Servitization: Emerging Business Model Focuses on Win-Win Outcomes

Game-changing new business strategies call for new terminology. And sometimes, influential business models that have been around for a while — and the unfamiliar words used to describe them — require a little boost to achieve more widespread adoption. 

Such is the case with “servitization.” 

Servitization – A Brief History

Servitization, otherwise known as outcome-based service, has been on the radar of some forward-thinking manufacturers and service providers since at least 2013. That’s when industry researchers Howard Lightfoot and Tim Baines published “Made to Serve: How Manufacturers Can Compete Through Servitization and Product Service Systems.”

Baines tells Field Service News that the term “servitization” dates back to at least 1988. That’s when the European Management Journal published “Adding Value by Adding Service,” a paper now credited with introducing the term to describe the idea of shifting from supplying only products to supplying a mix of products and services with the aim of increasing value for customers.  

The servitization strategy encourages companies to understand and prioritize their customers’ most important goals, and to provide a reimagined offering that’s focused less on product sales and more on helping customers achieve desired outcomes. However, it was slow to gain significant traction.

“The delivery of a service component as an added value when providing products, servitization is all the rage in the manufacturing sector around the world,” according to “Made to Serve” publisher Wiley’s description of the book. “Yet, despite the clear competitive advantage of servitization, most manufacturers remain reluctant to venture into what, for them, is a strange new world.”

Today, as more and more manufacturers and suppliers begin implementing (or at least exploring) servitization strategies, interest in the concept has expanded significantly. Aston University Business School in Birmingham, England, hosts an annual, three-day Spring Servitization Conference. The theme for this year’s event (held virtually May 10–12): “Servitization: A Pathway towards a Resilient, Productive and Sustainable Future.”

What is Servitization?

Servitization for manufacturing, for field service, or any industry for that matter, encourages companies to refocus their energies on their customers, to prioritize their customers’ needs and goals, while also preparing their own internal operations to provide a more robust, engaged field service offering. At one level, it can be looked at as a shift from selling just products to selling products as a service (PaaS). But there is much more to it than that.

“In essence servitization is a transformation journey — it involves firms (often manufacturing firms) developing the capabilities they need to provide services and solutions that supplement their traditional product offerings,” says Andy Neely, a University of Cambridge official and early academic proponent of servitization.

To help explain the concept, Neely cites the “classic example” of Rolls-Royce’s evolved approach to its aircraft engine business. Today, instead of selling aircraft engines as products, Rolls-Royce sells aircraft engine “power-by-the-hour” as a service, under contracts that guarantee the customer access to the needed aircraft engines and ongoing maintenance without actually owning them in the traditional sense.   

Engineering.com describes PaaS as “a business model that allows customers to purchase a desired result rather than the equipment that delivers that result.”

“This same trend — selling solutions rather than products — can be seen in lots of industries,” says Neely, with common examples ranging from heavy equipment and robotics to printing services and even music. 

Here are a few additional definitions of servitization: 

“Servitization is the act of restructuring traditionally product-oriented businesses towards service-oriented functions, including subscriptions, repair and maintenance contracts, and outcomes-oriented guarantees.”

Back to Basics: What is Servitization? | FutureOfFieldService.com

“Servitization is the term used to describe the transformation process of shifting from selling products to delivering services … [a transformation in which] services like maintenance and logistics are increasingly coupled to, and connected with, the manufactured products.”

The Role of Servitization in a Changing Economy | Firmhouse.com

As to the benefits, according to the Firmhouse article, the servitization and product-as-a-service model offers several notable advantages:

  • It can create and grow recurring revenue streams.
  • It can strengthen customer relationships.
  • It is scalable in all sorts of companies (small, medium and large).
  • It can help lock out competitors (when companies deliver on agreed-upon outcomes).
  • It can provide environmental benefits through promoting dematerialization.
  • It dovetails with the adoption of cleaner technologies.

Additional benefits can include:

  • Increased profitability and customer retention rate.
  • Improved lead generation and upsell opportunities for field service teams. 
  • Reputation for leadership in manufacturing customer service.

At the heart of the B2B servitization model is the question of ownership, says Neely, who suggests that more companies today are asking: “Do I really need to take ownership of an asset or am I more interested in the result the asset can deliver or the outcome?” For example, he says, “Does a quarry really need to buy the truck, or is the quarry interested in producing minimal cost per ton? And if that’s the case, maybe someone else should own the truck.”

Servitization – What You Need to Know

For manufacturers, field services operations or any type of company that may be considering a shift to servitization, the first piece of advice is often words of caution because the transformation involves far more than flipping a metaphorical switch.  

“You’ve got to think very carefully about whether your organization is ready emotionally, mentally and culturally to make this commitment to services — and whether your customers are ready for you to make that same commitment,” Neely says in a “Secrets of Servitization Success” Q&A with ServiceMax – Field Service Digital.

For best results, undertaking the switch to a servitization model requires: 

  • An organization-wide commitment to being laser focused on your customers’ success.  
  • A fundamental shift from being reactive to proactive in dealing with customers’ needs, problems and concerns.
  • Investment in technology to expand service-providing capabilities (examples: IoT and predictive analytics).  
  • Empowering your field service team to evolve from traditional break-fix technicians into proactive problem solvers who, over time, establish themselves as trusted partners in each client’s mission to succeed. 
  • Collaborating with customers to develop service contracts that specify agreed-upon expectations and outcomes. 

Because the goal of servitization is to improve outcomes for both the equipment/service provider and the customer, it is often described as a win-win business model — one that is likely to become more widespread as more companies look to help their business thrive by more effectively serving their customers. 

About the Author:

Paul Hesselschwerdt is a partner in Global Partners Training, an industry thought leader and customer relationship training provider for companies embracing the shift to outcome-based business relationships and servitization. 

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