Servitization in manufacturing demystified: Learnings from growing service business

In this article you will learn:

• What are typical challenges manufacturing industry companies encounter in their servitization journey
• Why roadmap for servitization is so important
• Key servitization learnings along with changing the service business model
• Towards profitable service business
• How do we work around servitization 

What is Servitization?

In my 22-year professional career working with manufacturing companies, I have seen a plethora of different definitions and interpretations of what servitization is. In its most simple base form, servitization is the selling of the outcome of the machine: assets, objects, things etc. The most well-known example, and often over-used, is the ‘Power by the Hour’ or “Pay by Hour” maintenance service agreement used for aircraft engines. Other more industrial examples are:

• Lifting Capacity – paying for tonnes lifted per hour/shift by a crane
• Shaft Rotation – hydraulic power unit and motor turning a shaft for a feeder belt on a mine with a specific payment for Nm of torque and speed
• Rock Crushing – Paying for the volume and quality of the aggregate end-product

However, the ‘fluffiness’ around servitization as a topic in the manufacturing industry stems not from defining the outcome to be sold, but rather ‘how’ to get to the point of changing your service business model so that selling an outcome becomes a reality.

Servitization challenges in the manufacturing industry

There are multiple (recurring) challenges in the manufacturing industry that I have seen and experienced that can become showstoppers or threats to a servitization journey:

1. Lack of a defined business model that clearly describes how revenue will be generated
2. Lack of a defined service portfolio roadmap that matches the ambition of selling outcome and performance
3. Siloed service customer approaches and service delivery channels
4. Risk management for both the financial agreement and also the capital asset performance
5. A lack of structured digital & service data capabilities

Ultimately, it is a non-linear journey, especially so for well-established machinery and equipment manufacturers with a long service and aftermarket legacy. However, if navigated successfully servitization as a business model holds amazing new business opportunities for the manufacturing industry and unlocks new levels of growth, competitiveness, and revenue. Your servitization journey can only be properly navigated with a starting roadmap based on the reality of your service business today.

Servitization needs a roadmap

In my work, I’ve been part of advising and developing advanced service portfolios for Nordic manufacturers. I have learned that you can significantly increase the chances of successful service business model change if you create a servitization roadmap. This roadmap can either focus on one area of your service portfolio (and specific customer types), or it can also look at the big-picture view of your service offerings. Either way, the roadmap must be rooted in a realistic starting point of what capabilities and offerings you have today and then committing to the needed capabilities (stepwise) to the point where you can ‘servitize’ an offering. These service delivery capabilities can only be identified when you have a roadmap that you believe is grounded in how you do business today.

One aspect of the work we do with our Nordic clients is to help them to define their starting service portfolio and then also create a ‘wish-list’ of future offerings. Then we map these current and new service offerings according to what they feel they can sell; today, tomorrow (+3 years) and in the future (+5 years).

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Example Service Business Model Change Roadmap – Foundational, Advanced, Outcome and Eco-system Driven Maturity.

As with any service portfolio, this is not a linear move from left to right (on the graphic), but rather a strategic picking of must-win battles based on what we know will create new revenue for you and also value for your end-customers.

Key servitization roadmap learnings

The nuances and intricacies of the servitization roadmap in manufacturing are different for each organization, but some key takeaways and learnings can be derived from our experience thus far:

• Create a servitization roadmap starting point based on what services you sell and capabilities you have today.
• Define the roadmap targets based on ROI and customer/market expectations.
• In order to get buy-in from all stakeholders (internal and customers), a servitization roadmap will help to change the mindset.
• Don’t boil the ocean but do determine the priority of the must-win battles.
• Don’t leave good profitable businesses behind. There will always be a portion of your markets that will only want traditional/foundational services.
• Keep on experimenting and developing your advanced digital capabilities such as Industrial IoT, digital customer channels, and data analytics. This is your foundation to innovate and manage your risks before you offer outcome-driven services.

Service business digitalization and commercialization

It can often be a challenge to prioritize the need to bring (or pilot) a new advanced digital service offering to the market and find a way to monetize it. Service business model change in the manufacturing industry is hard, and it does not happen overnight. There are different philosophies and ways to think about this, but I subscribe to the servitization approach that you should be patient with the technology, but impatient with revenue.

What this means in real terms is that, as with any new digital technologies and capabilities, (e.g., analytics, predictive maintenance, digital service channels, etc), there is a learning curve, and the ROI can at the start be somewhat subjective. Those manufacturing companies that invest with a realistic servitization roadmap in place find themselves moving towards outcome-driven services in a much faster and risk-mitigated manner compared to their peers.

How do we work around servitization?

Tietoevry is the partner of choice for many Nordic machinery and equipment manufacturers as we understand core service business needs and how digitalization impacts the business. We work with companies levering our wide range of capabilities from the business advisory, rapid servitization roadmap development, data driven innovation, core and ERP digital foundation, and service tooling to mention some key angles.

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Tietoevry's servitization business transformation services

We help our clients by matching the right skills and capabilities according to their service business growth ambitions. Let’s together ensure that you can also be impatient with revenue and expand your service wallet-share.

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