Overcoming the Challenges that are Slowing Down Servitization

Jun 15, 2020 • Features • The View from Academia • Servitization and Advanced Services

Professor Shaun West of Luzern University uncovers some of the fundamental barriers manufacturers face when trying to implement a servitization strategy.

The development of new services is not like new product development and here starts the problem in many manufacturing firms (Figure 1). It creates a significant disruptive change to the business – it is a change management process, and it is a journey.

Servitization may be a 'good move', But it is a complex undertaking...

Strategically, management generally likes the idea of service because customers ask for it and because margins are higher than in traditional product sales business. Given that customers want it and it has good margins, “senior management’ generally considers servitization a good move, without first understanding the challenges and the underlying barriers that could slow the journey into service.

Chart showing progress of new service strategy development
(Figure1: Differences between service- and product-based business)

The journey to services is often bumpy, and we have seen that services are not the same as products. Most of the value is created from the intangible aspects of the service, making it hard to identify and measure. Manufacturing firms often find it harder to deal with the intangible elements of services. For them, it is easier to measure metrics such as “on-time delivery” rather than “customer satisfaction” as they value hard facts more than soft facts (Table 1). Andy Neely and his research term provided a framework that helps us to identify the barriers that stop us from making the switch to services and categorized servitization barriers into seven categories.

Table showing technology driven service strategies

(Table 1: Differences between technology- and service-based firms)

We dug deeper to understand the specific challenges and learnt more via a series of surveys and interviews. We found there were common challenges that leaders had faced within each of the barriers. The good news is that that, in general, you are not alone. The downside is that contextual issues mean most transitions are unique as they have different starting points and different visions. Assuming that the firm has made the strategic decision to deliver services, then you need to understand the market readiness, the strategic fit, and the firm’s cultural context. Building the longer-term business structures (e.g., a business unit with its own P&L) is critical, and without this, there is limited long-term sustainability.

Resources need to be freed up for both service innovation and delivery; without budgets, nothing will ever happen. This also means that you need to develop and embed service processes, these are likely to be very different in detail to the processes that your manufacturing colleagues use, and this will create conflict, often because with services you work on a customer’s site together with the customer. Given that services are co-created and delivered with customers, engagement has to be proactively managed, and trust built so that you can continually innovate with your customers and improve customer experience.

Observation of the implementation-based barriers to servitization

Based on 40+ interviews and survey data from over 150 individuals, we tried to clearly describe the observations that slow or prevent the implementation of a servitization strategy. We start by providing some quotes (Table 2) from people who have been directly involved in a transition before giving a summary of the best practice as we view it at this time. In our servitization study, we quantified and ranked them the barriers in order of importance based on the input from the surveys.

Based on 40+ interviews and survey data from over 150 individuals, we tried to clearly describe the observations that slow or prevent the implementation of a servitization strategy. We start by providing some quotes (Table 2) from people who have been directly involved in a transition before giving a summary of the best practice as we view it at this time. In our servitization study, we quantified and ranked them the barriers in order of importance based on the input from the surveys.

Table showing quotes from academic interviews on servitization

(Table 2: Main barriers to servitization)

The move to ecosystem innovation is essential for the servitization journey when we consider the competition, suppliers, and partners. This is a significant change for firms as customers and agents can become important partners, and in some cases, competitors may become customers. Localization aspects are essential, and this depends on the size of the company – a large firm is different from a small firm. Local rules (or norms) can create barriers to service delivery, finding local partners can reduce costs and limit others from entering the market. It is important to learn to work and use customer pull to support servitization; some of your best supporters for servitization are your customers.

In many cases, they will champion your innovations and provide opportunities for prototyping ideas and helping you convert them into new value propositions. They will also support you with pricing signals and provide insights into new revenue models. Customers are critical to sales growth (clearly!) and margins. In service, the long-term retention of customers is recognized as a crucial success factor for both the service and equipment businesses.

As you grow your service business, sharing of knowledge and information about the services in action and your customers’ processes becomes more important. Information sharing needs to be managed within the service business as well as to the equipment business, and there are more customer touchpoints with service than with an equipment business.

Providing the information gathered as feedback to the equipment business can also reduce servitization barriers. There is often a push to move to advanced services, but basic data and understanding is required before moving to more advanced product-service systems – moving too soon to advanced services as a way to hide your weaknesses in service delivery can kill the service business.

Finally, businesses must have their own P&L and the support of HR to deliver the change because of the difference in processes and organizational culture.

What you can do to help with the shift to services

To help you, we recommend three things that you could do to help your firm, based on our insights from the study:

Open your mind and that of your colleagues to the differences between a product-business and a service-business. They are not the same, even if the underlying equipment is the same.
Focus on your customers, learn how they use the equipment, and how and where you can support them. Listen to them and allow them to support your service innovations.
Empower your service teams to deliver the service projects and ensure that the P&L contribution is recognized by the firm.

What are we doing to help with the transition? We are currently working on a book to support the shift to services in a practical way, basing the book on cases and providing examples of tools that we have seen being used to help product-based firms make the transition successfully.