The Rise of Service-Based Business Models
Servitization, in which products are sold as part of a service, is gaining attention.
This blog post describes the benefits of servitization and the technology required to transition to servitization.
March 29, 2023
Why Servitization makes sense
Servitization is a combination of product and services in a single, integrated offer. The move towards a service-based economy is now happening at speed, because it makes sense for suppliers and customers alike, as customers increasingly prefer to buy the benefits of a product, rather than the product itself.
Servitization is happening at a variable speed, depending on the sector and products concerned. In the B2C space, and for virtual products (banking, insurance or travel, for example), or for content (films, games…) buying the service is now completely normal. The same approach is also now gaining traction in key B2B markets, as well, and this is leading to some interesting and creative new developments.
In the automotive market, for example, we now think of motor cars as “connected platforms with wheels”, so a service-based approach is normal. That can mean leasing, not buying; taking a package of services, including customised features, maintenance, recovery and regular upgrades; and adding new options like driver-focused insurance, navigation, smart city and entertainment options, quite apart from the vehicle, itself.
In this example, it is now becoming normal for end users and corporate users to buy a packaged service rather than a product that requires them to customise to their needs and take the full risk of ownership. Even in areas where major capital goods are involved, like manufacturing or power generation, the concept of Equipment as a Service (EaaS) is starting to be accepted. Servitization is here, therefore, and is not going away.
Unlocking the benefits
Every product supplier is different but they all have some goals in common:
Better financial management. The service-based approach implies a general move from CapEx to OpEx, making it easier for all parties to manage cashflow, with payments to a predictable schedule, controlled by contracts. This also leads to:
Reduced risk. Now both parties to a contract perform to agreed KPIs, with the business outcome being paramount. This is likely to reduce disputes and lead to:
Better relationships. Suppliers and customers will get to know each other better, due to the service-based nature of the relationship. This makes it possible to targeted exact customer needs more accurately and deliver higher satisfaction levels.
Future-proofing and loyalty. In the service-based world, it is easier to think in terms of an updateable platform, rather than a standalone product, which rapidly becomes obsolescent. It is possible to extend product life, improve performance (for example, in sustainability) and encourage greater loyalty.
Many engineering product companies are naturally conservative (so are many of their customers) but, in an unstable economic environment, the need to share risk and reward, to avoid being exposed to sudden market movements means that the collaborative approach represented by Servitization is now irresistibly attractive.
Moving to a service-based economy requires enablement by new forms of technology, and especially by machine intelligence, because delivering to agreed outcomes requires performance measurement, leading to analysis and rapid intervention. This is both for trouble-shooting (proactive maintenance) and optimisation (performance improvement, retro-fitting and fine-tuning).
All major production equipment is measured and monitored as a matter of course (sensor arrays and such environments as SCADA have been available for decades). The most advanced aspects of service-based management, however, require real-time (or near) reporting; the ability to carry out diagnostics and optimisation from remote locations; and local intelligence for actions that require zero latency.
Sensor arrays, therefore, must evolve into connected IIoT networks, within a cloud environment where intelligence is devolved to Edge devices close to the products, and new forms of AI supplement human expertise to ensure highest levels of optimised outcomes.
We are now building publicly available environments in which emerging core technologies enable Servitization to operate effectively. These include:
APIs, providing standard interfaces between applications in a secure abstraction layer.
Analytics, using machine learning algorithms to identify trends, emerging threats and opportunities in real time, based on huge data streams gathered from:
Performance monitoring systems, tracking all actions, environmental conditions and external events that affect services and products in real time, interfacing with:
Intelligent distributed networks, with machine intelligence embedded in Edge devices, empowered to make interventions within pre-defined areas of competence, enabled by low latency connectivity to ensure agile responses, backed by experiential interfaces for more accurate guidance.
Profile Management, which enables better understanding of specific target customer groups, built from data drawn from interactions of many different kinds and over extended time periods.
Many aspects of Servitization can be delivered without all of these technology enablers in place but, as this adaptive, agile and intelligent network becomes the normal environment for where we develop and operate, so the options for service-based delivery will grow.
We believe the benefits of Servitization are becoming clearer, while the required technology platforms are becoming more mature every year. Companies in every sector need to test the options for themselves and at least start to model options and scenarios.
As with the Journey to Cloud, which is now recognised as a major change activity, enterprises should prepare for the multi-dimensional challenges that such changes bring. It is not all about technology but about People (Do you employ the right mix of talent?); Organisation (do you have the right corporate structures?); Planning (Have you accurately measured your levels of maturity?).
As with all major change, this is about the quality of advice you receive upfront and the roadmap you then build. We are all heading for a service-based future, with higher levels of product composability and collaborative platform working. This is a culture change like no other. The rewards will make the challenges worth facing!