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Servitization | 3 Steps to Overcome Common Obstacles for Successful Servitization

3 Steps to Overcome Common Obstacles for Successful Servitization

by | Servitization

Servitization, outcome-based services and product-as-a-service are hot topics. However, we see little examples in the industrial sectors. Too often, there is a gap between the theoretical framework and the real practice. Here are 3 critical steps to boost the success of your servitization journey.
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Summary

We hear a lot about servitization, outcome-based services and product-as-a-service business models. However, we see little examples in the industrial sectors. Many manufacturers face serious challenges while developing and launching new service offerings:

  • Clients do not see the value, have many objections and are not ready for it
  • Lack of strategic support to invest in necessary capabilities and to develop their business model

3 of the root causes are:

  • The gap between academic terms like servitization, outcome-based services and product-as-a-service and the practice is not being closed yet
  • Poor definition of the critical business problems of clients which will be solved with the new offering
  • The impact on the manufacturer’s business is not clear yet

In this article I share some of the best practices for designing advanced offerings which will help you to overcome these challenges:

  • Build deeper and broader insights in your clients business challenges and pain points
  • Focus on specific customer segment, based on their needs
  • Approach your business models more holistic

The Problem

Just as an increasing number of manufacturing companies, you may be looking for ways to thrive during disruptive change in your industry. This is an exciting journey of enhancing your business models with digital solutions and advanced services.

Some of the major trends that make this mission critical for your future success are:

  • Digital technologies
  • Digitalisation of clients’ operation
  • New emerging business models
  • Shifts in the value chain / ecosystem

The vision behind these innovations is:

  • Develop advanced services and solutions to develop new and recurring revenue streams and increase long-term differentiation.
  • Develop better performing and more efficient predictive maintenance services.
  • Meet a broader scope of (latent) customer needs, beyond availability and condition of equipment like operational performance solutions.

Most service leaders and innovators, solution providers, academics and consultants use broad and abstract concepts to describe their vision, strategy, innovations and new offerings with container words like:

  • Servitization
  • Advanced services
  • Outcome-based services
  • Remote services

I often hear from service leaders and innovation teams that they struggle with challenges like:

  • Clients do not see the value of the new offering or solution
  • Clients see many obstacles and risks
  • Clients are not willing to pay more for the new solutions
  • Clients are not ready for the new solutions
  • Lack of support from strategic stakeholders and other functions in their organisation

In essence, all boils down to the following 3 problems:

  • The new solutions and services do not solve (new) critical business problem of the clients. The value or impact is not clear (other than potentially lower prices for the maintenance services).
  • It is not clear how these services contribute to the overall business challenges and vision of the company as a whole.
  • The service vision is too abstract for internal stakeholders to understand and endorse. Words like servitization, outcome-based services, remote services and product-as-a-service are too theoretical and do not clearly articulate a vision and strategy.

 

 

This is pretty frustrating, isn’t it?

The Solution

In this article I share critical frameworks which many service teams miss in their service innovation strategies. These are:

  • Build deeper and broader insights in your clients business challenges and pain points
  • Focus on specific customer segment, based on their needs
  • Approach your business models more holistic

Build deeper and broader insights in your clients business challenges and pain points

To be truly outside-in and customer driven, you need to have a deep insight in the challenges and problems your clients are facing in their business. Deep customer insights should:

  • Go beyond their requirements about uptime and maintenance of their assets
  • Cover a time window of 3-7 years
  • Be thought provoking eye-openers for your clients

You and your colleagues already have most information at hand. It is a matter of turning this information and knowledge into a compelling customer story, for irresistible advanced services.

You can read more about this in “Build a Strong Customer Story in 7 Steps and Launch Irresistible Advanced Services

 

Focus on specific customer segment, based on their needs

One size does not fit all. Different clients have different visions and strategies, different challenges and therefore different needs. When defining the (latent) customer needs for today and the near future, it is crucial to have some sort of segmentation of your important clients based on their (future) needs.

This segmentation will help you to develop a robust strategy which defines which customer segments you will target, with which new service offerings and which business models you will develop.

There are many ways to segment clients based on their needs, largely depending on the specific industry. I will share two generic patterns for customer segmentation which can be useful for you to take as a starting point. They are based on segmentations of innovative and successful manufacturers and service leaders.

Two often used patterns for customer segmentation are:

  • Maturity – Willingness to outsource of a business
  • Maturity – Complexity of a business

This could be a useful pattern in industries where many of your (potential) clients tend to do most functions themselves instead of outsourcing the activities (like maintenance of equipment).

Along the vertical axis you can separate segments based on the maturity of their core capabilities and processes.

For example, in the industry of metalworkers this could be:

  1. Traditional craftsmen
    The entrepreneurs personally (together with their employees) manufacture the metal products themselves, love part of the manual work and working with their machines and tools. This is their pride. Little of the activities are put into structured processes.
  2. High tech workshops
    The entrepreneurs have invested in state-of-the-art tools to improve quality, consistency and efficiency. Their main focus is still on the technical side of the profession. Probably there is more structure in the workflow and processes, predominantly organised from a technical point of view. From a more economical point of view, the structure is not efficient yet.
  3. Lean manufacturers
    The entrepreneurs have a more economic view (or hired an operations director with economic competencies) and are working on efficient processes, workflow and organisation. They follow lean-six-sigma or similar approaches to optimise human resources, capital investment and materials.
  4. Value chain optimisers
    These entrepreneurs have a broader scope and are looking to their added value in the entire value chain, partnerships, vertical integration or specialisation. They may also develop more advanced value propositions to their clients like inventory management and delivery of the components they manufacture in small packages in the production line of their clients.

This is a very brief description. You should probably also look into functions like sales, marketing, engineering, internal logistics, inventory management, tools management, financial management, human resources management etcetera. You get the picture.

Along the horizontal axis you can segment your market into clients that tend to do as much as possible themselves versus clients that outsource many functions which are not part of their core-process. Clients in the first category probably have various dedicated departments, competence centres or teams for functions like process optimization and maintenance.

 

This pattern could be useful if you have clients with different types of operations with different levels of complexity.

The vertical axis is the same as in the “Maturity – Willingness to outsource” pattern.

Along the horizontal axis you segment your market into clients that have short and simple value chains versus clients with longer and more complex value chains. For example, again in the industry of metalworkers this could be:

  1. Jobbers or workshops that fulfil specific tasks like welding, cutting, bending, drilling etcetera and that manufacture intermediate components or semi-finished products
  2. Component manufacturers which perform several tasks to manufacture components, like engine blocks for the automotive industry
  3. Product manufactures, which manufacture complex products
  4. Machine manufacturers

Whatever pattern you use with these segmentations, you now have 4 (or more) segments in a logical structure. For each segment you can:

  • Find a descriptive name
  • Further describe their specific needs
  • Define their characteristics to recognise them

For each segment you should:

  • Decide whether you want to serve them or not. Or at least define which segments have your focus
  • Develop a customer insight or customer story
  • Develop specific messages to use in your marketing, sales and service delivery
  • Develop and map specific services, offerings and delivery models
  • Develop a specific commercial approach

When you are still in the early stages of developing advanced new service offerings, it often pays to focus on one specific segment first.

    Worksheet to build your customer story

    This worksheet will help you and your teams to capture all relevant ideas and knowledge and to structure this into a compelling and strong customer insight.

    With this insight you can:

    • Validate the insight with other colleagues
    • Validate the insight with your best clients
    • Specificy a customer research
    • Brief your marketing teams to prepare compelling marketing and sales messages

     

    Approach your business models more holistic

    As soon as your advanced services go beyond the maintenance and the condition of the equipment your company manufactures and sells, you will be reconfiguring or extending the business model of your company as a whole. This means, you need to have a strategic dialogue and innovation process with strategic stakeholders.

    To make this a fruitful and coherent process, you should avoid a discussion about product versus services. It starts with:

    • A shared concern about developments in the industry
    • The threats and opportunities for your business as a whole
    • A vision about the future state of your entire business and what needs to change to achieve this

    This will result in a few strategic priorities, one of which (hopefully) is services innovation.

    Now I would like two share two useful frameworks that help to take the development of the business models to a more holistic – company wide – level:

    • Generic types of business models for products and services
    • Types of service value propositions

    Note that these frameworks are not limited to services or products alone. They address the overall value proposition, which can be a combination of products, software, data and services.

    In the matrix above, you can describe changes of your business model along two aspects.

    Along the vertical axis, you differentiate value propositions:

    • From stand-alone offerings (like single products or services)
    • To comprehensive and integrative solutions which cover a broad scope of needs and solutions

    Along the horizontal axis, you differentiate highly standardised offerings from highly customised offerings.

    This results in 4 types of business models, which I will further describe with document printers as an example: 

    • Product Business Model
      • Only printers, probably including service contracts
      • A wide portfolio of different models to choose from
      • Additional equipment for folding documents, putting them in envelopes etcetera
      • Getting the printer for free and paying for the ink only
      • Predictive and remote maintenance
      • Cloud storage solutions and Microsoft Office 365 still fit in this model, even though you pay a small fee per month
      • Retail banking 
    • Project Business Model
      • An assessment of the entire business, to define how many printers, which type and where
      • Connecting the printers to the network, configuring security systems
      • Designing, building and commissioning an entire print room for high volume printing and mailing of documents
      • Designing more effective and efficient processes
    • Solution Business Model
      • Taking over the entire print room from clients, which could still be at your clients’ locations
      • Connecting the Salary Administration system to the print room to print all salary slips at the end of the month, put them in envelopes, and send them to the postal services
    • Platform Business Model
      In the printer industry the example may become a bit theoretical, anyway.
      • An online platform where clients can upload templates, designs and lists of destinations and pay for the job. The platform will split this in smaller jobs for various connected and certified print facilities across the world and process the financial transaction. (I am not sure if this kind of service ever existed).
      • In the Additive Manufacturing sector, we do see initiatives in this direction to allow manufactures to print metal spare parts anywhere in the world close to the customer
      • Other examples of today are Apples Appstore, iTunes, Spotify, Amazon, Uber and Airbnb.

     

    This framework will help you to better articulate the kind of value and related business models you are aiming for.

    In this framework you can define your value proposition along the horizonal axis based on the scope of the services. There are several ways to add value to your clients (deliver outcome if you like). I will use the commercial truck industry as an example:

    • Better products
      For example, improve fuel efficiency of the truck and engines.
    • Better availability
      Your services can maintain and improve the availability and condition of the equipment. This could be quite advanced with real time data, smart diagnostics predictive analytics or supported self-help offerings using AR.
      For example, predictive maintenance to improve availability (and maybe also improve fuel consumption).
    • Better application or use
      Your services can drive the output or performance of the equipment you delivered to clients by improving the use, configurations, settings and ongoing optimization tactics. These services can be onetime projects or ongoing support.
      For example: Reduce fuel consumption by improving the driving behaviour of truck drivers.
    • Better processes
      Your services can also concentrate on the overall processes and operation.
      For example: Reduce fuel consumption (and other cost) by improving the route planning, combining jobs, choosing the right vehicles for each job etcetera.

    Along the vertical axis you can separate your offerings in

    • Effort based offerings
      You promise to do certain activities for which your clients pays, regardless of the result of the activities. It remains the responsibility and risk of your clients to manage the overall performance and take the right decisions.
    • Performance based offerings
      You promise your clients a certain result and get a fee depending on this result. In the example of commercial trucks, this could be:
      • Guaranteed uptime and availability of the truck of 99% and penalties if the performance is below 99%
      • A fee per percent-point of reduction of fuel consumption
      • A fee per transportation job

     

      Assess your Innovation power

      This Scorecard How to Navigate Disruption will help you and your teams to assess the capabilities and practices of your business to innovate beyond business-as-usual and navigate disruption in your industry.

       

        How to use these frameworks?

        Map your current business model(s) in one or more of the matrixes described above. Also map a few scenarios for the envisioned business model(s).

        This will help you and your stakeholders to have a more structured and neutral discussion about the major trends in the market, technology and competitive landscape as well as in what direction your value propositions and business models should develop. Any choice will have an impact on engineering, manufacturing, software development, marketing & sales and services.

         

        What is at stake?

        If manufactures cannot successfully adjust their business model, they run a serious risk of falling behind existing and new competitors.

        Clients are developing more and more digital capabilities in all their functions. As a result, they will have other needs for services and solutions.

        This is an important opportunity for manufacturers to grow their relevance for their clients and grow their business.

        But it is also a unique opportunity for digital native service providers and system integrators, which offer remarkable and complete solutions to the (new) problems of your clients. They are your new competitors.

         

        Benefits

        If you use these frameworks and embed them in your service vision, your innovation strategy as well as in your dialogue with strategic stakeholders, you can develop the:

        • Shared concern for the business as a whole
        • The strategic priorities for the business as a whole, one of which will be services
        • Shared vision for the business as a whole, which includes services
        • A specific shared concern for the services business unity
        • The strategic priorities for the services business unit
        • A shared vision for the services business unit

         

         

        Rome was not built in one day

         

         

        It is an iterative journey. It takes time and work. The frameworks above will help you to facilitate and structure this journey.

        Manufacturers and service leaders with successful advanced services have used these kinds of frameworks for a long time and still are. This allowed them to achieve quick, continuous and more radical innovations and thrive in disruptive times.

         

        Conclusion

        For quite a few service leaders, the journey of service innovation is a tough one. Their clients do not see the value of new advanced offerings, they do not want to pay for them, and internal stakeholders do not provide the necessary support.

        Some of the key reasons are: 

        • The critical business issues of the clients are not clear and are not addressed with the new offerings
        • The business value of the new offerings and business models are not clear
        • The envisioned business model(s) are not clearly described

         

        Litmus proof

        I would like to challenge you with the following questions.

        Can you describe your services vision and strategy in concrete words? Without using words like:

        • Advanced services
        • Servitization
        • Product-as-a-Service
        • Remote services
        • AR, AI, IoT

        Does your services vision start with a description of:

        • Major trends in the industry of your clients
        • How challenges and priorities of your clients are changing
        • How that will change their needs

         

        Recommendation

        If you want to be leading the transition of your business and industry, I would recommend the following:

        • Define a clear shared concern with your strategic stakeholders:
        • Together with your strategic stakeholders, consider various options for developing the business model(s) and assess how these business models would help your business to thrive.
        • Agree on the innovation strategy and next steps.
        • Iterate!

         

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