Nick Frank and Dave Hogan of Hennik Edge, The Manufacturer’s networked expert advisory team, reflect on how to grow your business through data-driven services by first thinking about how they would benefit your customers.
If you sense the data generated by your products could be key to your future growth, then don’t follow the crowd into the technology black hole. Rather, look to your customers and their industry value chains to figure out how data-driven services will make your customers more profitable.
In our experience, the companies that are successful in implementing a service-led growth strategy are those that focus on their customers’ problems and then work backwards to offer solutions that create value or reduce risks.
They then work hard to understand their own DNA and take action to fill their capability shortfalls.
They identify the data and insights they need to serve their customers better, and then build a robust digital infrastructure in which they automate the data collection and analytics process.
Companies starting this shift to service-led growth have a focused obsession on how to make their customers more successful and scan the industry value chain for disruptive opportunities.
Outcomes replace products
For some manufacturers, this means adding services such as analytics or remote access to products to create customer value.
Others go further and no longer sell a product but an outcome. For example, the tractor units of many trucks on UK roads are no longer sold as a capital asset. Instead, customers effectively pay a charge per mile and the OEM maintains the truck to manage availability.
Another example, the leading bearing manufacturer SKF are well known for their availability contracts delivered through their Integrated Maintenance Solution.
When we start to challenge the view of how a traditional product-manufacturing company works, then we can see the opportunities offered by integrated product-service solutions.
A 2016 study by Cranfield University estimated that nearly 17% of the UK’s GVA comes from these product-service solutions. This compares with only 10% of GVA accredited to the manufacturing sector as traditionally defined.
The key to understanding how far a business can move from product-only towards products-as-a-service lies in the amount of value that can be ‘liberated’ within the customer business or its industry value chain.
Value can be difficult to imagine let alone quantify. One way to think about it is the ‘value iceberg concept’. The cost of the product or service you provide can be clearly seen above the waterline.
However, from the customer’s perspective there are many other costs within their business below the ‘waterline’. Some are easy to define such as labour, material throughput and energy. Others are much harder to outline, such as overheads or the cost of obsolescence.
And then there are risks and uncertainties that can be very costly and have a strong emotional impact on a company’s buying decisions.
The most profitable manufacturing companies understand the value iceberg very well. By adding services to their products and creating integrated solutions, there exists a huge opportunity to capture more value that is hidden deep within the customers’ business processes.
Take the truck example. The tractor unit represents maybe only 8% of the annual running costs. Half of this cost is the fuel and one quarter the driver, with other costs squeezing the profit margin down to perhaps 2% – 3%.
Over 20 years ago, MAN truck’s UK distributor added maintenance services designed to reduce fuel consumption by 10% and so double the profitability their customers could generate over the year.
Using telematics technology in the cab they were able to manage the running costs so well that they were able to shift their business model to effectively lease trucks by the mile.
The resulting business argument was so compelling that over a 20-year period their business grew from £50m to £550m.
Servitization by any other name
There are many labels applied to this kind of enhanced business model. Some call it ‘servitization’. Others define it as ‘digitalization’ of their business using the data produced by the telematics. Or the leasing model could be described as representing a ‘circular economy’.
The important thing to recognise is that successful companies never start with a hide-bound view of the business model they want to follow. Instead, they start with a deep understanding of how they can make more money for their customers, or how they can change the industry value stream using their know-how and technology.
The paradigm shift required to become a successful services-led ‘product’ organisation has a profound impact on people, technology and processes.
Employees have to engage more deeply with their customers’ businesses. Customers have to change how they manage their suppliers as they move processes and risks into their supply base. Managing internal and external cultural change is a key success factor for all concerned.
Services make sense for SMEs as well as larger manufacturing organisations. In fact, service-led manufacturing is potentially more important for smaller business and even startups for three reasons:
- Many smaller businesses are using service thinking to create competitive advantage. We recently came across an example where a six-person maintenance company for refrigeration units in small grocery stores identified that there was huge value to their customers in guaranteeing that these units would run 24/7. You can imagine the impact on your business if your fridge fails and you lose all your stock. They developed a service proposition where they guaranteed the availability of the fridge units.
- UK SMEs that are integrated into the supply chains of large OEMs supplying complex engineered products, such as trains or power generation systems, can gain a competitive advantage if they can integrate into the new service-led contracts of their customers.
- For technology-based startups, one way to overcome a reluctance to invest in new technologies is to not lead with the technology itself. But rather, they can develop a service offer in which the technology creates the competitive advantage.
If you recognise the potential value of adding services to your product portfolio then speak to Hennik Edge, The Manufacturer’s networked expert advisory team, about how we can help you grow.
Our experts are drawn from manufacturers and specialist solution providers with unrivaled experience and know-how: hennikedge.themanufacturer.com
Nick Frank is an expert in the development and execution of service strategies that increase the value of manufacturing and technology businesses. He is the managing partner of Si2 Partners and is a Hennik Edge specialist advisor.
David Hogan is an experienced operations and services professional and fellow of the Institution of Engineering and Technology. A senior industrial fellow at the University of Cambridge Institute for Manufacturing, he is a Hennik Edge specialist advisor.