This article was first published in Manufacturing Management.
Industrial manufacturing companies have traditionally been excellent at developing and producing physical products and selling them to customers, OEMs or distributors. Many also provide basic services to keep their products operational, such as selling spare parts or maintenance services. What they find difficult is developing the more intangible advanced services (proactively supporting a customer’s operations) and servitization (being paid for outputs or outcome).
PA recently interviewed 60 international industrial manufacturing companies about their service strategies. Their responses showed that for the ones that get it right, providing services has become a more sustainable and lucrative source of revenue and profit than product sales, and has helped them build a closer connection with their customers. Yet, only 30% of industrial manufacturers have a service strategy in place. What is holding the other 70% back?
Dealing with uncertainty
Part of the problem is that leaders can be reluctant to adopt a service-led approach. The move to become a successful service provider often starts with middle managers, not senior leaders. These managers are close to their customers, have autonomy to act, and the inspiration to connect engineers, sales, data-scientists and service staff to one another and to their customers.
They also tend to start with small experiments that reflect a genuine interest in the customers´ operating issues and a desire to use the supplier’s skills, insights and products to create a unique solution that delivers value beyond the original product. However, turning a single successful experiment into a sustainable business model requires companies to adopt new ways of going to market, build new capabilities and organise their resources to support services. This scale of change is not possible without leadership and support from senior management.
It is difficult for many leaders because transforming a company into a service-led model is a jump into the unknown and, like many people, they hate uncertainty. They see their role as safeguarding the companies´ interests and those of their shareholders. Therefore, the most frequently used phrase we hear when exploring service concepts is ´show me the money! ` Yet, it is clear that there is money to be made. Our research suggests that for advanced maintenance services, margins can range from 5-15% and, in some cases, reach over 30% on output based contracts.
Looking at your company through the eyes of the customer
To realise these benefits and reduce uncertainty, companies should test the appetite for these services in the market. However, traditional approaches to surveying customers won´t work. The top performers in servitization segment their customers according to their maturity and openness to buying services. This segmentation by customer buying maturity represents a new approach for industrial manufacturers with only 10% of respondents to our survey saying they took maturity into account when briefing customer-facing staff. Another issue is that the buyers of output- or outcome-based contracts are usually not the same people as those who buy products, so new customer relationships need to be developed. All that is more difficult for manufacturers that sell through OEMs or distributors.
What is needed is for companies not to think of themselves as manufacturers, but to look at themselves through the eyes of their customers and understand the issues they face in successfully running their business. This is a real challenge for many manufacturers who have traditionally been focussed on products and don’t really understand the value they can provide. So we see examples like that of a large company producing engines, who introduced sensoring techniques to tune engine performance. The sensor is being sold as a product on a cost plus basis, ignoring the value this offering brings through uptime and energy savings.
The key is for manufacturers to think about value in terms of how customers can achieve better yield, more output, and better outcomes from using their products, insights and services. There are already great examples out there which show what is possible. A microscope manufacturer experienced increasing levels of competition on their products. Their service organisation began an initiative to turn data from the microscope into information. They built propriety algorithms that support the quality cycle in the production process, now delivering astonishing results on the shop floor of a semiconductor manufacturer. Their offer goes far beyond selling the original microscope, it is about a full solution that combines product, data and data-analytics, algorithms into a compelling set of services that taps straight into the customers demand: high quality and yield on the shopfloor.
Get the right capabilities
Most successful service companies go through a gradual transformation in their thinking as they have moved towards servitization. First, they recognise that the intellectual property in the product may be much more valuable if it is embedded in a service. Second, they become aware that what used to be called ´after market´ is actually core to their business. Third, they understand that providing services is an art, where technology, software and data play a dominant role.
In order to deliver advanced services, having the right capabilities is conditional. The most important capabilities are usually in technology (what level of services does my technology allow me to bring to my clients), data (what data about configuration, operation and performance of the equipment do I have available) and customer (what is the sort of and intensity of the relation to my customers). We find that usually data analytical – and commercial capabilities to sell services are missing, so training, recruiting or partnerships may require action.
It is not only about the level of capability. The interaction between the different elements is key. For example, it is great to have performance data but if companies don´t use it for either their customers’ benefit or to accelerate innovation it is useless. Companies with strong functional silos are highly efficient but not so effective in working across functional domains to deliver a compelling service offering.
Embrace the benefits of servitization
Understand how to implement servitization
Service is not a department, it is a philosophy supported by the right customer-centric behaviours. This should be supported by the right commercial and operating model, including a (digital) platform that enables manufacturers to connect to the customer.
That means, before starting a large scale transformation, companies should experiment with a few carefully chosen customers and some compelling offerings. As they gain experience and build insights, companies become more confident and can move to the next level. Even if companies choose not to fully implement a servitized model, they find they are able to implement more advanced service models, generating an increase in revenue within months.
The key to this is being able to scale up from a successful experiment into a profitable business-model. That requires companies to think big, both in terms of market and customer potential as well as what it means for their current operating model and way of working. If that bigger picture is missing, experiments will remain isolated examples, even if they are successful - because nobody considered how to scale up when the experiments were started.
Adapting a service led approach is clearly paying off for many companies. Some have moved slowly, taking careful steps, whilst others have taken a bold approach once they have the confidence they can do it. Yet, these strategies are only possible if they have support from top-management to provide a long term commitment and a readiness to invest. So those leaders who are still undecided about going down this route should recognise that if they don’t explore these opportunities, the competition certainly will.
Hans Houmes is a manufacturing expert at PA Consulting Group