What is Servitization?

I've had a couple of occasions in the last week where I've used the word "servitization" - either in a presentation or an article and someone has responded by saying, "so what is servitization". Given the frequency of the question I thought it might be worth writing a short blog to explain what servitization is and where the idea came from.

In essence servitization is a transformation journey - it involves firms (often manufacturing firms) developing the capabilities they need to provide services and solutions that supplement their traditional product offerings. More formally, my colleagues and I at Cranfield University defined servitization as "the innovation of organisation’s capabilities and processes to better create mutual value through a shift from selling product to selling Product-Service Systems". Two other definitions accompany this: (i) the idea of a product-service system - "an integrated product and service offering that delivers value in use" and (ii) a "servitized organisation which designs, builds and delivers an integrated product and service offering that delivers value in use".

It is worth unpacking these definitions a little, but before I do, let me give a couple of practical examples of servitization. The first, and classic, example is Rolls-Royce selling "power-by-the-hour". Instead of selling aero engines, Rolls-Royce now contracts with many of its customers for "power-by-the-hour". In essence the customer buys the power the aero engine delivers and Rolls-Royce provides all of the support (including maintenance) to ensure that aero engines can continue to deliver power. This shift in business model is important because it means the interests of clients and providers are much more closely aligned. In the olden days Rolls-Royce used to make money on time and materials - basically repairing engines. Put crudely the worse the engines were, the more maintenance they required, so the more money Rolls-Royce would make. Of course customers don't want unreliable engines that are always in the repair shop. They want reliable products that - in Rolls-Royce's case - allow planes to fly safely.

This same trend - selling solutions rather than products - can be seen in lots of industries. In healthcare, for example, many pharmaceutical firms are under significant pressure. The cost of developing drugs is increasing, many of the traditional drugs are coming off patent and so the generic manufacturers can move into the market. As a consequence pharmaceutical firms are rethinking their business models - defining themselves as healthcare solutions providers. Think like a patient - most of us don't want the products that pharmaceutical firms provide. We'd prefer not to be ill in the first place. So if someone can provide healthcare solutions, which reduce the likelihood of illness, the interests of providers and customers are again much more closely aligned.

So let us return to the definitions. To make this transformation - to sell services and solutions - requires significant change inside many traditional manufacturers. They have to recognise that the product is a platform to deliver a service. They have to build solutions that deliver the outcomes their customers want and value. In essence these solutions are often capture in product-service systems, combinations of products and services. Customers only realise value from these when they actually receive the service - hence the concept of value in use.

Servitization as a word has been around since the late 1980s. The most frequently source article is cited as Vandermerwe, S., & Rada, J (1988) "Servitization of Business: Adding Value by Adding Services", European Management Journal, 6(4), 314–324. An article that appeared, but has only relatively recently been getting more attention in the broader academic literature and business press. A recent high-profile example, is UK Government's Foresight Report on the Future of Manufacturing - which identifies servitization as a core element in its vision for the future of manufacturing.


If you'd like to know more about servitization and my latest thinking on the topic why not join me for the Cambridge Service Design Programme: Making the Shift to Services - scheduled for 6-7th May. It would be a pleasure to see you there.

Struggling to make the shift to services? Write your own obituary!

It is clear that organisations across the globe are making the shift to solutions. Often the ultimate aspiration is providing the outcomes the customers (and in some some cases the customer's customers) want and need. Often this journey is described in terms of a service ladder - gradually moving from providing products to supporting the products with spares; through to remote or condition based monitoring; and finally onto contracting for capability or outcomes. While a logical flow and an inherently attractive proposition, successfully making this shift to solutions in reality is challenging. A critical issue is winning the hearts and minds of people who are used to a world of products. If you've always worked in a product or technology centred business then a commonly heard fear is "won't services cannibalise the product business" or put more directly "aren't we sowing the seeds of our own destruction - we'll kill the product business if we are too good at offering solutions".

Hearts and minds are always difficult to win, but one useful trick is to play on this fear. Recently we have been experimenting with asking organisation's to write their own obituary. The exam question we set is "write or record a short obituary for our services business. Imagine we are five years down the road and we haven't made our services business work (while all of our competitors have). What would the press be saying about us? What would they put our failure down to? Who would get the inheritance (e.g. which competitor gets our business and why)".

A simple trick, but the responses that are generated are both illuminating and in some cases humbling. Senior executives start to verbalise ideas like "ACME Inc has divested all of its remote and condition monitoring efforts and sold them to Monitoring-R-Us, a private company specialising in industrial solutions". Five themes consistently shine through these obituaries - the failure of the organisation concerned to keep pace with change; the inability to break away from the product-dominant culture; the need to get closer to customers and really understand their businesses; the reluctance to make the necessary investment - dabbling rather than committing to services and solutions; and missing the opportunity that the era of big data and sensors offers. In another blog I'll try to write more about these issues, but in the short-term if they strike a chord with you, join us in Cambridge on 1st October for the Cambridge Service Alliance conference - "Successfully Making the Shift to Solutions" - where we'll hear from organisations that are making the shift and overcoming the barriers. 

Performance Planning: Why Is It Always Left to Right?

Language and processes matter in the world of performance management. Yet far too often we take the status quo for granted. Take, for example, the phrase "performance management". Numerous organisations are seeking to improve their performance management processes, but are they really focusing on the right issues? Performance management smacks of managing past performance - taking corrective action to ensure we hit our targets. Sure, this is important, but how much effort are organisations putting into performance planning - planning future performance, rather than managing past performance?

Some would argue that shifting your focus from performance management to performance planning is a trivial change of language, but think about the behaviours performance management provokes in your organisation. Often people get very defensive when it comes to performance management. They see the aim of the game as demonstrating to their managers that they are on top of things. They have everything under control. There's nothing to worry about. Bad news can get swept under the carpet and fundamental issues can go unresolved for years.

Contrast this rather defensive behaviour with the idea of performance planning - planning for future performance. No longer is the focus on what has happened and why it has happened. Instead performance discussions focus on where we want to be and how we are going to get there. Sure we'll still need to talk about why we are where we are, so we can understand what to do differently in the future. but the performance conversations become more constructive - no longer are they defensive, reviewing past performance. Instead they focus on the future and where we want to go.

If you start down this route then some interesting issues open up. Many measurement system design methodologies (including ones we have developed) start from the classic vision-mission-objectives approach. The methodologies ask you to think about where you want to be, how you are going to get there and how you'll track your progress. These are all eminently sensible questions, but in essence they are left to right questions. Start with the vision, define the the objectives, specify the targets, elaborate your initiatives and execute. An alternative (or complementary) approach is to plan right to left, or at least to check the validity of your performance plans by working right to left. Right to left planning involves looking at the detail and asking yourself if we deliver all of these plans and initiatives what will they add up to? Will they deliver the results we want? Right to left planning is a great way of checking the validity of your left to right plans. Checking whether you'll achieve the performance you want to.

If you want to check the robust of your approach to performance planning, just ask yourself three simple questions: (i) do we have the balance right between performance management and performance planning - or are our systems tilted either towards reviewing past performance or planning future performance; (ii) do our performance systems provoke open and constructive debate or do they drive defensive and potentially destructive behaviour - have we got the balance right between accountability and creativity in our performance systems; and (iii) how well do we validate our plans once developed - do we do the right to left sense check to establish whether all of the individual projects and activities we are going to undertake will add up to the overall plan we are setting out to achieve? If you are not confident that your performance systems are working well against any of these criteria, maybe it's time to take another look at how you approach performance planning.

Andy Neely

Trading off service experience and service efficiency

I have just been at the QUIS2013 conference in Karlstad, Sweden. The final session was a panel discussion with the title "Small Details: What They Are and Why They Matter". The panels, which included a mix of academics and managers, started by providing a few examples of small details and why they matter is services. Janet McColl Kennedy, a Professor from the University of Queensland, told a story about an elderly person in  a care home, who when asked "what could we do to make your life better", replied "let me have a real cup of coffee in the morning". The chair of the panel (Professor Ruth Bolton from Arizona State University) countered, by saying "I'm Canadian, so for me it would have to be tea". This short exchange illustrated the importance of small details. To get the service right you have to deliver services which are personalised, contextualised and time dependent. Manfred Dasselaar, a service manager at Ericsson, built of this theme, describing the challenge of getting customers to understand how hard Finnish engineers were working on solving their queries when the customers and engineers were not co-located. He gave the example of a conference call involving Finnish engineers and their external customers. The customers were getting frustrated that they were not getting much from the engineers (they weren't communicating much, but then they were Finnish). Because the customers were not in the room they could not see that although they were not talking much, the Finnish engineers were sharing images and data on their computer screens - screens that the customers could not see. Once the customers understood how the engineers were communicating and how hard they were working on solving the problems, they became much happier. Again an illustration of how small details can influence the service experience.

So who delivers these small details and how do they make sure they are time, person and context dependent? Often the staff at the front line - often the least trained and least well paid people in the organisation, but those closest to the customers. Should we give these staff more autonomy? Should we train them and seek to create an organisational culture which allows service providers to personalise the service experience? At first blush the obvious answer is yes - this might provide a new and sustainable way of competing. But there are three issues with this first blush response. First, by personalising the service we can increase the cost and complexity of the service - we lose the efficiency gains that can be driven by standardisation and commoditisation. Second, by personalising the service we can create inconsistencies in customer experiences. If every time you are served by a different server and you get a slightly different personalised version of the service then how frustrated do you become when one server fails to do that special thing for you that the previous server did. Third, the more we use technology in services, the more we end up standardising the service. This drives efficiency, but does it deliver the best customer experience? Are automated voice systems better than talking to real people?

It seems to me there's a careful service design and delivery tradeoff to be understood here. Clearly personalising services and tailoring them to individuals in time and context can enhance the service experience, but at what cost in terms of efficiency and consistency? In designing and delivery services we need to be clear about the boundaries - where the scope for personalisation lies and where we should standardise and control. Going too far in either direction is going to result in disaster.

Beyond Servitization: What's Next?

I received an e-mail out of the blue from the leader of a company in Taiwan who asked the very thought provoking question "what is your prediction for the next revolutionary business model after the servitization of manufacturing". Rather than reply privately I thought I'd offer some public thoughts.

The first to say is that I don't think "servitization" is a business model - instead I see servitization as a transformation journey. Servitization is concerned with building the organisational capabilities and processes required to design, deliver and innovate high-performance product-service solutions. A business model is slightly different - it defines how you create and capture value through appropriate value propositions and delivery systems that operate within a broader ecosystem. A good business model also considers the risk or accountability spread that your organisation is exposed to through this combination of value proposition, value delivery system and ecosystem evolution.

Having said this, I understand the point behind the question, namely what business model options do manufacturing firms face post servitization? I'd break my answer to this question into two parts. First, I would think about the elements of the business model and ask what scope is there for change in terms of: (i) the value proposition; (ii) the value delivery system; (iii) accountability spread; and (iv) the ecosystem. Second, I'd think about whether there may be radically different business models at the aggregate level. The answer to the second question is relatively short, so I'll start with this one and simply say "I think its unlikely that we'll see radically different generic business models". Indeed one could argue that today's seemingly different business models are a rehash of old models. Take, for example, business that make money by attracting eyeballs and selling advertising - Google, Facebook, etc. Well TVs and newspapers have been doing that for years. The medium is different, but the base business model is the same.

So let me move to the more detailed level. Here I think we will see innovation - particularly in terms of the value delivery system; the accountability spread and the ecosystem. When it comes to value propositions I think most people understand the shift to outcomes - that organisations have to think clearly about what outcomes their customers really want and how they can then deliver these outcomes, rather than products or services. Where there's scope for innovation is in the value delivery system. Increasingly technology is playing a role in allowing organisations to innovate the way they configure the resources they use to deliver their products and services. Remote asset monitoring and diagnosis - using sensors and satellite infrastructure to monitor assets in the field and then diagnose potential maintenance requirements is becoming more widespread. In the education world, remotely monitoring student progress through online courses and intervening only when students seem to be going off track, allows schools and universities to focus teacher and faculty time on those students who most need support. Remote health monitoring technologies are revolutionising medicine and healthcare. Wearable devices can monitor the vital signs of individual patients letting doctors and hospitals intervene only when necessary. In essence the first wave of business model innovation we are seeing concerns  innovations in the value delivery system - looking for new ways of combining and configuring resources to ensure value is delivered to customers as efficiently as possible.

The second theme we'll see is a greater understanding of the risk and associated accountability spread. As organisations innovate their business models and take responsibility for outcomes they also take on risk. As they innovate their value delivery systems, often partnering with others, they reduce their own level of control. Both of these activities increase the risk or exposure of the contracting organisation. Too often today organisations cope with this increased risk and exposure by increasing their prices (and hence safety margins). Technology will help organisations get a better handle on the risks they really face and how these risks can be mitigated and as a consequence we'll get more sophisticated about how we price risk.

The third and final theme we'll see is greater innovation at the level of the ecosystem. Competition won't solely focus on your direct competitors. Instead firms will explore what role they should play in the broader ecosystem and how they can shape the ecosystem. Apple is one of my favourite examples here. By opening up the technology required to develop apps, Apple has encouraged a community of apps developers. If you have a large community of apps developers then you get lots of cheap apps - the individual apps end up competing on price as there's always a similar app to yours on offer. So the hardware - the iPad, iPod and Mac - becomes more valuable because it is the route to access lots of cheap Apps. When it comes to business model innovation we'll see more and more firms thinking this way - how do we shape the ecosystem to help us better create and capture value.

So back to the original question - "what is your prediction for the next revolutionary business model after the servitization of manufacturing". The short answer is that I don't believe we'll see radically new business models, but I do think we'll see radical innovations in the elements that make up business models - particularly in terms of the the value delivery systems, the accountability spread and the broader ecosystem.

The Installed Base: How Well Do You Understand the Opportunity?

In a previous blog I talked about the reasons why firms servitize. One important reason is the installed base - the ratio of new product sales to installed equipment. In mature industries these ratios can be significant. Figures often quoted include an installed base of 13:1 for cars, 15:1 for civilian aircraft and 22:1 for trains. That is for every new train sold, 22 are already in operation and available for service and support. Consider that trains have a working life of between twenty and thirty years and you can see why the installed base offers a significant business opportunity. Indeed in many sectors, the rule of thumb used is that a product will consume 3-4 times its original purchase value through its operating life in terms of spares and consumables.  So a $1 million dollar piece of construction equipment will consume between $3-4 million in consumables and spares over its thirty year operating life.

Researchers at the Cambridge Service Alliance have recently been looking at the installed based, seeing what data we can gather to understand the size of the installed base in different sectors. Our preliminary analysis suggests that the traditionally quoted figures underplay the size of the installed base in some sectors, especially aerospace. Take, for example, US aerospace - in 1995 there were 212,000 US aircraft in operation (both military and civil). In the same year 2,441 new aircraft were shipped, giving an installed base ratio of 87:1. By 2005 there were 246,000 US aircraft in operation, with 5,426 new aircraft shipped, giving an installed base ratio of 53:1.

While both figures (87:1 and 53:1) are considerably higher than the figure traditional quoted (15:1), the reduction in the ratio is interesting. One might expect that the installed base ratio would increase over time. New products are sold at a rate that is faster than old products are retired, but in the case of aerospace, underlying market growth has a significant impact. The number of new civil aircraft sold per year, for example, effectively doubled between 1995 and 2005, and it is this market growth (in civil aircraft) that brings down the installed base ratio. Even so, an installed base ratio of 53:1 highlights the significant opportunity that exists.

The story in the automotive sector is rather different. Here we see slight growth in the installed base ratio between 2003-2008, from 13.5:1 in 2003 up to 14.7:1 in 2008. This growth is driven by an increase in the installed base of passenger vehicles, with 13 million new vehicles being registered in Europe in 2008 and 198 million in operation. A key issue in the passenger vehicle market is the rate of retirement of existing products. Given the relative maturity of this sector, new cars are often replacements for existing cars and so as new sales are secured, old cars are retired. For this reason it is unlikely that we'll see significant growth in the automotive sector in the installed base unless product life cycles increase and/or consumers decide to reduce the rate at which they replace their cars.

So this brief analysis suggests three issues to consider; (i) understanding the size and potential of the installed base matters; (ii) in some sectors the installed base ratio will not change significantly, as the market matures and product replacement becomes the predominant reason for new product sales; and (iii) significant market growth can reduce the installed base ratio, although even so the installed base can be an attractive market segment.

Why Servitize: Alternative Rationales

I have often thought about the reasons why firms servitize (sell services as well as products). Usually I categorise these under three broad headings - economic, strategic and environmental. The economic reasons for servitization include:

1. The challenge of competing on cost - in many developed countries firms find it difficult, if not impossible, to compete on cost alone. The reality is that their underlying costs bases are too high in comparison to lower cost economies and so they have to compete through innovation and differentiation - services valued by customers are one route of differentiation.

2. The installed base argument - in capital goods industries, where products have long-life cycles, the installed base can be significant. In 2010, for example, Boeing had 19,410 commercial planes in operation and delivered 462 new planes, giving a ratio of 42 operational planes for every new plane delivered. Providing service and support for the installed base is a significant market opportunity.

3. Stability of revenues - particularly important in recent years, in many capital goods industries product revenues can be lumpy. Significant revenue is gained when products are sold and delivered, but this doesn't happen every day. Ongoing service and support revenues provide a more stable income stream, smoothing the effect of lumpy product sale revenues.

In strategic terms there are four key reasons for servitization.

1. Locking in customers - a traditional business model that has been used for years. Products are sold at or slightly above cost, money is made on the provision of spares and consumables. Think razors and razor blades; printers and ink cartridges.

2. Locking out competitors - especially important in industries with a high installed base. As demand for high margin service and support grows, new entrants are attracted to the services market. Many original equipment manufacturers make strategic moves to partner with their customers and in doing so seek to lock out potential new entrants to the services market.

3. Increasing differentiation - some customers value the stability that service and support contracts offer. A fixed price can mean predictable maintenance costs and a transfer of risk from the customer to the service provider. These benefits provide a differentiation advantage to original equipment manufacturers.

4. Customer demand - the final strategic reason I often talk about is customer demand, in the sense that customers demand that their providers offer service based contracts. In public procurement, particularly the defence sector, this is becoming an increasingly important trend. Government Departments are asking to contract for capability, by the right to use the assets (ships, ground vehicles and planes), rather than taking ownership of the assets.

A final, and potentially increasingly important, rationale for servitization is the environmental rationale. Here the idea is to question whether transfer of asset ownership is neccessary. Think of car sharing schemes, such as StreetCar and ZipCar, or DVD sharing schemes, such as Netflicks. Do consumers really need to take physical ownership of assets or can we share access to them, thereby reducing the environmental impact of production.


While these three rationales have stood the test of time, the reasons for this blog is I came across a new strategic rationale at a recent conference - the idea of service as a pre-sale opportunity. Volvo Cars run an active programme with their dealers where they seek to persuade them that every service encounter is also an opportunity to build customer loyalty and hence secure a repeat purchase - hence service as a pre-sale. The data that Volvo presented are illuminating. They clearly show that, at least for Volvo Cars, repeat business is a function both of product quality and service quality. How many of your service staff see service as a pre-sale opportunity?

Andy Neely

Director, Cambridge Service Alliance

The Great Myths of Measurement: Satisfaction is Dead

In the late 1990s Jeffrey Gitomer wrote a book entitled - "Customer Satisfaction is Worthless, Customer Loyalty is Priceless" - a title which neatly encapsulates the second myth of measurement, "loyalty is better than satisfaction". What Gitomer and countless others seem to miss is that "loyalty" cannot and should not "supersede" satisfaction.

The way to think about this is to consider the evolution of customer measures. Years ago we used to think that complaints were a good way of tracking customer satisfaction - simply count how many times people complain and then you'll know how good your products and services are. We now know that measuring the numbers of complaints is not a particularly effective measure of customer satisfaction. There are two reasons for this - first, in some organisations it is difficult even to get a complaint registered! Second, and more commonly, people don't complain directly to their organisation, they simply tell their friends about their bad customer service experiences.

So we move from customer complaints to customer satisfaction. Here firms decide to be more proactive and go out and ask their customers what they felt. Hence the plethora of surveys and phone polls asking for your opinion about service experiences. Xerox collected data in the late 1990s that showed highly satisfied customers were much more likely to repeat purchase than customers who were merely satisfied, so again the focus shifted - this time to "how do we get highly satisfied customers that will keep buying from us". The natural evolution was to customer loyalty - how do we measure the loyalty of our customers? Do they keep coming back and buying again - delivery repeat business? Do they help grow our business by recommending it to friends and colleagues (think how popular the net promoter score has become in recent years).

The final twist comes with the introduction of customer profitability as a measure. This was prompted by work which recognised that some customer were undesirable. Bain and Co released data suggesting that 140% of bank's profits come from 20% of their customers. The other 80% actual cost the bank money. So there was a sudden flurry of activity where people were trying to work out which customers were profitable and which were not. For the unprofitable customers the choice becomes - can we reduce the cost to serve (and make them profitable) or should we fire the customers and stop dealing with them.

These different perspectives on measurement complaints to satisfaction to loyalty and profitability are often seen as a natural progression, with more mature companies measuring loyalty and profitability. This is simply wrong. And it is wrong for a very simple reason. We have to different between what the customer wants of the organisation (great service, good prices, etc) and what the organisation wants of the customer (their loyalty, a decent return by working with them, etc). Customer loyalty and profitability don't supersede customer satisfaction - they look at the issue of customer measurement through a different lens. Customer loyalty and profitable are what the organisation wants. Great service and good value for money is what the customer wants. Our measurement systems have to track both, as both perspectives matter in successful organisations.

Five predictions for the future of services

What does the future hold for services? I was recently invited to give a talk on this topic and gazing into a crystal ball produced five predictions...

1. Services will become more automated, but automation will brings risk...
Clearly technology will play an increasingly important role in services. RFID tags and barcodes on installed products will store service and parts histories - no need to search for those old service records anymore. Social media and unstructured data will be used to guide service interventions. The city of Chicago, for example, is seeking to harvest Twitter data to identify potential problems with public infrastructure. Weblogs, loyalty cards, smart phones - coupled with position location trackers - provide valuable data that can be used to tailor and customise services.

Yet this increasingly interconnected world also brings new risks, particularly as organisation join data up across domains. Think of your local convenience store and the loyalty card data they collect. How happy would you be if they started selling data on your shopping habits to your health insurance providers? The automation of services will increase their efficiency, but firms will have to consider very carefully the ethical and morale implications of how they use data they can access.

2. Services will become more localised and personalised...
Technology is already enabling the localisation and personalisation of services. Couple these developments with environmental drivers, such as the cost of carbon, and we'll see an even great shift towards localisation and personalisation. Take 3-D printing – in the future we’ll have printers in our homes that can create incredibly complex products (things that can’t currently be manufactured). 3-D printing will revolutionise manufacturing, but it will also revolutionise the spares market – what will you do do when customers can 3-D print their own spares to order?

3. Health services will be massive...
The demographic changes that are afoot will have profound implications for healthcare – already pharmaceutical firms are redefining themselves as healthcare businesses. As their drugs come off patent, they are realising that they have to change their business model, reinventing themselves as healthcare solutions providers. A much more customer focussed approach - most of us don't want to take medicines, we want to be healthy in the first place. So if you can be the healthcare solutions provider that stops people getting ill you are in a powerful position. In healthcare, its not just the changing nature of the economic environment that matters. The ageing population will also stress the medical system – many countries won’t have enough capacity (beds) in hospitals for the potential demand and it is too costly to keep people in hospitals anyway. So Governments will look for alternative forms of healthcare provision, e.g. assisted living, where people remain at home and are remotely monitored, perhaps using biometric monitoring devices built into their clothing.

Then there’s the question of healthcare diagnostics – IBM's Watson, the software solution that won Jeopardy, is now being put to use in healthcare, supporting doctors in patient diagnosis. And the potential for new healthcare services does not end their. Will we see organ farms – farms where people grow replacement body organs that are sold on the open market?

4. Everything that can be digitised will be...
Digitisation is already a significant trend in some sectors - take books, music, films… When will we stop producing physical version of products that can be made available as electronic services? Will we stop producing cash – we can use electronic credits on our mobile phones – indeed M-Pesa already does! When will virtual holidays become the norm – augmented reality means we can take a Carribean cruise without leaving our house – we certainly won’t need to fly miles in an aeroplane…

5. We'll stop being consumers...
The growing pressure on the earth’s resources will make “consumers” outlaws… We won’t be pleased to be called a consumer – instead we’ll look for ways of sharing resources and physical assets. We won’t all own our car, our own washing machine, our own lawn mower… Instead we’ll share resources across neighbourhoods. Do we really need watches? Our digital devices (whatever comes after the iPhone) can tell the time, double as a TV, etc, etc.