Defining Product Servitization and Why It Matters

In this blog post, NTT DATA will discuss servitization, the paradigm shift from product creation to service delivery and why it is important for businesses, and describe the capabilities needed to build solutions that support servitization.

March 29, 2023

A paradigm shift: from creating products to offering services

The idea of a "connected product" is not new, but it has been becoming more important in recent decades thanks to the growing use of data, artificial intelligence, cloud and the development of IoT (Internet of Things), which we have already discussed more than once on this blog.

The practice of connecting a physical product to added value services leads to the concept of Servitization, which is now gaining traction across industry sectors.

Servitization is a paradigm shift that allows manufacturers to create new business models and revenue streams through innovation, adding added value features to their products in the form of services. This helps them to stand out in the market while also delivering a whole range of other benefits. These range from an enhanced ability to customize their offerings, to easing cashflow by moving from CapEx to OpEx to growing intimacy with end users, as they engage more closely by using the services not connected to the products they buy.

Although connecting products and services is nothing new (financial service companies, retailers and motor manufacturers have done this for decades, the new Servitization paradigm is based on cloud, and this innovative use of technology is what gives it such power and value.

For example, Hyperscalers like AWS allow their customers access to their servers through the services they offer. This saves companies from having to buy and maintain their entire on-premises IT infrastructure and allows them to focus on higher value-added activities. This is Servitization in operation, and it is not surprising that Cloud hyperscalers are at the forefront of rolling out the concept across other industry sectors.

Why is it important for business?

Product Servitization changes a company's business strategy from being product-centric to service-centric. In other words, the value proposition they take to market is more about the end user customer and their experience than about the features of the physical product being sold. Success lies in selecting the most logical and attractive ways to enhance the product by “wrapping" it in services.

These new services, which are normally created as a way of adding value to the product, sometimes reach the point where the product -previously the customers' main focus - becomes a simple interface for consuming the additional services offered. As services are normally repeatable, scalable and designed to last for a long time, this has the potential to make the supplier-customer relationship deeper, more intimate and much more commercially valuable.

The challenges of Servitization

Although the growth of Servitization is highly significant, it is estimated that today, only 9% of companies are bundling their products with additional services- although as we have seen earlier, most others are at least seriously thinking about doing so.

This means there is a clear awareness of market demand, a desire to address that demand through Servitization, but a lack of knowledge and confidence about how to do it. That gives technology companies a huge potential opportunity, which lies in helping companies create platforms that function as enablers of Servitization.

A solution that supports Servitization must be built on the following capabilities:

  • It must be scalable: capable of ingesting and processing data from many thousands of devices, which may be geographically widely separate and located on disparate platforms.
  • Near real-time processing, thanks to edge computing, which provides the programmable intelligence that earlier generations of sensors did not possess.
  • It needs to offer comprehensive security. In some sectors, concerns about allowing any data to be processed in the Cloud is a cause of concern.
  • Customer experience: It puts the spotlight on how this change ensures an enhanced experience for the customer, leading to better loyalty and improved targeting.

What technologies support Servitization?

A Servitization solution is composed of platforms and applications that automate processes occurring between people and systems. Let's look at which technologies make Servitization possible, both in terms of the product and the platform that offers the service to the customer:

  • Product:
    • IoT: The products must be networked or smart, both for gathering information via sensors and for the devices to communicate over the network.
    • 5G: To offer the product as a service, a network connection is necessary to allow for remote access. The required connection speed should scale to suit the needs of every kind of service, coping with varying product characteristics and numbers of connected devices. The need for low latency and high bandwidth makes 5G the ideal technology for Servitization development.
  • Platform: these should have the following features:
    • Composable: Allowing the provider to select the products that most closely match their needs. Composable products are based on the fundamental design principle that they will integrate with other products.
    • API hub: Integration hub that connects products and services with the data needed to function.
    • Edge computing: IoT devices collect information but do nothing with it. Today, it is mainly cloud hyperscalers that analyse and extract insights from IoT sensor data, but this restricts the freedom of action for product companies and their service provider partners. Edge computing allows IoT nodes to compute their own data.
    • Distributed cloud model: A decentralised IoT model can benefit from a distributed cloud architecture in which multiple clouds are used to meet compliance needs or performance requirements, or to support perimeter computing, while being centrally managed via the public cloud provider.