Professor Tim Baines from the Aston Centre for Servitization Research and Practice shows that small companies too can develop service-based business models and create new relationships with their customers.
Ask the average person on the street what a manufacturer does and they will probably say it makes “things” and sells them.
But is this really all that manufacturers do and is it sufficient to be just focused on products? What about services?
I think that services are an important stream of revenue that are overlooked by many companies.
Servitization is about helping manufactures grow their businesses through services. It’s a strange word, but an important concept.
Let’s take an example of a well-known enterprise, the West Coast Mainline for argument’s sake.
Virgin holds the franchise, but it’s mainly Alstom that takes the responsibility for ensuring trains are available and operate as expected. Not only does it design and manufacture the trains, but Alstom maintains, repairs and overhauls them. This enables Virgin to concentrate on operating the trains within the transport network.
All well and good for a large company like Alstom, but what does this have to do with SMEs?
At the Aston Centre for Servitization Research and Practice, we’ve been working with West Midlands SMEs to help them review their business models, explore how services could help their business growth and sustainability, and develop commercially viable services packages.
One such company is Haigh Engineering, a design and manufacturing business in Herefordshire with just under 100 employees. It manufactures maceration machines for the health sector, and screening and waste separation systems for waste water treatment.
One of Haigh’s problems was cyclical demand for products in the waste water side of the business and the associated cash flow issues this generates.
David Freeman, division manager, began working with us to understand how adding advanced services could help.
Freeman and his team had spotted an opportunity to become more involved with the refurbishment, servicing and maintenance of the firm’s equipment, and he developed a strategy to implement services contracts.
Key features include:
- Proactive maintenance and servicing to ensure equipment reliability
- Using IP to guarantee better performance of equipment, meaning better results for the customer
- Capability to identify potential problems before they occur and remedy them at no extra cost
- A regular revenue payment for services, rather than one-off payments for products
Haigh Engineering has now agreed a proactive maintenance and upgrading contract with one very large national water company, and the same model is being explored with several other water companies.
Revenue from services and spares increased by 25-30% in the first year of this new offering.
Ultimately, servitization offers market differentiation, enables sustainable growth, strengthens cash flow, and helps lock out competitors.
Not only that, but there are wider societal, economic and environmental advantages to servitization; it brings localised value capture, employment and skills development, and incentivises the manufacturer to invest in newer, cleaner technologies, which require fewer materials and less energy to produce and maintain.
I believe passionately that it is key to the future of British manufacturing.