Servitisation: manufacturing's 'new' solution

Manufacturing is being challenged on many levels, from the rising costs of raw materials through to skills shortages, competition from cheaper suppliers and changing consumer habits and expectations. To counter this multitude of challenges, many companies have found that by harnessing technology and data, and providing a combination of products and services, they can become much more responsive to customer demand.

Enter 'servitisation', a term that has been around since at least the 1970s and originally comes from academic literature on marketing.

Aston Business School in Birmingham, UK, defines servitisation as “the process by which a manufacturer changes its business model to provide a holistic solution to the customer, helping the customer to improve its competitiveness, rather than just engaging in a single transaction through the sale of a physical product”.

Tim Baines, a professor of operations strategy at the advanced services group at Aston Business School, stresses that successful companies make good money from servitisation. “Rolls-Royce derives, on average, 50% of its revenue from services each year,” he says.

A way to stand out

A key reason for advocating servitisation is that it helps companies find new ways to gain and retain customers in an ever-increasing competitive global market. “Companies can differentiate themselves from low-cost competitors, who offer alternative products, and reduce imitation because services are more difficult for competitors to copy,” says Mr Baines. 

Gene DePrez, managing partner at consultancy Global Innovation Partners, considers servitisation to be a continuation of what has been a long-existing trend. “IT is often described as ‘on demand’ service offerings,” he says, pointing to IBM as an early adopter.

“At IBM, it was an alternative to clients or customers buying equipment, servers, or setting up their own data centres,” says Mr DePrez. “IBM offered to provide a full set of comprehensive IT services [data centre, software, applications, and so on] through its own data centres and systems or through approved outsourcers or partners on an as-needed basis or on demand.”

In essence, servitisation allows manufacturers to exploit their unique knowledge and product intellectual property rather than seeing third parties generate revenue by providing services and spare parts for their products. “Servitisation also increases loyalty to the point where the manufacturer becomes an integral part of the customer’s business,” says Mr Baines.

Corporate examples

Today, increasing numbers of companies are jumping on the servitisation bandwagon. In fact, according to the annual manufacturing report published by The Manufacturer, 83% of respondents described themselves as either 'beginner' or 'intermediate' in their approach to servitisation. The report found that over the next three years, 65% of the worldwide manufacturing industry will switch from a focus on products and production and build their revenue streams through services. “This is true for manufacturers of all sizes and levels of complexity,” The Manufacturer said.

Other companies that have embraced servitisation include Rolls-Royce (power by the hour); Xerox (Managed Print Services); MAN (pay per kilometre) and GE (Digital Solutions).

Rolls-Royce offers a classic example in that it sells ‘power by the hour’ to marine and aviation customers by making contractual deals with them that guarantee an operational time of its equipment. For example, shipping and logistics company Nor Lines pays Rolls-Royce a fixed charge per hour of operation, per ship in exchange for Rolls-Royce monitoring equipment aboard each vessel from on shore by means of onboard sensors. The agreement covers planned maintenance while the shipping company carries out day-to-day maintenance onboard the ship.

“Our ability to record and analyse huge volumes of data means we can offer ships better and more comprehensive service agreements than we could just a few years ago,” says Knut Hovland, Rolls-Royce director, marine customers and services.

Meanwhile, GE Digital is transforming the company from one that sells sophisticated machines to one that sells solutions and capabilities. “It invested hugely in smart and connected industrial machines, and acquired ServiceMax, a cloud-based field service management company, to support its services,” says Mr Baines. “GE estimates there is a market-wide opportunity for capability-based service propositions of $25bn.”

Last year, GE Oil & Gas Digital Solutions launched a pilot programme with energy giant BP and subsurface software company Paradigm to “bring further focus to developing digital capabilities for oil and gas”.  

“Digitisation has become not only a competitive differentiator but, increasingly, a necessity,” says Lorenzo Simonelli, CEO at GE Oil & Gas. “We are evolving our business and digital offerings to match the needs of our customers, partnering with them to embrace the transition and help make their businesses stronger in the long term.”

A business rethink

Today many industries are selling solutions rather than products. “In healthcare, for example, many pharmaceutical firms are under significant pressure to redefine themselves as healthcare solutions providers,” writes Andy Neely, head of the Institute for Manufacturing at Cambridge University and director of the Cambridge Service Alliance, in a blog.

As services become more advanced, companies are becoming less product focused and more concentrated on supporting customer processes through the capabilities the product enables. “Companies that have strong, reliable products – be that a physical or a virtual offering – are the ones that can really exploit advanced services,” says Mr Baines.

Reaching this level of servitisation, however, requires a full-scale change throughout the whole of a corporation.  

Mr Baines sees co-locating facilities helping. “Localised facilities enable quicker fault diagnosis and speed of repair, impacting on product availability,” he says. “Proximity also increases reliability. Stronger relationships are built between the manufacturer and customer at the level of day-to-day operations, enabling the manufacturer to witness and improve their understanding of how the user operates the product.”

Closer relationships

Co-location also helps when it comes to modifying designs or making recommendations about product operation, as does vertical integration within the value chain and the exploitation of ICT for remote asset management.

“The core concept of servitisation is that manufacturers develop a much closer relationship with the customer to understand their operations and how the manufacturer can provide services that help the customer be more efficient or productive, or reach new customers or new markets,” says Mr Baines.

While servitisation can result in a company expanding or participating in FDI, Mr Baines warns that relationship building can be slow. “In any market, the provider needs to demonstrate an excellent knowledge of the customer’s business and operations and how it can help with these,” he says. “If it wants to do this in a new market, it needs to really do its research.”

A service-centric staff that is adaptable, resilient and skilled in relationship building is crucial. “Performance measurement systems need to replicate those of customers so as to be knowledgeable of, ingrained into, and responsive to their businesses,” says Mr Baines.