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Servitization: Lessons Learned from the Manufacturing Industry

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I've recently attended a two day workshop run by Aston Business School, led by Professor Tim Baines, Professor of Operations Strategy at Aston and his team, sponsored by the European Regional Development Fund (ERDF), on the subject of Servitization. Although I'm still not convinced it's actually a word, the term contains a hugely powerful concept that has emerged from the manufacturing industry, and can be defined as follows (direct from the course notes, with kind permission from Aston Business School):

  • Servitization is about manufacturers offering services that are tightly coupled to their products.
  • Seeing themselves as service providers, they exploit their own design and production competencies to deliver and improve business process to their customers.
  • This strategy strengthens customer relationships, creates new revenue streams, and sets high barriers for competitors.

The classic case study in this field is of Rolls Royce gas turbine jet engines: These are almost without exception owned by finance companies, not airlines, and Rolls Royce revenues come from the servicing and maintenance of the engines rather than the sale of the product itself. The revenue profile of delivering high end maintenance and repairs as a service over the lifetime of the engine can far outweigh the previous ticket price of the metal and composites sold as a unit. In many respects, this thinking is not new: Many companies have successfully commoditized products and made larger and more high value sales of services wrapped around the physical artifact itself, such as mobile phone handsets offered at no cost but revenues recouped from service plans, insurance etc. However, the science behind how to do this successfully is something that Professor Bains and his team have distilled over their years of experience in the manufacturing industry, and the 2 day workshop has been a thoroughly enjoyable and engaging piece of knowledge transfer. Although not explicit, I took away the implication that servitization is the natural extension of Lean principles, which I'm a huge fan of: Once you have a supply chain engaged in the efficient and waste free manufacturing of goods, you may as well continue to extend that approach to the full lifetime of the product, offering continuous service provision and enhancements for as long as physically possible. If there were two stand-out snippets from the course they were as follows:

  • Trying to decide if you're selling products or services can be futile: focus on the role you play in your customer's value chain and define a strategy to enhance that.
  • The first commercial manufacturers of aircraft, such as Avro, started by selling flying lessons: Until they'd established a market of people capable of using their products, they literally couldn't get off the ground (pun intended).

I also left the course thinking that the IT industry is already active in the area of servitization, even if the word is unfamiliar - the movement to delivering software as a service (SaaS) and the rapid growth of Cloud services are two obvious examples of taking away the pain of purchasing and managing IT products up front and offering high value services around them, often with larger incremental revenues. Less obvious examples would be the implementation of ITIL v3 or CMMI (Capability Maturity Model Integration) as tools for delivering IT products as repeatable and manageable services. It all resonated well with my experiences to date, and Prof Bains and his team certainly provided me with a new perspective and a practical set of tools to take away and help refine our propositions to the market. There are follow on sessions and a series of Special Interest Groups on the topic of Servitization that I'd recommend getting involved in. You can find out more here. With thanks to all at Aston and the ERDF for their support.

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