The traditional mission for manufacturers was clear-cut: take a combination of people, processes and equipment, and then transform materials into products for sale. Over the past few decades, however, this simple concept has shifted, drawing together two major parts of the economy we always thought of as separate.
For manufacturers seeking customer satisfaction, competitiveness and sustainable revenue, simply making and selling physical products is no longer enough. In the drive to build and protect customer bases and profit lines, services now have a pivotal part to play. The manufacturing sector finds itself transitioning to a new way of doing things: “servitization”.
In simple terms, it is about manufacturers building their revenue streams through services. You will have experienced something like it if you have ever gone for a new car on a Personal Contract Purchase (PCP) contract. It is basically a leasing model, in which the car manufacturers charge their customers based on the estimated mileage for a fixed period, rather than just the price of the asset. Repair and maintenance are usually included in these contracts, meaning that the customers would only need to fill the tank and enjoy the drive.
But servitization goes way beyond that in this new era and, of course, services themselves are not homogeneous. A variety exist – and they differ substantially in their level of risk, level of competition and potential to create competitive advantages.
In industry, debates about servitization almost invariably refer to Power by the Hour, the pioneering engine maintenance solution introduced by Rolls Royce in the early 1960s. It involved extensive changes to processes, structures, technologies and personnel within Rolls Royce and provides a benchmark for others. It also changed the deal with customers from a transactional purchase of equipment towards a ten-year contractual relationship.
These days there exists a remarkable breadth and depth of different offerings. Some manufacturers may offer an ever greater variety of “intermediate services”, including condition monitoring, maintenance, repair, overhaul and remanufacturing. Some move towards advanced services – such as Power by the Hour. These plans can include penalties if a product fails to perform when in service, or a system of payments structured around product usage all wrapped up in long-term contractual agreements which span up to 15 years.
Other examples include Alstom’s TrainLife Services. In this, French group Alstom provides the train with a bundle of repair and maintenance services and charges the operators (such as VirginTrains) based on the miles travelled through 15-20 year contracts. Xerox’s Print Management system offers a services and copier bundle which charges customers based on the number of papers they have copied or printed, and MAN’s pay-per-kilometre programme does a similar thing based on the distance its trucks are driven.
Such offerings are widely associated with a wholesale shift in ideas about the very nature of manufacturing. Ultimately, these make the deal more of a partnership than a transaction.
More and more manufacturing firms are joining in. A few weeks ago, GE Digital announced the acquisition of ServiceMax, a cloud-based field service management company – which, in theory, will enable GE to develop and deliver smart and connected industrial machines more smoothly and quickly than its competitors.
Goodyear has also announced the launch of Goodyear Proactive Solutions. This will aim to use new technologies such as predictive analytics to help truck fleet managers better handle how their vehicles are used. The common thread is that the outcome is not the sale of a product, but capability delivered through the performance of the product.
Servitization has emerged in business-to-business (B2B) offerings. But the concept is also starting to touch our everyday lives at a business-to-customer (B2C) level. Take Daimler’s Mercedes Me platform which remotely notifies drivers if the car requires maintenance or repair work. Brompton, the British manufacturer of popular folding bikes, now rents the bikes via docks across the UK to provide a more hassle-free option.
Before it becomes ubiquitous, as it may well do, servitization offers manufacturers a key competitive advantage. Those who embrace the idea should be able to help customers better achieve key strategic aims and, in doing so, offer something their rivals cannot. That in turn should deliver business growth and sustainability for both themselves and their customers.
Manufacturers get long-term contracts, closer relationships with clients, new business opportunities and revenue streams – and an enhanced image alongside that market differentiation. Customers should be able to squeeze out greater value from operations, better predict costs, and find it easier to scale up their operations.
The trend offers a future which will penalise the laggards. More and more technology-focused firms are moving into the product manufacturing space and disrupting their value networks. Take Uber, the ride-sharing tech company which is moving into the long-haul transport business with Uber Freight. This will allow a shipper to directly connect with a truck, challenging the traditional business model: in short, cutting out the middle man and offering real-time pricing.
Moves such as this create an active network in which manufacturers must be involved. The parts of the network evolve together to improve capabilities, and investments are aligned to create value or improve efficiency. What that means in practice is that a collaborative network is built between distributors, suppliers, technology and customers, which creates a resilient barrier that inhibits the entry of new players.
It is true that manufacturing firms can see an advanced services model as high-risk. The traditional product-based mindset is hard to break out of and realising the full potential of servitization demands innovation of the business model, a willingness to embrace new technology and new skill sets, as well as – ultimately – a wholesale change to the organisational culture.
But it might just be worth it. Manufacturing firms across the globe face a period of socioeconomic uncertainty. In the UK, Brexit is only adding to the challenges from a fragile recovery after the 2008 financial crisis, marked by intense competition from low-cost economies. In such an environment, servitization can offer a defensible long-term strategy that localises value creation and value capture.