Servitization is becoming one of the most transformative trends in the manufacturing industry history. From selling products to selling services? How can manufacturers use technology to integrate and accelerate the servitization business model?

Sergey Jermakov, Senior Partner at CLARITY, together with Mike Curl, SAP Advisory at Capgemini, discussed the nature of servitization, and whether businesses are ready to meet growing customer requirements in the CLARITY.SHOW podcast episode.

What is servitization and how it evolved over time?

Servitization is the process of building revenue streams from services for manufacturers. Many businesses find it difficult to transform themselves from manufacturing organizations into service providers. The initial idea for manufacturers was to answer the simple question of ‘how they could differentiate themselves from the competition. Services are a very good way to really stand out because you are increasing the value of your product for the end customer.

It may be surprising, but the servitization process appeared many decades ago. One of the earliest documented examples of servitization is the Rolls-Royce Power-by-the-Hour approach that was trademarked in 1962.

The last five years of IT system development have enabled companies to run scenarios that were previously impossible to execute at scale because of the difficulty of automating numerous human operations. These days, technology has enabled the entire servitization model. Now is a perfect time for servitization.

What are the levels of servitization?

The most simplistic form is a piece of physical equipment bundled together with a warranty or some form of after-sales service, spare parts, training, or software. Bundling the physical and the intangibles together and then just charging for them in a slightly more creative way.

Condition monitoring can become a part of the basic services. Business is taking more ownership of the service, monitoring it on behalf of customers, and doing predictive maintenance services that provide more added value for the customer.

The next level is charging based on real usage and consumption. This is where intelligent products with sensors are used. Customers need to build this intelligence into a future version of the product. Technology has made it possible to retrofit this on older machines as well. But it’s usually much better to redesign the product to have a built-in capability.

The third level is more customer-centric and offers a more complete service. In this step, the manufacturer or supplier takes full responsibility for keeping the asset in fully operational condition and delivering the desired outcome to the end customer. You must design it in such a way that the outcomes and benefits of your product are guaranteed. The advertisements can be structured around success and the fact that you are solving a problem for the customers. And this is the moment when we are already introducing a pricing model where clients will pay depending on the result or value that they receive from the services we sell.

The Bottom Line

Over the last ten to fifteen years, an increasing number of manufacturing organizations have shifted from a traditional product-centric to a service-centric approach. Now they are using the model in which a physical product is bundled with services, software, or aftersales. Ultimately, for businesses aiming to increase their performance and competitiveness, servitization can be an extremely powerful tool.