From Products to Services: How manufacturers evolve into service led businesses

May 31 • Features, Management • 868 Views • No Comments on From Products to Services: How manufacturers evolve into service led businesses

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Two decades ago high tech companies blazed a new trail that saw them move away from the traditional transactional relationships they had with their customers as they embraced service as a route to sustainable and predictable revenue.

Other industries including the copier, medical and discrete manufacturing sectors have since followed suit and the evolutionary path to becoming a service led business is now clear explains Hilbrand Rustema, Managing Director, Noventum Service Management

Twenty years ago, high tech companies such as IBM and HP were product driven organisations that sold hardware with a product warranty service.

Their products such as PC’s and servers were often mission-critical and too complex for customers to repair themselves. Once the warranty expired, customers had to pay for spare parts and on-site field service, also known as “Time and Materials”. These high-tech companies discovered that the service business was an interesting high margins and high growth business.

They adopted a new strategy to start focusing more on the Service Business. They created a new core service business with its own profit & loss statements, with dedicated senior managers at board level.

They adopted a new strategy to start focusing more on the Service Business. They created a new core service business with its own profit & loss statements, with dedicated senior managers at board level.

Their customers then discovered that rather than buying services when you have a problem, it was cheaper and less disruptive to purchase preventive maintenance services.

Eventually the high-tech companies found out that to have predictable and profitable revenue it was necessary to create services that would guarantee a certain availability of the product This was the start of a category of services called “Availability Services” and the start of “Service Level Agreements” as a business model that closely resembles that of the insurance industry when it defines a price for the service based on the risks and value as perceived by customers.

Following the high-tech industry, other industries followed a similar evolution, for example:

  • The copier industry with companies such as Xerox and Canon, now evolved into document management solutions;
  • The Medical equipment companies such as Philips Healthcare,  Siemens Healthcare and GE Healthcare that can now offer entire “Managed Hospital Services”
  • Discrete manufacturing where machine manufacturers are now moving from reactive to preventive and predictive services using the Internet of Things technologies to accelerate the transformation towards more advanced services.

Since then these high-tech companies have converted themselves into full-service businesses that no longer sell only products and “Product Related Services”.

They have moved up higher in the value chain by offering “Customer Business Related Services” which we can bundle under the name Pro-Active Services.

The model below illustrates the typical evolution of a service business:

We see roughly three types of Customer Business Related Services:

  1. Process Optimisation Services are the first typical types of services whereby process expertise is used, for example, in process advisory, process compliance services or benchmarking services. Most often, the service provider agrees upon a certain business outcome or deliverables such as an advisory report, a process compliance report or a business improvement result such as an agreed productivity improvement.
  2. Business Optimisation Services address improvements in the business model of customers such as “Pay per Use” models where the technology provider also provides the financing of the technology, thereby offering the financial commitment to become an OPEX (Operational Expense) rather than a CAPEX (Capital Expenses) leaving the financing burden to the supplier who is often better able to manage the risks.
  3. Business Transformation Services help customers to implement strategic changes. The expertise of the service provider includes the ability to manage change together with their customer. The ability of organisations to adapt fast enough to changing market conditions has become one of the most important drivers of success. Service providers may take over entire processes or functions and manage this with (Managed Service) or for (Business Process Outsourcing) their customer.

We see roughly four types of Product Related Services:

  1. Warranty and Time & Materials Services: Service organisations typically start off offering warranty services to their products. After the warranty period, customers start to request additional services. When a service organisation responds to this request, they most likely offer time & material services.
  2. Preventive maintenance: Preventive maintenance services aim to reduce the cost of time & material services. They can do so by planning ahead based on the product lifecycle and reducing the cost of delivery of services as they can be provided without urgencies.
  3. Availability Services: The next step is when customers only look at when a product is available for use and consider the cost of unplanned downtime. The service provider guarantees a certain level of equipment uptime or response time. The customer will balance the perceived risk of downtime with the price they are willing to pay. The service contract or service level agreement (SLA) usually renews automatically every year and therefore generates predictable revenues for the service provider, and represents a predictable cost for the customer.

Once organisations start to look beyond the level of the product, they find out that they have a lot of knowledge to help their customers improve their processes and even their complete business.

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