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PA OPINION

Servitization: a route to higher earnings

Traditional product manufacturers can boost revenue and margins by adding services and solutions – but they need a strategy

Manufacturing companies moving to offering services as well as – or instead of – selling products is a growing trend. And it’s bringing significant rewards. We’ve seen margins grow to over 30 per cent in some cases and revenue turn from stagnation to double digit growth. So for investors it’s an attractive opportunity. But it means a fundamental change in how a business operates and careful planning and management to do it well – and do it fast.

The drive to servitization
Businesses that manufacture and sell products have been under margin pressure for years. Traditional product innovation and improvements in technology have helped maintain margins, but even here, the value of product technology innovation alone is reducing. The digital age has brought with it a change in demand. Customers are demanding services and solutions to help them get more from products and equipment.

This has been a trend across a number of sectors. For example:

  • Industrial product businesses like steam system engineers Spirax Sarco, have moved away from simply selling kit. They’re now selling solutions based on how their equipment can improve efficiency in hygiene for clients like food or health organisations
  • Medical device and diagnostics businesses combine their technologies with others and add advanced data processing, making testing more convenient and getting results faster
  • Technology businesses like Ricoh, use their knowledge of document management systems to help financial service companies, universities and hospitals handle the vast quantities of documents they use.

In each case, overall revenues and very often margins increased. What's happening is that a company's intellectual property, traditionally geared to creating the best product, can now become a major differentiator.

From Products to Services: how do you create sustainable growth in manufacturing through Servitization?

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Opportunities are out there, but need care

Our research on the benefits of servitization shows that 75 per cent of executives are convinced that services and solutions will play a bigger role in their business over the next three to five years. But only 30 per cent of those companies had a strategy in place, which is crucial for success. Companies who stray into the world of services and solutions without a clear operational plan or strategy may significantly risk their earnings performance. There’s a whole new set of commercial and operational risks and a set of new capabilities a business needs be successful in this new market. We’re working with companies to help them make this complicated shift. And, in spite of the challenges, we’ve made sure servitization delivers value even within the typical time-frame of a private equity investment.

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