Why servitisation can be a value-adding strategy for manufacturers

21 June 2019 Consultancy.eu 7 min. read

In a new research by RSM Erasmus University, servitisation has been found to be a highly effective approach for manufacturers seeking to bolster their effectiveness. To gain insight in why and how servitisation adds value, Consultancy.eu sat down with Fabian Nullmeier, now an operations consultant at consulting firm Berenschot and author of the study, and asked him five questions on the study’s main findings.

In recent years, manufacturers have been increasingly experimenting with or even deploying servitisation in their business models. Servitisation stands for the trend that is seeing manufacturing companies shifting in the services realm. In the old days, the manufacturing service chain was comparatively black and white: manufacturers would make products for people, and service companies would provide for the services. Today, boundaries are blurring, as trailblazing manufacturers embark on a transformation to capture more of the consumer value. Enter: servitisation, which advocates a model where manufacturers sell products and bundle that with services, with the goal to create more value to their customers.

The research concludes that servitisation can be a value-adding strategy for manufacturers. Can you explain?

Servitisation can be beneficial for manufacturers and their customers since it enables manufacturers to deliver outcomes that act as critical inputs to their customers’ operational processes. Take for example the widely known ‘Power-by-the-hour’ concept through which Rolls-Royce sells flight hours rather than airplane turbines. To develop this concept, Rolls-Royce determined the input that is most critical to the operational processes of airline operators. Having determined that maximising the number of flight hours is critical for airline operators to optimise their operational processes, a product-service bundle was created focused on delivering flight hours. 

This means that the main advantage of servitisation for customers is that manufacturers are incentivized to deliver equipment performance that is central to their business. Servitisation can be a valuable strategy for manufacturers since product-service bundles can be sold at a premium and thus offer higher margins than selling products. In addition, servitisation offers the opportunity of long-term customer relationships through multiyear service agreements. Due to the increased closeness to the customer, additional products and services can be sold over time.

Rolls-Royce uses a servitisation strategy to add valueWhat are other great examples of servitisation seen in practice?

Industry statistics reveal that about one third of manufacturing firms are in the process of adopting servitisation. There are thus many examples of servitisation in practice, some more successful than others. Academic literature has identified three main types of services: basic services, intermediate services, and advanced services.

Basic services are focused on product provision (i.e. selling access to equipment), intermediate services are focused on maintenance of product condition (i.e. selling uptime of equipment), and advanced services are focused on delivering a capability based on product performance (i.e. selling product performance).

Most manufacturers are focused on complementing their offering of basic services with the delivery of intermediate service. For instance, industrial manufacturers such as Caterpillar (manufacturer of construction machinery) and Atlas Copco (manufacturer of air compressors) bundle their equipment with maintenance and monitoring services to focus on maintaining equipment condition. Another example of a manufacturer that has ventured into selling advanced services is Xerox. Xerox is focused on selling office printer performance by selling copies/prints through its pay-per-copy service. 

Putting servitisation into place is however no easy task, as highlighted in the study. It requires “a considerable change process” to optimise business models and (financial) operations. What are the most important steps to take?

The research uncovers that to sustain financial margins of selling servitisation, manufacturers need to undergo a considerable change process to optimise operations such that financial obligations tied to servitisation can be minimised. These financial obligations arise as manufacturers become responsible for covering maintenance expenses and fines specified in risk sharing contracts. 

In this organisational change process, three steps are identified. First, financial obligations tied to selling intermediate and advanced services need to be assigned to business functions by adopting relevant KPIs throughout the organisation. That is, system reliability should become a core objective for all business functions. Second, maintenance operations need to be optimised by implementing predictive maintenance. Third, financial obligations need to be (partly) transferred to the manufacturer’s supply base by designing contractual agreements that formalise reliability and quality requirements. 

Subsequently, performance management processes need to be implemented, to ensure that suppliers adhere to the formulated requirements. Where necessary, suppliers need to be assisted in improving their operations such that reliability and quality targets can be met. By increasing supply chain alignment through these operational changes, financial rewards that can be extracted through servitisation can be maximised.

How far should companies go in their servitisation offerings? Is there an ‘optimum’ defined for suppliers and customers?

The ‘optimum’ level of servitisation is company and sector dependent. The study reveals that when considering the adoption of servitisation, it is of utmost importance to determine the financial obligations tied to servitisation. Once an analysis of the financial obligations tied to a specific service offering has been conducted, an organisation can determine which type of service can be delivered in a feasible manner. 

Finally, how do you expect the concept of servitisation to evolve as technology-driven opportunities emerge in the coming years?

Technology driven opportunities will be central to minimise financial obligations tied to selling advanced services. Investing in technologies such as digital twinning enables manufacturers to optimise their equipment design, production process and maintenance process. By optimising product design, production and maintenance, manufacturers can increase equipment reliability and minimise downtime.

One important example is predictive maintenance, which predicts the time at which equipment components will fail. When these predictions are accurate manufacturers can deploy service engineers to replace a component before it breaks down. This does not only decrease downtime but also streamlines maintenance processes. An great example from practice is the monitoring of engine performance during flight by Rolls-Royce maintenance centres. When abnormalities are detected in component performance, Rolls-Royce schedules maintenance with airlines.