By Sarah Nicastro, publisher/editor in chief, Field Technologies
Servitization has been defined as a manufacturing or product-centric organization’s ability to develop the capabilities needed to offer services after the product sale. For service-specific businesses, a similar focus has been put on migrating away from the traditional break-fix service model to an outcomes-based service model. Both transformations serve the purpose of maximizing revenue and increasing profit margins through service offerings. Research from McKinsey highlights the benefit of servitization, finding that the average margin for aftermarket services is 25 percent—substantially more than the 10 percent realized on new equipment sales.
While I think most companies would agree that it is imperative to increase revenue and maximize profits, the reality is that the path to servitization is far easier in theory then it is in practice. IFS released a study this week that provides a “snapshot of where industrial companies are currently on their servitization journey (whether they are selling products only, selling aftermarket parts, offering reactive field service, selling annual service contracts, or offering asset-as-a-service or product-as-a-service—charging not for the product but for usage or productivity).”
Findings of IFS’ study revealed that:
- Servitization maturity is tied to profitability of the service organization. Manufacturers involved in planned maintenance or service contracts were most likely to report service as a profit center with 62 percent reporting profitable service operations
- 38 percent of respondents sold only products, with no aftermarket or other service revenues
- 19 percent sold products and some aftermarket service parts
- 15 percent sold products and aftermarket field service through break-fix repair
- 16 percent sold planned maintenance contracts with service level agreements (SLAs)
- Only 4 percent of respondents reported full servitization — which IFS defines as selling products on a subscription rather than a discrete item through power-by-the-hour, fee-for-usage or revenue sharing agreements. Companies operating in this fully-servitized business model include:
- 22 percent of medical device manufacturers
- 5 percent of metal fabrication businesses
- 5 percent of companies in the oil and gas industry
If the benefit of servitiziation is so clear, then why are these numbers so low? Because regardless of a company’s recognition of the value servitization can provide, my conversations with field service leaders prove that the path to get there is riddled with challenges. Here are a few of the challenges that commonly come up:
- Creating a valuable service proposition. Service is supremely competitive, so it’s not as easy as just deciding you’ll provide a service that many others do as well and that decision leading to success. You need to have a deep, solid understanding of precisely what it is your customers value and are willing to pay for. This is going to be different in each industry, but the key is that you have to take steps to engage with your customer-base, to intimately understand their expectations and what type of experience they’re looking for, and then mold your service offering around how you can deliver that value. There’s no easy way through this process, and simply offering the service your competitors do likely won’t be enough.
- Transforming your business model. Migrating from a product company to a service provider, or even from a break-fix service provider to an outcomes-based service provider, takes more than the decision to do so – but it does start there. Meaning, your company’s leadership needs to be in agreement that the path to servitization is the right path for the company, and also on the same page about how to get there. This alignment needs to trickle down to your sales team, who will be interacting with customers in a vastly different capacity than they did before and who you’ll be relying on to articulate your company’s new value proposition. And don’t forget about your service team, who will either be a new and imperative part of your organization or an existing function that will be tasked with operating entirely differently than ever before.
- Intelligent use of technology. A company can’t achieve servitization with poor visibility, manual tasks, and a lack of data. The journey requires a company to invest in and master the use of many of today’s technologies. Visibility is paramount, automation is key, and the incorporation of IoT data is especially necessary to move toward the true servitization, usage-based scenario.
These challenges aren’t meant to scare you – in fact, quite the opposite. The reality of the service landscape is that you have to face these challenges head on and determine your path through them. The data here illustrates the fact that it isn’t an easy progression – if it were, the percentage of companies achieving servitization would be higher. But with the recognition that it’s a worthwhile evolution, organizations will continue to work through these roadblocks to achieve higher revenue and greater profitability.