Part 1 of 8: This is the first blog post of this series of 8, focussing on ever-present topics impacting the technology world.
The Servitization Journey
To understand servitization it is worth absorbing some of the thinking which is encapsulated in a now renowned book on this subject titled ‘Made to Serve’, co-authored by Professor Tim Baines from Aston Business School.
Professor Baines talks about the progression that some trail blazing manufacturers have made on a journey from simply selling hardware-based products; to wrapping services like 24/7 tech support helpline and/or repair or replace warranty schemes around those products; through to delivering the capability and, ultimately, the outcome that the product enables as an ‘all-in-one’ service.
So, in the examples Baines uses Xerox does not just manufacture a printer but offers a ‘print management service’. While Rolls Royce created its ‘Power by the Hour’ service which is a complete engine and accessory replacement service which has been offered to jet owners on a fixed-cost-per-flying-hour basis. This aligned the interests of the manufacturer and operator, who only paid for engines that performed optimally. Professor Baines classifies these types of offerings as ‘Advanced Services’. Common features of Advanced Services being offered by manufacturers often include these 4 key areas:
Payment per use or consumption-based pricing i.e., per page you print out, per hour you fly your jet etc)
Sharing of risk and reward i.e., the consumer of the service shares in profits generated by the service
‘Cost-down’ commitment – maybe a commitment to reduce running costs as contract progresses and economies are realised.
The theory is that as manufacturers work through the journey towards servitization, they simultaneously begin to see their success as intricately bound up with their customers’ success. Benefits run both ways. The customer, on average in the work which Professor Baines has carried out with the likes of Xerox and MAN trucks, saves 25-30% in terms of operational costs by plugging in their supplier’s advanced services. While manufacturers are able to sell more to each customer.
So, each customer becomes both more valuable in revenue terms but also ‘stickier’ – more loyal. So, the lifetime value of each customer keeps on rising. Typically, when OEMs embrace servitization, they see their services revenues rise at a rate of 5-10% per year so that in a few short years they can become much more resilient by deriving 50% of their revenue from product sales and 50% from advanced services. They also sign customers up to on longer-term contracts. Although there is some evidence that, as these advanced services are rolled out, profit margins fall. However, they still are able to command decent margins on a much bigger piece of the overall market they often come to dominate.
A really good example is how Philips provides the lighting for Schiphol Airport in Amsterdam. Instead of selling bulbs and light fittings and offering to maintain those; it instead bundled the service with the products to create ‘Lighting as a Service’ solution in which Philips remains the owner of all the fixtures and fitting.
It provides real-time management and optimises power consumption to increase the system’s sustainability. The result is, because it shares the responsibility for the whole lighting system with the airport’s owners, it works tirelessly to prevent failures and has been able to gain 75% longer life on its fittings than more conventional lighting equipment. Both parties in this contract benefit, and the environment is also a massive winner as energy consumption and waste is reduced. Demands for greater sustainability in procurement are met.
Hardware-only selling can be lumpy
In traditional models of hardware-only sales, the manufacturer makes a single sale and then moves on to the next sale. No further revenue is derived from that customer until the product is beyond repair or upgrade. The vendor starts each financial year at zero revenue, knowing that on paper he ought to sell as many devices as last year but also knowing that there are many moving parts and variables which might prevent those sales numbers being replicated or exceeded. They can be particularly vulnerable during economic shocks like we had following the 2008/9 banking crisis and subsequent Great Recession. Apart from anything else, the vendor must keep on innovating and persuading customers to upgrade to the next generation of products.
Hardware manufacturers worked out many years ago that in order to strengthen the link between them and their customers they needed to offer additional services around their products to tie customers in. Warranties became one clear way of both deriving additional revenue for the vendor and staying closer to the customer. It created an opportunity to sell an extended warranty at the end of a two or three year term for your new car or laptop for example.
IoT Connectivity offers more routes to advanced services
As we begin to connect hardware devices to the internet; it becomes possible to provide remote firmware upgrades and run remote diagnostics on our cars, printers, cameras and frankly nearly every consumer product going forward. There is a potential to diagnose problems remotely and even begin to predict parts failures and swap them out before component failures occur.
For vendors, this provides the potential to bind the customer even more closely to them by recommending upgrades or parts changes before the product fails and has to be towed to the garage so to speak. The intelligence can also be fed into the vendor’s R&D department and used to help build more robust products in the future.
Vendors can also use this intelligence to engineer a more direct relationship with the customer – servicing them directly and increase margins by doing so. Alternatively, it can provide this predictive intelligence to favoured reseller partners who can then advice the customer and offer to make the changes for a fee.
As IoT (Internet of Things) connectivity increases and superfast broadband and 5G Wi-Fi becomes the norm, it will become easier for resellers, integrators, or (in the automotive world) car dealerships, to restyle themselves as not just on site agents, installers, upgraders, and maintainers but also ongoing remote managed services providers.
So, in the IP video surveillance world, Alarm Receiving Centres (ARCs) have become increasingly sophisticated as their monitoring services extending beyond reaction to intruder alarms or motion detection on a protected site after hours; to offering predictive maintenance and even remote diagnosis and fixing of devices.
There is no doubt that remote monitoring of devices, processes and operations in general has been given a massive shot in the arm during the pandemic as, in many cases, service engineers were not allowed on site to check and fix systems. They simply had to do more through remote diagnostics and wherever possible remote maintenance. During the pandemic, London City Airport’s traffic control function was even moved offsite through the use of a high-end video monitoring system.
Servitization is going to shake up nearly all markets. For those who get this transition right, there will be rich prizes in terms of increased market share, a resilient balance sheet, sales growth and customer stickiness. For those which don’t adjust they are likely to be out of business sooner than they anticipated.
I read recently that a McKinsey study found that the average length of stay of a S&P 500 company in the States had fallen from 61 years in 1958 to just under 18 years old today. Embracing of a combination of servitization and the subscription model offers a way to buck that trend – and become one of those businesses which outlasts your competitors.
Are you planning to signal to the world that you are no longer just a product business but a ‘customer outcome driven business’? Perhaps you need to launch a Product as a Service offering? Maybe you need to signal a raft of planned changes to the market you serve – making it clear you want to serve them in a new, more engaged manner?
I’ll be hosting the next one-hour live webinar on Thursday 9th September 2021 at 12:00 (BST). It will offer some best practice tips for communicating strategic changes such as Servitization and Subscription Model adoption. Please join here if you are interested in exploring the biggest change to hit the technology market in a generation.
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