently. And with Augmented Reality technology, this knowledge is remotely and immediately shared to support customers. COVID-19 clearly accelerates these developments and the needs thereof.
This new phase in the Industrial Revolution focusing on interconnectivity, remote support, automation, machine learning, and real-time data is Industry 4.0. As a result of this revolution, data is King: who owns the data owns the business, making digitization a truly disruptive innovation.
And that is why digitization is the synthesis of the Service Paradox.
Digitization enables servitization
Digitization is the Service Paradox synthesis because it enables and drives servitization. At the same time, digital innovation needs a purpose: a model that transforms the advantage of being able to capture and use data-driven knowledge into profitable business. Digitization needs a servitization strategy because, by definition, sharing knowledge is offering a service.
A servitization strategy is required to succesfully digitize
That is why digitization will drive servitization.
Most likely, digitization will change existing supply relationships. Digital technologies bring new insights and opportunities at all levels of the value chain.
Opportunities for tech and machining industries to gather and use data related to their products and the use thereof. But also opportunities for their customer, and the customers of their customers, to better understand and improve their business processes.
The need for close customer relationships has never been so imminent. Only the manufactures that travel the digitization journey with their customer will have a chance to learn more about their customer’s needs and transform new opportunities in win-win deals.
The customer is the best partner to digitize and servitize
Therefore, servitization starts by understanding customer needs and pains. For each segment, manufactures should understand their own position on the value chain. Next they choose their differentiation strategy. And then define their optimum digitally-enable servitization strategy. Such strategy may be different per customer segment.
Service Paradox synthesis
Today, all industries acknowledge the need to invest in digital technology. But digitization is not a goal in itself.
In the aftermarket, the servitization strategy will provide direction and purpose to digital transformation: a business model how to best share knowledge with customers. That is why digitization requires a new effort by tech and machining industries to servitize. An effort addressing the emerging opportunities as well as threats from Industry 4.0.
Digitization is the synthesis of the Service Paradox. It is now time for Servitization 2.0 !
Service Strategy in Action, A Practical Guide for Growing Your B2B Service and Solution Business, Kowalkowski, Christian; Ulaga, Wolfgang; 2017.
Made to Serve, How Manufacturers can compete through servitization and product-service systems; Baines, Tim; Lightfoot, Howard; Wiley; 2013.
Overcoming the Service Paradox in Manufacturing Companies; Gebauer, Heiko; Fleisch, Elgar; Friedl, Thomas; European Management Journal Vol. 23, No 1, pp 14-26, February 2005.