For the past few years, manufacturing companies have been trying to reinvent their traditional businesses into the new holy grail of business models – “As-A-Service.” An increasing number of companies are embracing this transition from a product focus to a service focus, otherwise known as “Servitization.”
So what is driving this change? Momentum in manufacturing has been on the decline for a while now. 2019 has been witness to a global slowdown in manufacturing. Rising labor costs, higher trade tariffs and uncertainty around trade policy have dented businesses. According to the IMF, the global trade volume growth in the first half of 2019 was 1 percent, the weakest level since 2012. This global phenomenon is pushing manufacturing firms to seek additional sources of competitive advantage, as well as new sources of revenue that can deliver their next wave of growth. In the past, this has been inorganic and a race for market share. But with the services economy continuing to hold-up against economic downturns thanks to the emerging ‘experience economy,’ manufacturers are shifting their focus to wallet share.
Companies are now innovating with services to both differentiate their products and drive outcomes for their consumers. Service innovation is taking the front seat over product innovation and mass production. It might seem that opening new revenue channels through product-service systems would be beneficial, yet research suggests that most companies (almost 80%) struggle. Such a transition (i.e. to servitization) is challenging, since it requires companies to change both their processes and their mindset.
So how can companies get it right?
Critical Success Factors for Servitization Success
A good servitization journey begins with a sound strategy. In a survey of 60 top industrial engineering executives in Europe, only 30% of their organizations had a service strategy in place, and 40% cited a lack of leadership direction as a major impediment. A great place to start is by analyzing the existing offerings and market context to guide the innovation. This can evolve in three directions:
- Incremental Innovation: Small improvements made to existing products, services, processes and commercial models to improve efficiency, effectiveness and competitive differentiation. For example, HP realized that owners of inkjet printers are often frustrated by printer cartridges drying out. To counter this, HP launched a subscription service, “Instant Ink,” which allows consumers to subscribe to an ink cartridge and print when needed rather than buy cartridges outright. Additionally, when these cartridges dry out, the printer automatically notifies HP to send a replacement.
- Niche Innovation: This approach focuses on specific customer segments with differentiated solutions that align with industry trends. For example, ABB launched ABB Ability, a portfolio of digital solutions that help customers in the utilities, industry, transport and infrastructure sectors develop new processes while advancing existing ones through insights and the optimization of planning and controls for real-time operations. The results can then be fed into control systems to improve key metrics such as factory uptime, speed and yield. By combining their technology capabilities and domain expertise with insights from performance data of an installed base of more than 70 million connected devices and 70,000 control systems, ABB created a niche for their Ability platform.
- Disruptive Innovation: Here, companies create a new offering and business proposition, eventually disrupting an existing market and displacing established leading firms, products and services. For instance, Proto Labs was a traditional manufacturing company that started off by developing an automated process for producing injection-molded parts in a fraction of the time and cost it had previously taken. Today, it has pivoted its business model to become one of the largest suppliers of custom 3D printing services in the world, producing more than 100,000 printed components every month across six different additive manufacturing technologies.
The ecosystem plays an important role in bundling the services and owning the service outcome. While evaluating any of these strategies, it is important to consider the opportunity to create a Digital Ecosystem of connected participants. Digital disruption is forcing the unbundling of industries and the blurring of lines across industries. Successful ecosystem players are setting up customer-centric models that provide a single-access gateway to enjoy end-to-end value across a wide range of products and services enabled by diverse companies. Manufacturers can draw inspiration from companies like Farmobile, which incentivizes farmers to install smart chips in farm equipment that create customized heat maps of a cultivated area. The collected data is then monetized to an ecosystem of interested parties such as agri-retailers, agronomists, insurers, equipment manufacturers and other software providers.
Customer Journey Engineering
A modern “service provider” is often measured against the standards of services we experience in our personal lives from the likes of Amazon and Uber. Consumers attach great importance to the “non-physical” aspects of their overall experience, beyond just the technical and functional aspects. For businesses, this includes the technical competence and context awareness of the personnel as well as ease of use, ease of maintenance and an assurance of quality and performance. This means customers have a clear need to assess subjective qualities that may aid their decision-making process.
By placing consumers at the center and imagining the service experience around them through service-design techniques, manufacturers can deploy targeted interventions that deliver a powerful end-to-end experience. Steve Jobs famously said that “Design is not just what it looks like and feels like. Design is how it works.” We often associate design with look and feel, but it has the power to impact the overall experience itself. A simple and easy-to-use experience that masks engineering complexities from end users can go a long way toward ensuring adoption and customer success.
A leading American automobile manufacturer leveraged these principles to conceptualize a connected car ecosystem that links advisors, dealers, fleet managers and end consumers. The platform is designed to enhance a driver’s experience by facilitating personalized, location-based interactions with shops, hotels, restaurants and gas stations. This pioneering program became a massive source of competitive advantage for the manufacturer.
Enterprise IT Renovation
The technology backbone supporting an organization plays a significant role in the company’s ability to innovate and react with agility to customer needs. Adapting in a “servitized” world requires adopting high-velocity software engineering practices that accelerate time-to-value. This requires a holistic transformation across five dimensions:
- Team Design: Too often, software development teams are dependent upon other teams to do their work, whether it be technical experts or business groups, which severely restricts their ability to be nimble. This is especially true when working on customer-facing processes and/or products. By scaling autonomous teams that work on a roadmap and are held accountable for customer outcomes, technology teams can deliver change faster.
- Talent Design: A critical component to success is evolving systems and processes that match the right portfolio of work to the right talent, and doing so at velocity. In addition, the team’s technical competence is key. Motivated, engaged and knowledgeable workers want to get better at their craft. The most effective organizations give them the support and means to do so.
- Method Design: Companies can quickly and cost-effectively test critical assumptions and construct a portfolio of change by putting end users at the center of the experience and delivering it through a minimum-viable-product approach. Through a series of fail-fast / learn-faster iterations, companies can define and deploy potentially shippable increments to gather feedback.
- Engineering Design: It is possible to automate the lifecycle of software development by adopting DevOps practices such as continuous integration, continuous deployment, infrastructure-as-a-code, monitoring and collaboration. Doing so can enable teams to innovate for customers faster, adapt to changing markets better, and drive business results more efficiently.
- Architecture Design: A high-speed, customer-centric frontend running alongside a low-speed, transaction-focused legacy backend would help companies transition faster. For software-release cycles and deployment mechanisms, the customer-facing applications should be modular to enable quick deployment and avoid time-consuming integration work. In contrast, the transactional core systems of record must be designed for stability.
A global engineering group launched a subscription-based mobile app service that will allow their customers to use an iPad interface for CNC programming. The app was developed in seven months by adopting agile software-development practices and cloud-native engineering practices to scale the offering from a few hundred users to thousands.
Talent and Mindset
The most difficult aspect of servitization that many organizations struggle to master is their talent strategy. Customers equate the quality of any service to the quality of the company itself. Every interaction and touchpoint influences the customer’s image of a company. The people managing these relationships, and those building new services, should work with relentless focus to be brand ambassadors. This requires talent transformation at scale through training in technology, soft skills and problem-solving, and enablement from an organizational standpoint.
Successful servitization is not easy, but it isn’t impossible either. Critical success factors span four key dimensions: strategy, service design, IT, and talent and mindset. Finding the right balance between the business model, enabling OEM arrangements, underpinning processes and the collaboration ecosystem is critical to effective servitization. This is not a “once done and forgotten” activity. Rapidly evolving market factors will require organizations to remain invested in this journey to stay ahead in the game. And, of course, the best way to get started is to start small but aim big.