One of the hottest money-making opportunities in service these days is coming from companies that — traditionally, at least — aren’t service providers. Manufacturers are realizing it’s no longer enough to make products. Now, they must also sell advanced service contracts for the trucks, jet engines and other products they produce. It’s all part of a trend called “servitization,” and companies like Rolls-Royce, Toyota and Xerox have led the way.
We spoke with Ali Bigdeli and Eleanor Musson, researchers at the Aston Business School in Birmingham (UK), whose pioneering research examines how global manufacturers are getting into the service game. Here, they explain why servitization requires an extreme commitment to customer success, why everybody wins when it works — and what traditional service leaders can learn from their counterparts in manufacturing.
Servitization is getting a lot of attention in the service industry. What is it, and why should companies care?
Bigdeli: Traditionally, manufacturing firms have focused on making products. But because of contextual factors, including the economic downturn and market competitiveness, manufacturers realize they need to do more. They’ve started to focus on not just selling the products, but also on providing advanced services wrapped around those products.
What are the biggest benefits you’ve uncovered in your research?
Bigdeli: The leading companies in servitization have seen significant opportunities and benefits for decades. We recently met with a senior manager from Toyota’s UK materials handling business, who said that one of the only ways that the company had survived the recession was through the delivery of advanced services. The company wasn’t able to sell a lot of its forklift trucks, but it could sell more advanced services around those trucks.
The benefits of servitization can be divided into four main areas. The first is about the response to customer demand. Customer and market demands are getting more and more complex; product innovation alone isn’t enough any more. Customers are looking for something more, and that’s where services help to meet their demands.
Second, servitization can deliver financial sustainability and operational scalability, because contracts tend to be long-term.
The third benefit is secure revenue streams. When companies know they’ve got a long-term contract, they feel safer. What’s more, the cost of product innovation decreases because of the information and data that the company gathers from customers’ use of the product.
The fourth benefit is constant learning. Take MAN Truck, for example. The company has sensors in different places on its trucks — in the engine, tires, pumps, everywhere. Every movement within the truck is monitored. The manufacturer is learning constantly about how the product performs, and the longitudinal collection of this data, which incentivizes customers to stay with the manufacturer in the long term.
Can you explain how servitization differs from merely providing a service?
Musson: Servitization is the transformation process that manufacturers need to go through in order to offer advanced services. It’s the manufacturer that provides a service, rather than a services company. And it’s not just about providing a product and a service to the customer — it goes a step further, to understand what problems the customer has in delivering its own business, and helping the customer to be more successful.
“It’s not just about providing a product and a service to the customer — it goes a step further, to understand what problems the customer has in delivering its own business, and helping the customer to be more successful.” — Eleanor Musson
MAN is a really good example: The company can provide its customers with usage data for each of its drivers. Perhaps one employee is driving too fast or leaving the engine running while stopped, which wastes fuel. The customer can [now] do something about this (and MAN even runs driver-training courses). MAN can say to customers, “Not only will we provide you with a really good truck, and do the monitoring, maintenance, the spare parts — everything — to make sure it doesn’t break down, but we’ll also go further by helping you run your business more efficiently.”
What are the major challenges service leaders face in adopting servitization?
Bigdeli: Companies large or small should know that servitization is not just about business model innovation. It’s about organizational transformation — whether it relates to corporate culture and management attitudes, or organizational structure and business processes.
Salespeople, for example, have traditionally focused on selling products. With servitization, they must sell the whole package. That’s a challenge because it’s much harder to sell service compared with pure product.
The other important aspect is to educate the customer. If you’re not able to educate your customer regarding the benefit of an advanced services contract, you won’t be able to sell it.
How many companies are actually offering servitization today?
Musson: There are different levels of services that companies can provide. Basic services [would be] delivering a spare part. Intermediate services would be providing a sensor on the part, so the company can know when it’s going to break down, call the customer and proactively fix it. A lot of manufacturers offer these kinds of service.
Advanced services, though, are where servitization really comes into play. That means going further to help the customer be more profitable. There are a number of leading examples, but a lot more [companies] are just starting to realize that this is something they need to do.
Five years ago, when we talked about servitization at conferences and to the manufacturing industry, people hadn’t heard of it and many couldn’t really see the relevance. Now, five years later, people are waking up to why this is so important.