Manufacturers start on the road to servitization for many different reasons. For some, their customers demand it; others see it as a way to compete through innovation rather than just through costs. For many, it’s a case of simple economics: As they grow in size and scale, offering services is seen as the best way to keep growing.
Whatever the reason behind the move, it changes and deepens relationships with customers, says Andy Neely, head of the University of Cambridge Institute for Manufacturing. Based on talks with manufacturers already deep into servitization (such as BAE, Rolls-Royce and Caterpillar), Neely and his Cambridge Service Alliance colleague Veronica Martinez have developed a seven-step framework for successfully making the transition to services.
Customer and internal readiness, governance structures and resources are all critical for making this transition successfully, as Neely outlined in a recent webinar.
Field Service Digital caught up with Neely to talk through some of the key issues of shifting to a servitization model.
Can you single out one of the seven critical success factors in your framework that’s pivotal to success?
Andy Neely: The first step, which is around market and internal readiness, is key. One of the things we noticed in the services area is that you’ve got to think very carefully about whether your organization is ready emotionally, mentally and culturally to make this commitment to services — and whether your customers are ready for you to make that same commitment.
If the customer is not ready to change the way they contract with you — or the customer is not willing to give you some control over some of the readers you might need to control to successfully deliver that service — then there’s a danger that you are creating an unsustainable business model.
You’ve got to think very carefully about whether your organization is ready emotionally, mentally and culturally to make this commitment to services — and whether your customers are ready for you to make that same commitment.
And the flip side is also true. If your customers say they want you to contract for outcomes and capabilities, but you’ve got an organization that’s really strong on engineering and technology and that sort of mind-set, then you may not be ready as an organization to make the commitment to shift to services. It’s a really delicate balance.
What’s the best way to make that first important step into services?
AN: You need to think about research.We wrote a paper recently called “Innovating Backwards,” and the argument in that paper was that, in the services world, often your first contract is a bit like an R&D investment.
If you’ve thought about your first contact as a pilot contract, then you can learn how to build the capability to deliver the services and then take that capability and use it in other contracts afterwards. That’s quite a sensible model, particularly if you work with the right customer.
Some organizations talk about deterministic customers who say, ‘We want you to work this way with us. We’ll do a pilot scheme with you, and we will work with you to create this service automation and at the end of that, you will have built that capability to take to market.’ It’s quite a good way of creating a service with a customer who knows you’re not going to get it right immediately.
How long does it take to shift to a services-based model?
AN: It’s undoubtedly an evolution. These service models keep evolving, and I think this will continue to be the case. There’s a constant evolution in how the business model is enabled by data and technology. And that changes the nature of the relationship with the customer. It’s not a static thing — it is a very gradual change.
And does the shift require manufacturers to retrain staff or change their hiring policy?
AN: This is also a part of the reason why transformation takes a long time. You’re not going to get rid of the production bit — you still need those capabilities — but you’ve also got to build new capabilities in the organization, which might involve hiring new people, but also involves thinking about new processes.
Most organizations have a well-defined and documented process for designing products, but actually designing services is a different process. Understanding the risk in service contracts is different than the type of risks you might take on in a product-based contract, so you need to develop the capabilities to understand those risks.
Most organizations have a well-defined and documented process for designing products, but actually designing services is a different process.
So there’s some hiring of new people but you also need to think about how you can effectively run a business that straddles products and services. That can create tension within the organization.It might be better to say, we’re not going to do this ourselves and we’re going to build an ecosystem with partners who might take responsibility for particular bits of it. You might outsource service design, or you might outsource the maintenance part of the contract, and you become responsible for running the ecosystem.
People don’t like change, so how do you ensure that this shift to services and the disruption that causes is as painless as possible for employees?
AN: I don’t think people are resistant to change. I think it’s actually that people are creatures of habit. People are used to doing things in the same way, and they get better and better at doing them, because they’ve practiced. So actually changing the habit becomes the challenge.
What are the wider, longer-term implications of servitization — not only for the business-to-business world but also for consumers?
AN: One of the interesting trends happening more in the business-to-business world rather than consumer world is this question of ownership. Do I really need to take ownership of an asset or am I more interested in the result the asset can deliver or the outcome? Does a quarry really need to buy the truck, or is the quarry interested in producing minimal cost per ton? And if that’s the case, maybe someone else should own the truck.
In the business-to-consumer world, there’s the environmental impact. Some are experimenting with models that maybe we can persuade consumers that they don’t need to own the asset themselves but they could effectively pay to use the asset. For example, most of us don’t own our mobile phones any more.
Does a quarry really need to buy the truck, or is the quarry interested in producing minimal cost per ton? And if that’s the case, maybe someone else should own the truck.
Under that model, potentially you can see a situation where people start to share assets rather than take ownership themselves. The risk of that is that the way our economy works is that it’s keen on people buying and consuming things and then buying a new thing.
Think how many lawnmowers there are. If a lawnmower gets used for an hour a week, it’s an incredibly inefficient product. Imagine if a street pulled together and said we’ll own just two lawnmowers for the street and just use them when we need to. That suddenly means that lawnmower manufacturer is selling two rather than 20 lawnmowers, and that has quite profound economic implications.
Click here to hear the full recording of Andy’s Service Innovation Series webinar.