Servitization: when less is more

Posted on 2 Sep 2015 by The Manufacturer

Can offering too many services actually be detrimental to your shift towards a service-based business model? James Tetherton of Kaiser Associates explores.

Servitization is a hot topic for manufacturers of all sizes and across sectors.

James Tetherton, senior vice president, Kaiser Associates
James Tetherton, senior vice president, Kaiser Associates.

With productivity stagnating, and competitive pressure squeezing margins, manufacturers are increasingly pressured to develop advanced services that help their customers attain the maximum performance benefit from purchasing new products.

For manufacturers, the potential benefits of servitization are compelling; secure, long-term customer relationships through the life of the product (and in many cases, beyond), stronger differentiation vs. low-cost competitors, and a more diverse revenue base that is less reliant on new product sales.

Take the Annual Manufacturing Report SERVITIZATION SURVEY and benchmark your company against the best in UK manufacturing.

So, if servitization is so important, why are so many manufacturers struggling to execute a winning strategy?

My experience suggests a slightly surprising answer: put simply, the greatest barrier to successful servitization is often too many services.

When developing a service-based strategy, manufacturers must carefully balance both the breadth and depth of potential services offered, against the increased costs of service development and operation.

With limitless potential offerings and combinations of service offerings, the average manufacturer is actually more likely to launch far too many services, not too few.

This can often result in either overwhelming their customer base, or failing to capture their attention with unfocused messaging, and inferior experiences.

Kaiser Associates Servitization PQManufacturers frequently spend a great deal of time coming up with new ideas for potential service offerings before entering into servitization; however the more important question of “what should my service offering EXCLUDE?” largely remains untouched.

As a result, uptake can fall below expectations, costs skyrocket and margins suffer, leading manufacturers to re-evaluate their place in the service market.

From here a manufacturer may either give up entirely on their service shift, believing the market isn’t ready, or take a step back to understand the market and optimise its service offering.

Service proliferation tends to take one of two distinct forms. In the most extreme cases, manufacturers will be guilty of both:

  1. Overwhelming breadth: Slowly but surely, in efforts to keep up with perceived competitions, companies add more and more services (everything from a simple helpline and break/fix service, right up to remote monitoring and advanced outsourcing), and one day wake up and have far too many – and too many ineffective ones
  2. Overwhelming depth: Identifying a few “big ideas”, but adding more and more options and therefore complexity to the services offered.

To put this into context, a recent client of ours – a global capital equipment manufacturer – was seeking to implement advanced remote monitoring services as part of an overall Internet of Things (IoT) strategy.

Eager to please every type of customer, the client developed six different levels of service. Although this level of customisation sounded good in theory (an optimal offering for every customer type), the reality was very different.

On the positive side, the overall idea of the service resonated strongly with customers. But, customers felt confused by the complex range of services on offer.

Put simply: too much choice made decision-making more difficult for the customer, not easier. And faced with the risk of picking the wrong choice, many customers simply preferred to delay the decision to another day.

At the same time, the manufacturer’s own internal teams (particularly, its sales force), found the new concepts hard to understand and explain.

As often happens, the manufacturer had significantly under-estimated the amount of training that was required to drive a shift from selling products to selling services.

The solution: significant simplification from six different services down to only two; rapidly increased customer adoption; and a much quicker and less costly sales team training programme.

To avoid this service proliferation and complexity, and help prioritise options and develop an optimised service portfolio, Kaiser Associates developed a checklist of seven key questions that we believe any manufacturer needs to answer:

  1. How difficult is this problem for the customer to solve? Is this a major challenge, or an easy fix?
  2. How important is this service (or the service option) for the customer? Is it absolutely essential or nice to have?
  3. Is this service genuinely new or adequately met by other providers in the industry (including the customers themselves)?
  4. Can we place a monetary value on this service and successfully articulate the cost/benefit equation to the customer?
  5. Do we have the ability (or can we create the ability) to meet customer needs better than anyone else in the industry?
  6. If we reduce the options associated with the service, do we increase or decrease customer response?
  7. Will this service allow us to significantly enhance our relationship with the customer?

By answering these seven questions, manufacturers can optimise their service offering, truly create long-term value for their customers, and develop a service business model that is economically rewarding.