Strategy & Leadership

Manufacturing, Remade: How Product Companies Embrace Services

“We’ve basically reinvented what manufacturing is. Manufacturing now and going forward is a different business.”

That’s a bold statement from Nick Frank, co-founder and managing partner at Si2 Partners, but as far as Frank is concerned, servitization, exemplified by the likes of Rolls-Royce’s power-by-the-hour approach, is changing the face of manufacturing forever.

Frank, who has first-hand experiences of this change from his time at both start-up services businesses and large manufacturers, now helps firms make the transition to a service model.

Field Service Digital caught up with Frank ahead of Maximize Europe in November where he will share some of his ideas for making this transition as painless as possible. Keep reading for more, and don’t miss Frank’s session, “Organizational Transformation Workshop: A Practical Guide to Outcome-Based Models and Service Innovation,” Nov. 8 at 3 p.m.

FSD: What’s the impact of servitization on the manufacturing industry?

Frank: Service is the key to manufacturing businesses being really profitable. Every manufacturing business is actually a service business. When the eyes meet between the engineer and the manufacturer, and they agree on a solution that has a lot more value than what the part actually cost to make, that’s what makes you profit.

What does servitization mean to you?

A lot of people interpret servitization as a business model where [a manufacturer] delivers an outcome, but that’s not appropriate for a lot of businesses. There’s a product-service continuum, and companies need to find their place on that and determine how they can add the right level of service. Where manufacturers place themselves on that continuum is a function of the value they can make for their customers.

What exactly do you mean by value?

Think of an iceberg. Let’s say your product costs £10 (US $13) — that’s what you see. But the influence of that product is hopefully a lot greater than £10. For someone making a decision about your product, they’re actually looking at the whole iceberg. The more you can add value in that hidden part of the iceberg, the more value you provide to your customer — and the more money you can make. Services are a very good way of getting down deep into that iceberg.

For example, what you pay for a truck is a small percentage of the total cost. Fifty percent of cost is actually fuel, and 25 percent are the drivers. If you’re really trying to add value to your client, don’t just provide a truck and walk away. If you can help reduce their fuel costs, you’ll make a much bigger difference to their bottom line. And that’s basically what MAN Truck & Bus did.

How well do manufacturers understand this idea of added value?

It’s about a change in mindset, and that’s where people struggle. If you look at the value iceberg, they look at what they are delivering (the product) but don’t really understand how their customers make money.

If you got go to manufacturer’s exhibition, they all talk about their equipment and what it does. But if you ask them how their customers make money, they’ll say they know what their customers need, but they won’t necessarily say, ‘This is how my customer makes money’ — or how they fit into that process.

Manufacturers need to get over the mindset of just providing a product, because what they’re actually providing is an outcome. If you can make that outcome really influential for your customer, and for your customer’s customer’s business, you’ll make money.

That’s potentially a big change. Where should manufacturers start?

Recognize where you have services in your business, and make sure that you deliver those services well. Make sure the processes are standardized at the back-end so that you make money. As you go through the process [toward servitization], you’ll naturally start to recognize that value iceberg.

You’ve referred to servitization as an art — why?

If you’re going to be successful on this journey (which actually never ends), it’s helpful to understand how businesses operate. It’s blindingly obvious, but you don’t really think of it: Businesses have a strategy that drives services and products. They know what they want to do, and then they do it. But strategy is delivered by internal people and customers, and the ‘how’ of getting people to do that is very different from the ‘what.’

A business might be very strong strategically, but weak in delivery, so you need to spot where the key issues are and where to prioritize, because you cannot do everything at the same time.

The people aspect is the biggest problem. If you have the right mindset, you can overcome everything else. Successful businesses get results by having the right culture and understanding the ecosystem. Deciding when to make changes, when to accelerate the business, is an art.

Don’t miss Nick Frank’s full presentation at Maximize Europe (Nov. 8-9, 2016, in Amsterdam).Click here to register.

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