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Three Things You Need to Know About Servitization – By Sean Hoban

The CEO of Kimble Applications since its foundation in 2011, Sean Hoban has over 25 years experience in IT consultancy, having worked for Oracle and LogicaCMG as well as start-up consultancies. This articles first appeared on the Salesforce AppExchange

Servitization is one of the most important shifts in the manufacturing and services sectors today. There are three key points to understanding what is meant by servitization and how this phenomenon is unfolding across the globe. 

  1. What Do We Mean by Servitization?

Servitization is a relatively new term which is still unfamiliar to many. It describes the transition from commodity manufacturing production to providing high-value, product-centric services.

It is easy to confuse the process of innovating a company’s ability to compete through the addition of services with simply being better at customer service. Servitization deals with the former – it involves a change in how a manufacturing company earns its revenue. For manufacturers, servitization is about competing through encapsulating a product within a services-led offering rather than selling products alone.

In his book Made to Serve, author Tim Baines identifies different levels of this process. At the basic and intermediate levels, services support the product like spare parts and automated repair requests. Advanced level services refer to manufacturers bundling services with the product to come up with what he describes as “a more adventurous business model”; rather than selling things, the advanced services model is centered around selling capabilities. A great example is Goodyear – this organization is moving from selling tires toward selling the capability of keeping a truck on the road.

  1. Servitization: Why?

In an increasingly global market, manufacturing and engineering companies have had to find new ways to grow and to increase their competitiveness. Manufacturing companies, often those making engineering products, have been in the vanguard of those moving toward a more service-based ecosystem. It is now becoming essential for these companies in advanced economies to introduce servitization.

Charles Cochran of PwC Japan experienced first hand the competitive pressure that companies like this have experienced in recent years. Margins are squeezed since, in a global economy, someone can generally build an engineering product more cheaply. Therefore, these businesses need to find a way to add value to their clients’ portfolios and build on what they can do outside of simply trading products.

The servitization business model creates an opportunity for businesses to differentiate and to reap a competitive advantage. They can build truly global supply chains, acquire services companies, find ways to build new revenue streams, and grow.

  1. Servitization: How?

Technology is the key to “how”. Cochran said, “Technology and data are the glue which binds the product and the services together.” The scope for a truly servitized business is based on the data. For example, a train manufacturer moves to sell not trains but passenger miles, plus services like wifi, food, and travel packages with the intent to optimize train frequency, seats, ticket prices, and so on based on data.

To break down the how a bit further, managing a services-and-product business in the global economy is, as we have seen, about delivering capabilities. Customers do not want to pay for the cost of providing the services they consume – they want to pay on the basis of outcomes.  

Being able to do this profitably involves being able to tightly match supply and demand, and to optimize a global talent pool. It also involves a high degree of visibility of costs and resources. Any services business manager will confirm how challenging this is.

Servitized product businesses have an increasing cross-over with the services sector, where they can share expertise and grow revenue. Both are increasingly looking to harness the power of AI, professional services automation, and other technological solutions to drive success and help to build closer connections with their customers.

Want to go more in-depth on these key points? Check out this joint webinar with Salesforce, Kimble, PwC, and Aston Business School — a leading academic authority on the subject.