Why Rolls Royce’s performance guarantee is working

Organisations are struggling with the reality of the new digital age and a new strategy does not always increase the true competitive strength of a company. Some manufacturers have made a fundamental change by delivering services instead of, or as an addition to, their products alone. 

Declining profit margins and a loss of competitiveness are often the catalysts for organisations to start thinking about making this change. Recent research by PA shows that profit margins achieved with service-oriented business models lie between 20 and 45 per cent – and sometimes even higher. This is a significant amount when margins are under pressure and there are no more cost reductions to be gained.

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Modern demands to delivering service go beyond just maintenance that companies already deliver. If you have so much knowledge about your product, why not guarantee the ‘output’ or ‘outcome’ of the product? This is what is called servitization. Rolls Royce has successfully adopted servitization by providing aircraft engines as a service – keeping ownership of the product and performing maintenance for their customers.

If is important to realise that if you do not act on this as a company, your competition will. Small start-ups often come up with clever solutions, offering a new service and growing quickly because they meet a previously unmet need. It often starts with small changes that do not seem threatening, but this is dangerous because it means part of your margin is gone, you’re losing contact with your end customer and reducing your innovation. 

Most companies that successfully implement servitization realise they do not have all the knowledge in house. Collaboration with partners not only brings missing knowledge, but can also be an essential component to create a profitable business model together.

If you start to issue guarantees as a service provider, you need to deliver intelligent products or machines. It suddenly becomes very worthwhile to invest in the durability of your product. If you are responsible for light, for instance, you produce lamps that never break. To do so requires a fundamental change in your organisation as inter-departmental collaboration is key.

Pioneering concepts have one thing in common: a sharp vision of the needs of the customer, the solution, the way it will be marketed, the business model and the operating model (organisation, processes, applications, data, people, partnerships, etc.) that can realise solutions. 

The four elements of new success:

1. Define the market and your ecosystem. Start with your market, your customer and the application of the product. What do the product-market service combinations look like and which ones are attractive? Also, look beyond your customer – who are their clients? And assess aspects such as the outputs and outcomes of your products.
2. Create a smart product design. How can you design a product that can deliver services, for example, by using digital sensors? How do you position the product – as a product or service? Is it scalable?
3. Adapt your operating model to your service. Data plays a crucial role. How do you use data to effectively arrange your service? But the operating model comprises of more, eg  application landscape and workflow, as well as culture and behaviour.
4. Ensure the commercial model is fully aligned to your service model.

The ease with which a company responds to developments and is able to create markets itself will determine its success. For all this to work, internal collaboration is key. Salesmen need to learn that service sells and is different than selling products. It is important to maintain momentum, in which managers play a key role. Touching upon the core of the business is scary, but necessary to secure the future of your organisation.