How Innovation in Business and Technology is Driving Servitization
Over the years, the success of the manufacturing industry has been shaped by various trends such as the industrial revolution and the rise of new business models. One such trend transforming the manufacturing sector is servitization which is expected to play a critical role in helping manufacturers maintain their position in a turbulent marketplace swayed by heavy margin pressures, unpredictable global economic trends and dynamic supply and demand cycles. With the onset of disruptive digital technologies and customer demand for superior services over and above the products they purchase, manufacturers must transform their core businesses if they want to survive in the digital era. This paper considers the business and technology levers that are driving the increased adoption of servitization. It also provides guidelines for manufacturers embarking on the servitization journey.
In recent times, manufacturers have been diversifying their operating models from manufacturing and selling pure-play products to offering end-to-end product-related services. This trend of servitization enhances their competitive edge by allowing them to differentiate themselves in a market governed by customer demand for superior services and solutions, not mere products. For instance, heating, ventilation and air-conditioning (HVAC) manufacturers are shifting from simply selling HVAC equipment to offering ‘comfort’ as a service for their customers.
While servitization has been around for a while, there are some emerging trends – both business and technological – in today’s economy that are accelerating the shift towards Servitization.
Business levers for servitization
With improvements in manufacturing standards, the products available today are tougher and more long-lasting. One look at the automotive industry illustrates this. The models produced today last much longer and end customers may not feel the need to upgrade to newer models. As product sales deplete, manufacturers are recognizing that providing end-to-end maintenance services is an important revenue stream for them to sustain their position. Servitization can drive significant revenue growth, allowing manufacturers to significantly increase their annual revenues without the steep investments needed to launch new products. Moreover, instead of one-time revenues arising from product sales, servitization provides a more sustained revenue source. This is particularly important because service revenue often comes at a premium compared to product or equipment sales. This capability can help manufacturers ease heavy margin pressures and gain a greater market share as service-based companies, rather than product-centric ones.
From a business perspective, servitization balances the unpredictability of customer demand and the seasonality of sales. It also provides a way for manufacturers to retain customer mindshare by engaging with them continuously, which in turn may drive future sales and future product designs.
Technology levers for servitization
Apart from the business levers, the advent of new technologies is creating a new breed of consumers who value exemplary customer service above all else. These technologies are also transforming manufacturing processes by enabling cheap data storage, connected shop-floors, optimized maintenance processes, and faster product development cycles.
The Internet of Things (IoT) allows manufacturers to collect real-time data through the use of sensors. The data collected provides information about products as well as equipment use, environment, storage conditions, etc. With the increasing adoption of IoT, the cost of implementation has reduced in recent years, making it a viable solution for manufacturers who want to design servitization offerings based on real-time data.
Cloud computing offers a cost-effective and high-performant solution for infrastructure challenges faced by manufacturers. With easy data storage, retrieval and security mechanisms, cloud acts as the foundation for manufacturers to leverage latest technologies and digital transformation that complement servitization initiatives. For instance, it supports advanced data analytics using data collected through IoT sensors, giving stakeholders access to actionable insights. This drives a host of servitization offerings surrounding equipment monitoring, predictive maintenance, timely responsiveness by field personnel, and more. All of these contribute to greater revenue and customer satisfaction. For example, the combination of cloud, data analytics and IoT allows HVAC manufacturers to track the health of installed equipment and respond to incidents or failure much faster than before.
Advancements in artificial intelligence (AI) takes these service offerings one step further. AI coupled with digital technologies like augmented reality (AR) and virtual reality (VR) allows manufacturers to leverage digital twins that can assist technicians on the field, reduce time spent on complex repairs and even eliminate the need for human intervention for issues that can be resolved remotely.
The Infosys maturity framework
Infosys has designed a maturity framework that helps original equipment manufacturers (OEMs) understand how they can implement servitization. The framework offers four stages for adoption of servitization across products, products + services, as-a-service offerings, and digital platforms.
The framework acts a valuable guideline for manufacturing companies seeking to transform their business models, improve existing offerings or design innovative services.
Guidelines for a servitization roadmap
Manufacturers seeking to venture into servitization must first develop an underpinning strategy that outlines what kind of services they plan to offer and whether the expected value justifies the investment costs. This strategy should include evaluating their strengths to be a natural owner for the service, the current and future demand of the service, how it impacts the core businesses, potential adverse impact from not offering the service, what ecosystem partnerships are needed to maximize the efficiency and value of service delivery, and what technologies are needed to deploy it effectively.
Once these aspects have been properly identified, a robust roadmap must be created that includes the business and technology levers discussed earlier. For instance, how can manufacturers establish a digital foundation to improve the customer experience and service delivery, thereby forging lasting customer relationships? Other considerations for a successful roadmap include implementing advanced analytics that can scale as the business grows, new operating models that bring in revenue from as-a-service capabilities, and a robust AI base that makes decisions and executes actions based on the analytics engine. In some cases, it may even prove worthwhile to consider establishing a focus wing for servitization offerings rather than as a mere add-on to existing products.
The scope of servitization has been evolving over several decades driven by new technologies and business models. Today, manufacturers can no longer afford to depend solely on revenue from product and equipment sales. The delivery of product-related services provides a lucrative revenue stream for them to buffer against low sales cycles and market volatility. Technological drivers such as IoT, AI, data analytics, and cloud not only drive greater production efficiency but provide cost-effective ways for manufacturers to deliver as-a-service offerings to customers. However, before embarking on servitization, it is important for companies to develop the right strategy that evaluates how servitization brings value to the business. Following this, a robust roadmap must be designed and executed keeping the business and technological drivers in mind. This approach will help manufacturing companies achieve greater revenue and customer mindshare, helping them sharpen their competitive edge.