What Is Servitization?
Servitization refers to the transition from manufacturing and selling products, to selling added services and offering outcomes-as-a-service. With a servitization model, the ownership of the product remains with the manufacturer and the customer pays for the outcome of the product, usually as a set price per unit of service consumed. For example, instead of buying a jet engine, the customer can pay a set price for the number of hours an engine is in flight.
This model enables manufacturers to set up new recurring streams of revenue while incentivizing them to become more circular when designing and manufacturing products. In addition to guaranteed uptime, customers benefit from no longer having to make large, upfront equipment purchases and no longer having to worry about maintaining those pieces of equipment.
How Does It Work?
Key to servitization is the ability to keep equipment up and running, as manufacturers are only paid when the asset is working. Manufacturers must know how their equipment is performing and be able to intervene with service before downtime occurs. This means providers must be equipped to deliver proactive and predictive maintenance for their assets. Asset data and remote monitoring through the Internet of things (IoT) play an integral role in providing proactive service. As sensors within equipment feed data back to the manufacturer or service provider about the condition of parts and the overall product, maintenance issues can be resolved before the problem occurs. Additionally, if anything breaks unexpectedly, the manufacturer will know immediately.
To be successful with servitization, companies need a level of digital transformation maturity that provides asset visibility, service history visibility, standardized data collection, a moderate-to-high level of automation, and resource scheduling. This means your service organization needs to be using field service management software, not manual, pen-and-paper processes. Additionally, servitization often requires an organizational transformation—from the corporate culture and organizational structure to business processes and sales team strategies.
Another challenge is the uncertainty of profitability. Servitization does not happen overnight, and not every product line is the right fit to offer outcomes-as-a-service. Companies must be able to understand the cost to serve for each of their product lines or product types. The lower the cost to serve, the more likely they can provide a profitable outcome-based contract.
Servitization offers numerous benefits for both manufacturers and customers.
- Growth in revenue and profit: Servitization can deliver financial sustainability and operational scalability as contracts tend to be long-term, and proactive maintenance strategies reduce operational costs.
- New revenue streams: Manufacturers have access to constant streams of additional, incremental revenue from added services.
- Customer demands: Customer and market demands are getting more and more complex and product innovation alone isn’t enough to sustain a business anymore. Customers are looking for something more, and that’s where services help to meet their demands.
- Customer retention: Servitization allows businesses to better meet customer demands while taking the ownership and maintenance of assets off the customer’s plate so they can focus on their core business.
- Product innovation: Manufacturers can gain useful insights into future R&D processes by analyzing the performance of products in the field.
- Differentiation: Companies can differentiate from the competition through advanced services and quality of service delivered, moving away from product feature/functionality comparisons with the competition.
Examples of Servitization
Rolls-Royce’s “Power-by-the-Hour” is another long-time example of servitization, first launched in 1962. Today, customers can buy the TotalCare® service package, where customers pay by the hour according to the amount of time an engine is in flight, and Rolls-Royce monitors data from the engines to predict potential maintenance problems. This saves costs on unneeded maintenance work, and also reduces the need for unplanned maintenance and engine downtime. The greater alignment between the needs of the client and Rolls Royce has had proven business benefits for Rolls-Royce, which has been covering the majority of engines with their service package since 2010.
Philips provides LED lighting-as-a-service to the Amsterdam-Schiphol airport. Under this business model, Schiphol benefits from a 50% reduction in electricity consumption without the upfront cost of buying the lamps. Philips retains ownership of the equipment and instead sells light as the product. Through IoT, Philips monitors each lamp and replaces any faulty units often before the fault occurs, providing the complete servitization package. With this model, Phillips is helping Amsterdam-Schiphol to achieve its goal of being one of the most sustainable airports in the world.
The printing company Xerox offers 'pay-per-copy' as well as advanced services that are tightly coupled with existing products. They provide Hertz with learning solutions including curriculum content, administration, and learner support services. For Siemens Italy, Xerox created a digital archive and interface to improve document control and reduce paper waste and usage.
SunEdison has pioneered power purchase agreements (PPAs) for solar photovoltaics (PV) that enable rapid uptake of solar PV by allowing customers to purchase solar energy instead of investing in the panels themselves.
Delivering Servitization With ServiceMax
ServiceMax’s field service management solutions, Core and Asset 360, enable manufacturers to understand the as-maintained status of their assets and shift to proactive maintenance strategies that are integral to servitization. ServiceMax unlocks visibility into your assets, including the current condition of assets, asset performance over its lifetime, asset location and service history, as well as the contracts, warranties, entitlements, and SLAs attached to each asset.