Professor Tim Baines of Aston University’s Centre for Servitization Research and Practice explores the models and methods available to manufacturers for gaining revenues from service provision.
The world once seemed simple; manufacturers made things and services companies did things for us.
Today, increasing numbers of manufacturers compete through a portfolio of integrated products and services. This is a services led competitive strategy, and the process through which it is achieved is commonly referred to as servitization.
Celebrated exponents of such strategies include Rolls-Royce, Xerox and Alstom; all offer extended maintenance, repair and overhaul contracts where revenue generation is linked directly to asset availability, reliability and performance.
Servitization is much more than simply adding services to existing products within a few large multi-national companies. It’s potentially about viewing the manufacturer as a service provider that sets out to improve the processes of its customers through a business model, rather than product-based, innovation.
The manufacturer exploits its design and production competencies to deliver improvements in efficiency and effectiveness to the customer.
Manufacturers have traditionally focused their efforts on product innovation and cost reduction. Companies such as Porsche and Ferrari are celebrated for bringing new and exciting designs into the market, while companies such as Toyota are held in awe for their work with Lean production systems.
These successes foster a perception that the only way for manufacturing to underpin
competitiveness is through new materials and technologies, faster and more reliable automation, machining with more precision, waste reduction programmes, smoother flow of parts etc.
Competition through services
Services offer a third way to compete.
This is not an ‘instead of’ or ‘easy option’ for companies that are struggling to succeed. Indeed, delivering advanced services can require technologies and practices that are every bit as demanding as those in production.
Neither do they require the manufacturer to abandon its technology strengths; instead it can build on these to help to ensure long term and sustained benefits.
Consequently, there is a growing realisation that such services hold highvalue
Conventional manufacturers can struggle to appreciate the value of services, seeking such simple explanations of servitization that they fail to appreciate potential benefits.
This is often the case with organisational rather than technological innovations. In the
early 1980s it was difficult to imagine that ‘Just-in-time’ would endure, and yet today it’s hard to identify a single manufacturing company that has not been touched by Lean techniques in one way or another.
Servitization is a similar paradigm shift.
The word ‘service’ can be used in different ways. It can refer to how well an action is performed – “that was good service” – or to an activity, like maintenance, spare parts provision and so on.
Servitization relates to this second interpretation; activities that a manufacturer can perform to complement its products. All manufacturers offer services to some
extent, but some establish market differentiation through these, following
services-led competitive strategies.
Servitization is a term given to a transformation. It is about manufacturers increasingly offering services integrated with their products.
Of these, some manufacturers choose to servitize by offering an extensive portfolio of relatively conventional services, while some move almost entirely into services, largely independent of their products, by providing offerings like general consulting. Others move to deliver advanced services.
Advanced services are core to servitization.
Xerox’s ‘Managed Print Services’ is one example; rather than simply selling equipment, the company offers ‘document solutions’ to customers.
For a typical customer, such as BA, Xerox provides project management, implementation of new technology, and management of third parties.
There are various types of advanced services, and a variety of terms is used across industry to describe these (e.g. availability contracting, performance contracting, managed services, solutions).
However the outcome of these contracts is, invariably, a capability for a customer to perform a business function or process.
This is distinct from conventional services where the outcome is product ownership and
maintenance of an asset’s condition.
Particular contracting features are often coupled to advanced services.
There are four key features; the first three of which are relatively widespread:
- Pay-for-use revenue payment: pay-perclick, pay-as-you-go, power-by-the-hour etc. are all terms used to refer to advanced services. For instance, in its contract with Xerox, Islington Borough Council receives a ‘click charge’ each time a document goes through a machine.
- Long-term contracts: Contracts of fewer than two years are rare. The Heart of England NHS Foundation Trust has a ten year contract for its pathology laboratory facility, while in power generation, GDF Suez enters into contracts of 20 to 25 years.
- Risk management: The provider is responsible for ensuring asset availability, condition and performance. If an Alstom train is late, penalties of £600 per minute of delay are incurred if the fault is with the OEM.
- Commitment to on-going process improvement and cost saving: this features increasingly in advanced services contracts. – See more at: https://www.themanufacturer.com/articles/servitization-explained/#sthash.FhddGLwR.dpuf
When these features are coupled with the principle of delivering a capability, contracts become sophisticated and demanding. Many existing contracts are relatively large, which is perhaps part of their appeal to OEMs.
MAN Truck and Bus UK has 10,000 vehicles under contract, and expects this to grow by 50% over the next three to five years, to represent £200million of business. The Heart of England NHS Foundation Trust’s five-year contract in its pathology laboratory is valued at £20m per year.
Advanced services are however not only for large organisations. They can hold high-value for manufacturers big and small. They can help strengthen relationships, lock-out competitors, and grow revenues and profits.
We delve into this impact in our next article on servitization.