Unveiling the Spectrum of Servitization
In a new series of articles that are serialised from an exclusive new Field Service News white paper co-authored by Kris Oldland and Justin Konopaske, we will explore multiple aspects of the complex discussion of servitization…
In the previous article in this series, we outlined the ‘why’ in the case of servitization, and across the rest of the series, our focus will be much more on the pragmatic ‘how’. However, before we look at some of the nuts and bolts of servitization, in this next article in the series there is an essential concept that we have to establish.
Servitization is often outlined as a journey, with the destination being outcome-based services. In many ways, this is true. Several key steps or milestones need to be achieved to allow you to develop a servitized offering.
However, the journey’s end point is not to move wholesale to an outcome-based model. Remember, in our previous chapter, as we defined servitization, we outlined that fundamentally at its core, servitization is a mechanism that allows for the shift of risk from customer to service provider in exchange for longer, more profitable contracts. However, customers will have different risk appetites, internal competencies, and ultimately different needs.
If we were to view servitization as a journey that ends in outcome-based services, then we are placing our business strategies ahead of our customer’s needs. However, what if we view servitization as a journey towards providing a range of service solutions, including outcome-based but also solutions more aligned to the traditional break-fix model?
This allows a company to take an Outside-In approach, where customer needs are at the heart of the strategy. It also provides a framework to move customers along the spectrum, creating opportunities for up-selling as clients’ needs evolve.
Indeed, as we peel back servitization’s layers, we reveal a nuanced approach that extends beyond a linear transformation. And as we move through this paper, as we delve deeper into the concept, we’ll unveil the spectrum of servitization, the driving forces behind its growth, and the evolving landscape beyond outcome-based models.
However, there are still a number of well-defined step-change milestones that can allow an organization to evolve their advanced service offerings. Doing so in an iterative fashion builds the layers of the servitization spectrum. Significantly, every step of the process adds further value to the service organization and drives service revenue.
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"Contracts help customers avoid downtime and extend the lifespan of their equipment. Organizations benefit from steady, predictable revenue streams and can effectively plan resources...."
Several models outline the path to servitization, all of which have validity. However, a simple means of looking at the process allows us to see the evolutionary path many organizations follow as they establish servitization elements into their service portfolio.
- Stage 1: Parts Sales Supported by Parts Availability and Pricing
- Stage 2: Service Contracts – Time/Cycle Based
- Stage 3: Service Contracts – Outcome Based
- Stage 4: Everything as a Service (EaaS)
Let’s take a little look at what each of these achieves.
Stage 1: Parts Sales Supported by Parts Availability and Pricing
At this foundational stage of the servitization journey, organizations begin by offering spare parts as a standalone service. This involves ensuring parts availability and establishing precise pricing models. Customers can purchase individual components to replace faulty parts of their equipment. While seemingly basic, this stage sets the groundwork for a service-focused mindset, as it establishes the importance of reliable parts support.
Stage 2: Service Contracts – Time/Cycle Based
Moving up the servitization ladder, companies progress to offering service contracts based on predetermined time-frames or usage cycles.
Customers sign agreements that entitle them to regular maintenance, servicing, and support. These contracts help customers avoid downtime and extend the lifespan of their equipment. Organizations benefit from steady, predictable revenue streams and can effectively plan resources. The shift from a transactional model to a service-oriented approach becomes evident as the focus shifts from one-time sales to ongoing customer relationships.
Stage 3: Service Contracts – Outcome Based
Organizations take a transformative leap at this stage by offering service contracts tied to specific outcomes. The emphasis shifts from maintenance and support to guaranteeing performance results.
For instance, an aerospace company might provide an outcome-based service contract that guarantees a certain level of engine efficiency for a set period. This requires advanced data analytics and IoT integration to monitor equipment and ensure desired outcomes continuously.
Organizations that achieve this level of servitization build strong customer partnerships founded on mutual success, as customers pay for the value delivered rather than mere services rendered.
Stage 4: Everything as a Service (EaaS)
The far end of the servitization-spectrum is the “Everything as a Service” (EaaS) model, where companies provide complete solutions rather than discrete products or services. Organizations take ownership of the entire customer experience, delivering equipment and outcomes customers seek.
This model could involve charging customers based on actual usage, ensuring peak efficiency, and continuous optimization. EaaS requires a comprehensive technology ecosystem, from IoT sensors to advanced AI algorithms, to deliver seamless experiences. Companies adopting EaaS position themselves as partners deeply invested in customer success.
"One of the biggest challenges of the more advanced service models centre around correctly pricing parts so you can ensure profitability, getting this step right is an essential starting place..."
In summary, these four stages represent a progressive evolution in the servitization journey.
They also illustrate how organizations transition from traditional product-based models to outcome-focused service paradigms.
Each stage builds upon the previous one, adding layers of value and revenue potential to the service organization. The ultimate goal is to shift from mere transactions to lasting partnerships centred around delivering exceptional value and tangible results.
Having identified these four stages, let’s take a quick look at what is required for each from a technology and process perspective.
Stage 1: Parts Sales Supported by Parts Availability and Pricing
Technology:
At this initial stage, organizations need more than a basic inventory management system to track spare parts availability. Indeed, many companies struggle to get this first basic part of the process correct because they will try to use systems that are not fit-for-purpose such as an add-on within an ERP. With the dynamic movement of parts in field service, any inventory and pricing tools must be able to provide real-time updates on stock levels and facilitate easy ordering and reordering.
However, as one of the biggest challenges of the more advanced service models centre around correctly pricing parts so you can ensure profitability, getting this step right is an essential starting place.
Processes:
Organizations should establish efficient parts procurement and storage processes including looking at how to optimise the supply chain, and understanding van-stock for full visibility.
Even at this stage, accurate forecasting methods can help prevent overstocking or under-stocking of parts. Streamlined order fulfilment procedures ensure timely delivery to customers or engineers ahead of the day of service.
This stage lays the foundation for customer relationship management (CRM) practices, even though they might not be fully automated.
Stage 2: Service Contracts – Time/Cycle Based
Technology:
Transitioning to stage 2 requires an advanced CRM system to manage customer relationships and contracts; FSM & service scheduling software becomes vital to keep track of maintenance cycles. Implementing a reliable communication platform is essential to inform customers about scheduled service visits and updates.
Processes:
Effective maintenance planning becomes a core process. Organizations must ensure technicians are dispatched on time and equipped with the necessary tools and spare parts. Customer communication becomes more structured, and regular follow-ups contribute to building customer trust.
Stage 3: Service Contracts – Outcome Based
Technology:
Advanced data analytics and IoT integration become crucial at this stage. Organizations require sophisticated predictive maintenance tools that use sensor data to anticipate equipment failures. AI-driven algorithms analyse data to predict outcomes and optimize service interventions. Data security measures are vital to handle sensitive information.
Processes:
The shift to outcome-based services necessitates a robust performance monitoring process. Real-time data collection and analysis informs technicians about the equipment’s condition, allowing them to intervene pro-actively. Customer collaboration deepens, with regular meetings to align on goals and expectations.
"One of the biggest challenges of the more advanced service models centre around correctly pricing parts so you can ensure profitability, getting this step right is an essential starting place..."
Stage 4: Everything as a Service (EaaS)
Technology:
Achieving the EaaS model demands a comprehensive technological ecosystem. IoT sensors, connected devices, and edge computing are essential to capture real-time usage data. Advanced AI and machine learning algorithms optimize equipment performance and efficiency. Cloud platforms facilitate remote monitoring, data storage, and analysis.
Processes:
The transition to EaaS demands a complete organizational overhaul. Cross-functional collaboration becomes a foundation, with teams working together to create and deliver holistic solutions. A robust feedback loop integrates customer insights into ongoing improvements. On-boarding customers onto the EaaS model becomes critical, involving thorough training and support.
In summary, the technology and processes required for each stage align with the increasing complexity of service offerings. From essential inventory management and CRM systems to advanced data analytics and IoT integration, organizations gradually build their technological infrastructure.
Simultaneously, processes evolve to prioritize customer-centricity, predictive maintenance, and holistic solution delivery. This iterative approach ensures that each stage enhances both the customer experience and the service organization’s revenue potential.
Servitization, often referred to as Advanced Services, represents the pinnacle of a three-tiered service approach. While primary and intermediate service levels focus on transactional relationships, servitization takes a leap into true partnerships with customers.
This shift is marked by a departure from mere product offerings to holistic solutions that encompass outcomes and experiences, and this is why we often see the path to servitization outlined as a step change process.
The Servitization Spectrum
For organizations that have built the processes and technology infrastructure in each of the steps above, they are in a position to embrace the servitization spectrum.
Servitization is not a one-size-fits-all model; it embodies a spectrum that caters to varying organizational contexts and customer maturity levels. This spectrum offers a range of possibilities, from expanded customer success initiatives to fully outcome-based service models. What unites them is the commitment to aligning services with customer needs.
In servitization, the traditional transactional relationship takes a back seat to a more profound collaboration. Businesses and customers become co-pilots in a journey toward shared success. The model’s flexibility accommodates diverse approaches, ranging from outcome-based solutions to customer success-oriented engagements.
Ultimately, servitized business models rewrite the rules of engagement. The transition from contract-based sales to long-term partnerships reshapes the relationship landscape.
This is exemplified by a shift from CAPEX costs to subscription-based models, enabling customers to access services without the burden of upfront expenses. Additionally, the assurance of uptime and risk sharing between customers and service providers becomes the hallmark of this partnership.
Charting the Growth of Servitization
As we have seen across several years of research studies on servitization by FSN Research, there has been a compelling growth trajectory across industries.
The data from multiple studies from FSN Research have shown a consistent upward trend in adopting servitized elements within service portfolios.
In 2022, 68% of companies embraced servitization, compared to 64% in the previous year and 58% in 2020.
The same data also outlined the core driving forces behind the servitization movement coming into focus, shedding light on why organizations are transitioning toward outcome-focused service models. As per FSN Research’s 2022 findings, customer demand emerges as the most compelling driver, with 36% of organizations citing it as a primary motivation. The pursuit of increased service revenue, driven by a desire to provide exceptional value, follows closely at 24%.
Addressing Diverse Customer Needs
Organizations must adopt an “Outside In” mindset to navigate the spectrum of servitization successfully, placing the customer’s needs and expectations at the core of their approach.
Different customers with different needs will still always fall within these three categories, and by embracing servitization as a spectrum, your organization will be best positioned to drive service revenue efficiently from each of these groups.
Different customers with different needs will still always fall within these three categories, and by embracing servitization as a spectrum, your organization will be best positioned to drive service revenue efficiently from each of these groups.
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