Products are dead, long live products – why servitisation could be key to post-pandemic recovery

Manufacturers, such as Rolls Royce, which took a reported £4bn hit in 2020, have long been big advocates of servitisation, a process that focusses on selling preferred outcomes, as opposed to individual products. It’s a model that has been around for a while but has only really taken off in the last few years. Technologies such as sensors, data collection and analytics have been the catalyst for that increased adoption, with predictive maintenance through machine learning enabling service providers to set outcome targets and meet those goals, delivering in the case of Rolls Royce, engine up-time hours and not just engines.

However, for aerospace firms the COVID-19 pandemic has been particularly difficult. Recent financial results from the likes of Rolls Royce, Pratt & Whitney and GE Aviation paint a grim picture but as Sumair Dutta, industry analyst and director of digital transformation at ServiceMax points out, the pandemic has also proved to be a stress-test for servitisation models.

“When demand for travel and engine hours was high, this worked well,” says Dutta. “With COVID-driven travel restrictions, those models have seen the opposite impact. While the risk transfer has helped the customers, it hasn’t necessarily helped the aircraft engine manufacturers. Therefore, there is greater visibility into the risk associated with outcome-based models and safeguards that need to be put in place to allow for the management of that risk.”

There is greater visibility into the risk associated with outcome-based models and safe-guards that need to be put in place”, Sumair Dutta / Servicemax

For those organisations already invested in servitisation models, this is perhaps not such a bad thing. The very nature of servitisation is to play the long game, to build business around lasting, mutually beneficial relationships rather than just the shorter-term buyer-seller relationship. Any insight into potential risk can be managed and as organisations look to navigate any sort of recovery in the months ahead, this will no doubt help to strengthen the model.

As Sven Denecken, COO S/4HANA and head of product success at SAP SE says, more organisations should be looking at servitisation now to improve agility and develop stronger customer ties. Changing business models, which have accelerated as a result of the pandemic are the biggest threat to their business according to Denecken. 

“Servitisation can be an effective strategy to prevent companies and their products becoming a commodity and losing relevancy in a more service-led economy,” he adds, claiming it can also help to drive differentiation in a competitive marketspace and make it more challenging for competitors to replicate service offerings.

Examples of this include Philips’ Signify, a holistic lighting solution it calls “light-as-a-service” which includes the conceptualisation, installation, and maintenance of a lighting system, and comes with guaranteed SLAs and cost reduction for electricity. Another example is Oki’s Managed Print Services and Document Solutions, which includes planning, installation, maintenance and operations. Customers pay for the number of printed pages and archived documents (pay-per-use).

Cultural challenges

For Dutta, the advantages for keeping faith with servitisation are clear, although he admits it may not be for everyone. He says that the real challenge in accepting servitisation comes from within. Can organisations stomach the short-term drop in capital revenue for a longer-term, more assured revenue stream? It requires, he adds, a very mature commercial mindset to accept this switch, which is sometimes referred to as ‘swallowing the fish’ – a model that outlines the longer-term financial benefits of servitisation. This, of course, may fly in the face of more traditional sales people, for example, who are fed and watered on maximising short-term revenue.

Internal structures based on legacy IT and processes and a more traditional mindset towards product sales and customers’ relationships may not be the best breeding ground for servitisation. But this could change. Customers may start demanding it, especially following the COVID-19 experience.

“For the customer, there are several factors that draw them to the servitisation model,” says Dutta. “There is often no large capital expense associated with the upfront purchase of equipment and theoretically there is an easier financial relationship where you have an agreement on the payment per outcome. Therefore, there is less negotiation and back and forth between purchasing and the sales organisation around the price of the asset and the subsequent price of service and parts. Ease of business is a major factor that makes the outcome-based model lucrative to the customer.”

It’s a view supported by Colin Elkins, VP, Manufacturing Industries at IFS who says that one of the key barriers to servitisation is mindset.

“There is often a ‘why change’ attitude from those that believe they’re making a healthy profit today, so why take the risk? This will take some time to overcome, for the most part, because they haven’t yet taken the time to analyse and understand where their ‘moments of service’ are, and therefore where the untapped value in their business is.”

Elkins adds that in many cases, this is also combined with a lack of data needed to calculate the ‘real’ costs, since in a servitisation model the maintenance and repair costs of the product move from the customer to the supplier.

Servitisation can be an effective strategy to prevent companies and their products becoming a commodity”, Sven Denecken / SAP SE

“Legacy IT can make this a very complex issue,” adds Elkins. “Organisations are increasingly looking for ‘composable’ or modular technology that can flex as their business changes and provide the visibility and capability needed to capitalise on this untapped value, creating new revenue streams through servitisation.” 

It is the agility that is increasingly attractive to both service organisations and customers, especially those left a little exposed by the pandemic. The key is finding where an outcome-based deal can work best. As Dutta suggests, it doesn’t have to be an all or nothing. Organisations can identify an area where servitisation may hold better value and less risk.

“Depending on the asset, or the customer preference, a traditional service model might make more sense, whereas for other customers, an outcome-based model may be preferred,” says Dutta. “As customers look to inject a little more flexibility or agility into their business processes and their risk exposure, these models do hold longer-term promise.”

Technology change

Of course, as Elkins suggests, the underlying infrastructure within an organisation could make this difficult. If a business really wants to benefit from servitisation, it may mean a complete re-design, in terms of how the business is planned, run and transformed – and that includes how it organises its technology too.

Denecken at SAP breaks it down into three key areas; system scale and performance, billing system upgrades and intelligent data analytics which encompass areas such as IoT and predictive maintenance. There are, he adds some fundamental questions to ask.

There is often a ‘why change’ attitude from those that believe they’re making a healthy profit”, Colin Elkins / IFS

“Is the ERP system able to manage the significant increase in the amount of data and transactions that come with a service-based business model?” asks Denecken. “Can analysis/reporting be done quickly and, on the fly, to minimise risk and take action quickly at service level agreements?” 

Denecken also talks about the explosion in invoicing volumes due to a service/subscription-based model and asks whether current billing systems can cope with the need to scale? But for most organisations, it is the foray into intelligent data analytics that will demand significant change.

“There is a need to consume, monitor, analyse and predict the large volumes of IoT data from connected products, in order to offer a compelling service-based approach and for the model to be commercially viable,” he says. “Naturally this has a significant impact and challenge for the IT teams to manage. The more customers can automate their business processes the better they are able to drive efficiency in their businesses. This also ties into the ability to offer more creative and differentiating services.”

Circular economy

From a tech point of view, these are not insurmountable challenges but as Dutta at ServiceMax suggests, delivering outcome-based services requires “a significant integration of incentives, measurements, and operating models across business functions, something that is very difficult to achieve.”

Getting the organisational mindset right is essential and there will always be those organisations where old habits die hard but servitisation can give organisations new impetus and direction, something which many may need following the pandemic. This also feeds into thinking around sustainability, building more responsible business models, reducing waste, energy and carbon impact.

As a World Economic Forum report on how servitisation could help save the planet suggested last year, the servitisation model “strongly incentivises the equipment owner – that is, the service provider – to think long-term when designing and selecting the technology. By offering state-of-the-art maintenance, the provider can minimise operating costs, in particular energy use, which is the largest cost component over the life cycle of the equipment.”

It should, in theory, lead to better products and services, improved brand reputation and closer relationships with customers. Interestingly, it’s the thinking behind Rolls Royce’s TotalCare servitisation programme, to ‘close the loop on material usage’. As the poster child for servitisation, it will be interesting to watch over the coming months, to see how it helps the business recover and of course, to see whether other manufacturers and suppliers are inspired to change their approach to selling products. However, for the moment at least, servitisation is still some way off being the new normal.  

What impact will right-to-repair legislation have on servitisation?

Later this year, governments across Europe and the US will start to implement regulations compelling manufacturers to provide maintenance information for products (at this time the regulations are focussed primarily on white goods), so that customers can carry out their own repairs.

Aimed at reducing landfill waste and increasing the length of product lifecycles, the ‘right-to-repair’ regulations will, for the moment at least be limited. As Elkins at IFS says, “the immediate impact on servitisation will be zero, as in a servitisation model, the suppliers are selling an outcome/service not a product, so they are responsible for the equipment upkeep not the customer/consumer.”

However, Dutta at ServiceMax points out that this could open up the market and actually help accelerate a shift to outcome-based models. He says that customers want to increasingly pick from a range of service providers based on the cost and speed of service and this could lead to a shift in mindset towards traditional product selling. 

“For the service provider, the move to an outcome-based model theoretically eliminates most of the competition as the delivery of outcomes could be contractually tied to the exclusive service relationship between the customer and the service provider,” says Dutta. “Any handling of the asset by non-approved parties would lead to a breach of agreement or penalties for the customer. In a way, the customer is now locked in with the service provider. Where it gets extremely interesting is the impact of these servitised models on the areas of self-service and remote-assisted support, areas that have seen a great deal of investment in the last year. Servitised models will also drive service organisations to formalise their network of ‘approved’ service partners to ensure the efficient delivery of outcomes.”