‘Servitisation’ – jargon invented to fulfil the needs of management academics or a business paradigm companies should be exploiting to remain competitive? Jane Gray looks into the practicalities of selling services as a route to enhanced revenues and growth.
The term ‘servitisation’ is a piece of business jargon that has become popular in recent years to describe a trend for manufacturing and product orientated firms who develop complimentary services for their customers.
A third of large manufacturing firms globally are now ‘servitised,’ according to research from the Advanced Institute of Management Research (AIM). The figure stands at 60% in the USA and anecdotally it also seems that SMEs are increasingly leaping on the bandwagon. In the UK, where 99% of business is accounted for by SMEs, around 40% of manufacturing companies are now thought to be servitised.
5 steps to servitisation
- Consider potential service value propositions around your product. Remember the end outcome for your customer is not owning your product but achieving some other goal
- Consider whether you can help achieve that goal without selling your product
- Consider whether you will be able to deliver the service using in-house resources and who you might need to partner or collaborate with externally
- Assess your appetite for and ability to cope with the risk implications of providing services
- Form a skills and technology strategy which will deliver the business infrastructure you need for service provision
But what does this actually mean? How do operations at these servitised manufacturing organisations differ from their traditional cousins and what investments need to be made to achieve the transition?
Professor Andy Neely, deputy director of AIM and director of the Cambridge Service Alliance, a business-led group exploring the design and implementation of complex service systems, explains that servitisiation can broadly be grouped into two types – product focused services and customer focused services.
“The first is a well developed approach in the UK and globally,” explains Prof Neely. “Product based service is typified by manufacturers of trains and planes – anything which is meant to last for years and will need an ongoing supply of spares and support.”
The second type of service however, is where a great deal more scope lies for manufacturers to realise increased revenues, market share and customer retention. “The logic behind customer focused services is outcome based. The manufacturer does not sell a product but enters into an agreement to help the customer achieve their objective,” explains Neely.
It’s an approach which is relatively well developed in the defence sector where the MoD, the customer, is increasingly contracting for capability rather than placing equipment orders.
“The logic behind customer focused services is outcome based. The manufacturer does not sell a product but enters into an agreement to help the customer achieve their objective” – Professor Andy Neely, Deputy Director, AIM and Director, Cambridge Service Alliance
This way of doing business is spreading. Customer focused services are now a growing concern among UK pharmaceutical and healthcare companies according to Neely. “There is mounting awareness in this sector that drugs are exceeding their patented life cycles and the cost of new drug development is escalating. This is coupled with a realisation that the end customers for pharmaceutical firms don’t actually want drugs. They want to be healthy and this means manufacturers need to move away from producing drugs and toward producing health outcomes for society.”
You’ll be forgiven at this point for issuing a snort of scepticism. And Neely admits that many are “reticent” about accepting the need to so radically alter their business model and their ability to do so.
One of the biggest challenges for manufacturers attempting to develop service offerings is the need to realise that additional skills sets will be required of employees – and not just those working in sales and direct service roles.
Festo, the German automation equipment provider, is relatively well advanced on its servitisation journey. Gary Wyles, MD of Festo Training and Consulting UK says the original plunge in the direction of services was made when the company realised there was diminishing scope to differentiate its products on performance and reliability merits.
“This puts pressure on staff to raise their understanding of customer businesses and their sector conditions,” says Mr Wyles. Festo’s training and consulting arm has developed a Fit for Change programme to help sales engineers step up to the mark. The coaching programme includes sending sales representatives out to industry conferences and debates. “We need them to immerse themselves in sector business concerns,” states Wyles. “They still need engineering and product knowledge, but it is becoming more and more about business knowledge.”
Wyles also says that rising customer expectations around service and rapid issue resolution mean more staff than ever before are expected to interact directly with customers. “Around eighty per cent of Festo’s staff will now be a customer point of contact,” he says – an increase from around 50% spurred by the need to access diverse knowledge pools and answer customer queries or resolve issues quickly.
The same impetus has meant reconfiguration of manufacturing processes. “We need to have greater ability to respond to a more diverse range of customer demands,” says Wyles. “This means that right back through manufacturing and into the R&D department employees need to show they are interacting directly with the market.”
Some of this interaction will require monitoring of equipment and its performance as well as data collection on market trends and associated influences. Andy Neely points out that, quite apart from the significant technology investment that this may mean for manufacturers, it also raises another skills issue.
“Companies need to understand the data they are collecting,” he observes. “For a time that understanding may be found in-house, but as service systems grow and their complexity increases most find that they need to bring specialised data scientists on board and this needs to be built into skills development and recruitment strategies from the start of a servitisation journey.”
Festo will present at ’s Future Factory event: Driving Skills Development in the Workforce on February 26
Industry leaders such as Nigel Brooksby, chairman of the UK Life Sciences Board at sector skills council Cogent however, assert that the need for remodelling is very real. “Over the last few years there has been a dark cloud over the global pharma industry with the ever present ‘patent cliff’ and the pipeline drought as we approached the end of the blockbuster era,” he says. “‘Big Pharma’ has responded with new business models and restructuring. And inevitably CEOs and directors have come and gone with the regularity of Premiership football managers!”
In 2013 as these change take traction, Brooksby says we can expect to see those who have laid the best remodelling plans “break free of the rest of the pack”.
Measuring service success
In today’s economic climate the ability to prove the value of any strategy and show return on investment are essential.
But with regards to growing a service enterprise around or alongside a manufacturing business, this can be difficult. Mark Ager, Group CEO of Stage Technologies which produces stage automation equipment, explains that, in his company’s case, the value of service activities took a long time to be realised due to a focus on measuring turnover rather than contribution.
“Three years ago our services business, which is mainly focused on electrical maintenance of our equipment at customer sites, totalled around £700,000 a year. For a £25 million turnover company this seemed fairly insignificant and we had come to view it as something of an irritation,” recalls Mr Ager.
“Then, three years ago we took a fresh look and thought about services in terms of contribution rather than turnover. Suddenly the £700,000 was far more significant to the business.”
Having grasped this Stage Technologies increased service resource by recruiting additional engineers and in 2012 Ager says services contributed around £2.2m. The biggest investment made to facilitate the service expansion has been building a service database to track customer issues and information. “It’s difficult to estimate the total cost of expanding services in the past three years,” says Ager. “Particularly since a lot of work has been done in-house. But I would say about £30,000.”
Ager says that focussing on turnover can be very misleading for manufacturing firms and can obscure hidden potential in activities to bring far more real value to the business. Essential in Stage Technologies’ growth of both its services and rental businesses has been an active decision on the part of the board to measure contribution rather than turnover.
“Turnover is an easy measurement which many people understand,” comments Ager. “In addition banks like it as a measurement as it tells them how much money they will get to handle. But concentrating too much on turnover can make you a busy fool.”
Mark Ager will speak at TM’s AutomateUK conference on February 26
With regards to ability, the call to action is less clear cut. There are broad ranging skills and technology requirements behind the successful execution of a servitisation strategy – there are also downsides to achieving the transformation, particularly for outcome-based services and for smaller companies says Neely.
“Companies should carefully consider their appetite for and ability to shoulder the additional risks and liabilities that come with offering services,” he explains.
Traditionally, when a manufacturer sold its equipment to a customer it took little part in the risk of the customer’s operation failing. “For example, I might have sold earth-moving equipment to a customer who aimed to shift 100 tonnes of earth per minute from a site. Traditionally the risk of failing in that objective was the customer’s alone. But if I agree a contract which guarantees my equipment and services will help achieve the target and my equipment breaks down, suddenly I am at fault.” And standard product warranties or professional indemnity clauses may not be sufficient to cover your back.
This means that, for smaller organisations, a mistake can kill the business very quickly. “Organisations need a critical mass in terms of turnover and financial stability before they consider expanding into services,” sums up Neely.