FROM

PRODUCTS
TO
SERVICES
Creating sustainable growth
in industrial manufacturing
through servitization

Make the Difference

www.paconsulting.com
ABO UT PA CO NSU LTI N G G RO U P

PA is a consulting, technology and innovation

firm. We define success as achieving exceptional
results that have a lasting impact on businesses,
communities and individuals worldwide.

This principle has remained the cornerstone

of our ethos since 1943 – and it continues
to underpin everything we do.

Our clients choose us because we challenge

convention to find the solutions that really work
– in practice, not just on paper. Then we roll up
our sleeves and get the job done.

At PA we don’t just believe in making a difference.

We believe in making the difference.
 SERVITIZATION REPORT 3

CONTENTS

04
Foreword

06
About our research

08
Key findings

10
Introduction

14
How to compete

25
Interview: Mark Elborne

28
How to operate

40
Interview: Richard Loendersloot

42
How to transform

50
Get in touch
4 SERVITIZATION REPORT

FOREWORD
 FOREWORD 5

FOREWORD

Imagine. You are the director of a company manufacturing heavy industrial equipment.
You visit one of your customer’s plants to explore the potential for selling new machines.
What you see and hear there completely changes the way you do business with that
customer. Your conversations with them reveal an opportunity to make money in a
completely new way.

The director mentioned in the introduction noticed The concept is hugely important for manufacturers
a significant part of the customer’s equipment was operating in markets where low-cost producers are
in poor condition. Conversations revealed regular taking market share and driving down margins. It
breakdowns disturbed the production process. offers an opportunity for manufacturers to establish
Therefore, full capacity was never achieved and a closer bond with customers, making it harder for
employees sometimes had nothing to do. Although competitors to find a way in. And it is a chance to
the business was financially sound, the customer capitalise on advances in technology and data to
could not afford to invest in new machinery at create new service-focused businesses that are right
that point in time. for a digital world.

Understanding the requirements and the constraints, Servitization has an impact on every part of the
the equipment manufacturer came up with a different business – from strategic questions on markets
solution. They reviewed the production capacity and and positioning, to operational challenges around
capability that was required, evaluated which part capabilities in technology, data and the ability to work
of the current equipment could fit, and what gaps more collaboratively with customers. There are also
needed to be filled. They made an offer to refurbish questions about how to organise for services so cost
and replace equipment – taking ownership, supported and risk are controlled, and how to develop and price
with a full maintenance contract to guarantee new service-focused offerings so they deliver above-
performance. Not only did they do that for their own average margins.
machines, the deal also included machines that had
originally been delivered by competitors. Our research proves it is possible to earn substantial
margins from servitized offerings. And it also shows
This new business model is now applied in another it pays to invest time and money in developing
region, and the manufacturer opened small support new ideas with the right customers. This can be an
locations close to the customer so they can respond instrument for creating highly innovative, durable and
directly to customer needs. This business delivers rewarding relationships that keep competitors out.
a growing slice of revenue and margin for the
manufacturer, with margins significantly higher than We are extremely grateful to the executives from
for traditional product sales. the 60 companies that took part in our research. We
also thank Marc Elborne, CEO of General Electric in
Sound too good to be true? This is actually a real-life the UK and Ireland, and Richard Loendersloot of the
scenario and the starting point for ‘servitization’ – Twente Institute for Maintenance Excellence for their
the shift from selling products to providing services interviews. You can read their views in this report.
that address customers’ real needs. What we have
outlined above is a basic example, but includes
key servitization ingredients such as observing and HANS HOUMES
responding to the customer needs, adapting the PA INDUSTRIAL MANUFACTURING
offering and introducing a new business model. LEAD
6 SERVITIZATION REPORT

ABOUT
OUR
RESEARCH
 ABOUT OUR RESEARCH 7

ABOUT OUR RESEARCH

Manufacturers in the industrial engineering sector are moving away from selling physical
products towards providing value-adding services based on their products’ core capabilities.
This trend is giving rise to a new type of business model where companies are paid for the
output or outcome they deliver for their customers, rather than for the physical products
themselves. This is servitization. What our research seeks to understand is why companies
are moving in this direction. Do servitized offerings deliver better financial rewards? Do they
enhance companies’ competitive position? And what does it take to get servitization right?

About our respondents

To find out, we interviewed 60 industrial STAGE 2
engineering companies in Europe. 93% were Next, we discussed the company’s business and
manufacturers of assets critical to customers’ core service strategy, position in the ecosystem, operating
production processes. They included international model and the way it organises its services. We also
companies, large corporations and family-owned explored the company’s ambition to move to an
businesses operating in different parts of the output- or outcome-based delivery model and the
industrial engineering sector. reasons behind this. We identified gaps between the
company’s current offering and customer demand,
The respondents interviewed expressed their views and considered the strategic moves required to
from, among others, the following companies: move forward.

Aebi Schmidt, ASML, Assa Abloy, Atlas Copco, Autoliv,

STAGE 3
BDR Thermea, Bonava, Bosch, Boskalis, Brightstar,
Finally, we looked at whether the company’s current
CIRA, Damen, De Lage Landen, Denso Europe, DSM,
data and technology capabilities, and its existing
Electrolux, EMAS Chiyoda, Esko Graphics, General
customer and business model, are mature enough
Electric, Groningen Seaports, Hencon, Hittech,
to support a servitized offering. This included
Lockheed CAE, Marel, MCB International, Mitsubishi
considering how the company’s capabilities compare
Electric, Moba Group, Munters, NCC, Nibe, Olympus,
with the perceived capabilities of its most important
Port of Rotterdam, Prysmian, Rexnord, Rockwell
competitors. We asked how urgently the company
Automation, Royal IHC, Sarco, Sealed Air, SKF, Spectris,
feels the need to change, and what barriers it faces in
Spirax Sarco, Stork, Swecon, Thermo-Fisher FEI, VDL,
its efforts to develop a servitized offering or enhance
Volvo, Walraven Group, Yanmar.
an existing one.
Each face-to-face interview took the following structure:
We combined the results from all the interviews in an
anonymous database. Where we mention a specific
STAGE 1 company in this report, the company has given their
The first part of the interview was about checking explicit approval – or the information is available in
the basics: company profile, customers, competitors the public domain.
and their profiles, services delivered, revenues
and margins.
8 SERVITIZATION REPORT

KEY FINDINGS

75%
of industrial manufacturers expect delivering
services to become a significantly bigger part
of their business in the next three to five years.

61% some form of output-based services,

Today, 61% of companies already deliver

whereas 21% deliver some form of

21% outcome-based services.
85%
According to survey participants, 85%

57% aim to deliver output-based services in

three to five years' time, and 57% aim to
deliver outcome-based services.

Companies that run their service business

successfully report significant margins. Most companies do not have a
consistent strategy, capabilities and
The average growth margin from
operating model in place to support
services delivered ranged between 15%
services – top performers do.
and 35%, much ahead of the margins
15% 35%

realised on their products. Despite the anticipated growth

in service provision, only 30% of
Companies doing well invest in service
the companies interviewed have a
concepts and digital technologies to
service strategy in place.
keep costs down.

75%
75% of the companies interviewed
acknowledge they are missing core
capabilities to deliver services.

30%
 KEY FINDINGS 9

20%
The top 20% that are successful in servitization
effectively combine their capabilities in the
areas of technology, data and customer to shape
their offering.

Most companies we interviewed acknowledge they

could make far better use of the data they possess
to improve how their customer uses the product,
improve performance or boost innovation.

The top performers have embedded collaboration

between functional disciplines in their culture and
leadership style.

Many try to sell services as if Servitized offerings fundamentally

they were a product. change customer relationships and the
way companies organise and run their
Successful companies clearly
differentiate their servitized offering businesses. Leadership to drive and
and adapt channels, customer orchestrate the change is critical.
approach and even their brand.
Although we found many servitization
By segmenting their customer base initiatives start at mid-level management,
on buying maturity, they are able to successful scaling requires an active
bring different service offerings into role and support from top management
the market. in terms of creating a vision, making a
budget available and creating a plan. In
Only 10% of companies perform the most successful companies, board
customer segmentation that is members proactively reach out to the top
explicitly based on customer buying management of their customers.
10%

behaviour and maturity.

10 SERVITIZATION REPORT

INTRO
 INTRODUCTION 11

INTRODUCTION

Making and selling great products is still the traditional

business model for most industrial manufacturing
companies. But competition is tough. Having an excellent
piece of hardware for sale is no longer a guarantee that
customers will continue to buy. Demand is changing,
reinforced by rapid developments in digital technology
such as sensoring and data analytics. Software becomes
a key component of many modern offerings. Should a
competitor's offering result in higher productivity at lower
cost, the customer may start doing business with them.
This means companies need to reconsider what it is they
deliver to customers and how they deliver it. Leading
manufacturers are successful in developing service-based
offerings as a new source of revenue and income. What
makes them successful is what we seek to uncover in
this survey.
 12 SERVITIZATION REPORT

7.0
Economy RoA
6.0
(Linear) Economy RoA
5.0

4.0

3.0

2.0

1.0

1995 1998 2001 2004 2007 2010 2013 2016

Source: Thomson reuters Eikon; Avention; PA analysis Note: Public comapnies in Europe with revenue >$1bn were
selected to represent the EU economy.

Figure 1: Return on assets for the EU economy, 1995-2016

Thomson Reuters Eikon; Avention; PA analysis NOTE: Public companies in Europe with revenue >$1bn was selected to represent the EU economy

As can be seen in Figure 1 (above), the return supported by a supply chain to enable further service
on assets has been gradually declining over the in the next harbour. Technology is therefore enabling
past decades. Equipment manufacturers face the a completely new business model, ensuring reliable
consequences through declining prices and eroding power instead of selling machines.
margins. Different strategies are applied to respond
to the changing competitive forces. Owning cutting-edge technology in itself does not
guarantee success. It is how businesses combine
Cost-cutting has been largely successful in helping technologies and bring them to the market that counts
manufacturers protect margins, but cost-cutting as illustrated in the example below:
programmes have eroded companies’ creative
and innovation capabilities – the ‘capital’ they
need to compete on product innovation. Another
strategy is to make production more efficient. We A leading Japanese consumer electronics
recently carried out research and found 36% of all company invented the Walkman in the 1980s
new initiatives taken in industrial and automotive and owned all the technology that could have
companies aim to improve efficiency, eg by
made the company the inventor of the iPod. But
applying robotics as a substitute for costly human
labour.1 This is enabling companies to build high- because the different technology components
performance products at a lower cost than has were all ‘owned’ by different business units,
ever been possible before. there was no overarching idea what the
combination would be capable of.
Technology changes markets and creates new ways
to compete. Developments in 3D printing add a new
dimension. Manufacturers use 3D printing to produce Steve Jobs envisioned the future. With a
equipment parts more easily and reliably, at any relatively simple product, he laid the foundation
time, in any location. So, for example, a manufacturer
for a completely new industry that transformed
of engines for ships can take full control of a ship’s
engine room, providing an on-board service engineer the way music is distributed and revenue and
and a 3D printer to produce replacements for any income are generated.
parts that fail while the ship is at sea. And this is all

1 Digital business models for the automotive and industrial sectors

www.paconsulting.com/insights/digital-business-models/
 INTRODUCTION 13

Servitization promises important Servitization changes everything

advantages but comes with Servitization has an impact on almost every aspect
of how a company operates – from strategy and
new risks go-to-market approach, to operating model and
Industrial manufacturing companies are increasingly financial model.
searching for innovative ways to reach their market.
In our research, 75% of manufacturers expect Although 75% of companies interviewed expect to get
delivering services to become a significantly bigger a significant portion of their revenue from output- or
part of their business in the next three to five years. outcome-based services rather than products in the
next three years, 70% do not have a service strategy in
Servitized offerings can range from services related place. And only 20% are well organised to cope with
to basic repair and maintenance, to full control the demands of a servitized offering. The successful
over a customer’s production processes and even companies embrace servitization fully and organise
output. As a result, various commercial models for it, without losing focus on what they are good at
apply – each with a different financial and risk profile, today: selling products. As Arjan Ester, director at
and generating a different level of revenue and Aebi Schmidt, stated: “You can’t forget to keep selling
margins. Some services may eventually become fully your product.” It is the combination that provides
independent of the products that launched them. challenges, and we will explore them throughout
this report.
Servitization has two main attractions for
manufacturers: high margins and a more intense By capturing insights from our research, we aim to
relationship with their key customers. Higher margins help manufacturers shape their servitized offerings,
come from delivering – and being able to charge for – organise to deliver and achieve success. Our insights
an offering that is more valuable to the customer than are organised into three sections:
a product alone. Customer partnerships come from
the relationship that develops between manufacturer
• HOW TO COMPETE
and customer as they work together to find new ways
This section explores changes in customer demand,
to address the customer’s needs. In this process, the
looks at manufacturers’ strategic positioning in their
core businesses of the two parties become intertwined
ecosystem, and investigates how the evolution from
– keeping customer and supplier close, and raising
product to servitized offering takes place and what
the bar for potential new suppliers. Both suppliers
challenges companies face.
and customers are cautious of creating too many
dependencies, and deliberate strategies to create
‘customer lock-in’ may work in the short term. But past • HOW TO OPERATE
experience shows these are usually unsustainable. Here we analyse the different capabilities required
to deliver servitized offerings, and how to organise
Naturally, there are downsides. These include higher them effectively in a business model geared to the
operational and financial risk. When asset ownership success of customers and manufacturers.
remains with the manufacturer, this changes their
financial position. Not only does this have an impact
• HOW TO TRANSFORM
on the balance sheet, profit and loss statement and
Finally, we explore the strategic and leadership
cash flow; the revenue recognition and earn-out
challenges associated with transforming the
model are also different. Operational risks need
business – both strategically and operationally.
to be managed as the advantage of flexibility for
the customer comes with a downward risk for the
Servitization can be the instrument for a highly
manufacturer. These risks include valuable assets
innovative, durable and rewarding relationship with
that stick on the balance sheet and lose value when
your customer. It is about applying market innovation
customer demand or technology changes. General
and leveraging on strengths that a company already
Electric experienced this during the 2010 economic
has. Applying these differently, filling the gaps in
crisis when customers reached out to renegotiate
much-needed capabilities, allows manufacturers to
contracts as machines were only used for half of what
be successful in the new operating model, creating a
the contracts were based upon. Part of the risk can
unique competitive advantage.
be covered in contracts, but not all as this will reduce
the benefit for the customer. Leasing companies see a
new market developing and have specialised offers to
support manufacturers.
14 SERVITIZATION REPORT

HOW
TO
COMPETE
 HOW TO COMPETE 15

HOW TO COMPETE

Servitization is set to reshape manufacturing value

chains dramatically. Manufacturers need to think carefully
about how their markets and their customers’ needs are
changing and the impact on their offerings. They must
identify which segments they see themselves working in,
understand their position in the ecosystem to define the
route forward and redefine the relationships they have
with customers.
16 SERVITIZATION REPORT

New models adding value for customers

We have identified three levels of servitized offerings and these are
outlined below using the CT scanner product as an example.

Product-related services:
Product-related services are still closely related to the product built by
the manufacturer. They often focus on helping the customer get superior
performance, eg through sophisticated maintenance and calibration
services. Product-related services are usually delivered under a traditional
financial model. The customer buys the product, operates it and puts it
on the balance sheet. Once the product’s technical or economic lifetime
comes to an end, the asset is decommissioned and replaced. CT scanners
have traditionally been sold to hospitals in this way.

Output-based services:
Output-based services deliver what the customer requires from the
product, rather than the product itself. In the full form of output delivery,
the customer does not buy the product. The machine remains on the
manufacturer’s balance sheet, and the customer and the manufacturer
agree a price per output – usually embedded in contracts with risk
controls. For the customer, capital expenditure becomes operational
expenditure, while for the manufacturer, revenue is spread across the
contract life cycle.

The function of the scanner is to produce CT scans. Hospitals are more

interested in getting the highest-quality scans possible, reliably and at the
best price, rather than in owning the equipment. The manufacturer knows
how to manage the performance and output of the scanner to deliver this,
and how to optimise maintenance and performance across a portfolio of
scanners. Contracting on a ‘pay per scan’ basis can be attractive both for
the hospital and the manufacturer. This model is simple, measurable and a
better fit for the hospital’s financial model.

Outcome-based services:
Outcome-based services deliver what the end customer requires.
Although the ultimate outcome of a well-treated and healthy patient is
dependent on more than a scan, scans and scan data are combined with
other rich data about diagnosis and successful treatments used for other
patients. This can deliver the insights that enable the doctor to find the
therapy that is likely to be most successful given the characteristic of
the individual patient. The scanner as a product is still essential, but the
manufacturer has made their offering much more valuable by applying
data analytics, software and extensive experience to the benefit of the
end customer.
 HOW TO COMPETE 17

OUTCOME

DESIGN
DIAGNOSTIC
PROVIDE
DIAGNOSTIC
IMPROVE
DIAGNOSTIC
The drive to create value for the end customer is
METHODOLOGIES METHODOLOGIES METHODOLOGIES further boosted by customer demand. GR Health,
the Georgia US Regional Health organisation, asked
Philips to help them shift and share responsibility for
OUTPUT

DESIGN INSTALL ENSURE

X-RAY IMAGERY X-RAY IMAGERY X-RAY IMAGERY
creating value for patients. They requested healthcare
delivery to be based on innovative technology and
collaboration, triggering new business models. GRHS
PRODUCT

DESIGN INSTALL MAINTAIN and Philips formed a strategic managed service,

CT SCANNERS CT SCANNERS CT SCANNERS
offering a range of advanced medical technologies,
consulting services and operational performance, at
DESIGN PROVIDE ENSURE pre-determined monthly operational costs.
Figure 2a: A service matrix for a supplier of CT scanners
Our service matrix plots product-based, output-
based and outcome-based offerings against ways for
manufacturers to deliver these for the client: design,
provide, ensure.
SOLUTION FULL
OUTCOME

ENGINEERING RESPONSIBILITY As an example, Figure 2a (top left) shows the service

DELIVER INSIGHTS matrix for a supplier of CT scanners. Figure 2b (left)
OPERATE ASSET gives more detail on the sort of services provided in
TURNKEY PERFORMANCE each of the areas.
OUTPUT

SYSTEM MANAGEMENT
ENGINEERING DIAGNOSTICS
PROJECT
MANAGEMENT MONITORING

PRODUCT The picture on the ground

PRODUCT

QUALIFICATION RECYCLE
ENGINEERING INSTALLATION REMOVE
LOGISTICS UPGRADE Servitization is already having an impact in
PRODUCTION MAINTENANCE industrial manufacturing. Although 90% of our
DESIGN PROVIDE ENSURE survey participants are involved primarily in selling
products and product-related services, more than
Figure 2b: The type of services provided in a service matrix 50% of companies said they have started building
output-based offerings.

Some are already operating outcome-based contracts,

although very few have managed to take full
responsibility for outcome, as can be seen in Figure 3
OUTCOME

33% 23% 13% (bottom left).

For manufacturers, one of the attractions of

OUTPUT

developing servitized offerings is the potential to

53% 55% 65%
improve margins. Almost all our interviewees confirm
margins from services substantially exceed margins
PRODUCT

from product sales.

93% 78% 85%
Getting a reliable financial insight into the company's
DESIGN PROVIDE ENSURE performance proves to be a challenge: only 18% of the
companies we interviewed systematically measure
and report on revenue and margin from their services.
Figure 3: Manufacturers’ current activities
18 SERVITIZATION REPORT

90
85%
80
73%
70

61%
60 58%
50
% 45%
Products
40

30 Output
21%
20
Outcome
10

NOW FUTURE

Figure 4: An overview of manufacturers’ offerings – now and in three to five years

When they operate output-based and outcome-based product sales, while simultaneously building a service
contracts, they can indicate roughly the percentage delivery model. How to organise for this represents
of revenue these account for. However, this is usually a significant challenge; some interviewees referred
not reported as part of their standard financial and to this as an ‘identity crisis’, looking for leadership to
management information, nor internally or externally. give directions.

Where we could establish figures, we found We came across three basic types of pricing mechanism
maintenance services (which are product-related applied: usage based (how the customer utilises the
services) are generally delivering a gross margin of equipment, such as pay per click or software licence
15-20%, with emergency call-out services scoring fees); performance based (how well the service provider
considerably higher. For output-based contracts, performs, such as service response times); and output
gross margins range from 5% to 35%; the 5% are based (how much business value the equipment creates
companies still learning and experimenting, and the for the customer, such as volume of quality products
35% are those that have embedded output-based delivered). The pricing mechanism, the formulas used
delivery in their core business process. For outcome- and the contract need to be in line with the offering and
based services, the sample was too small to give any fit customers’ and manufacturers’ needs. Companies
reliable indication of margins. often still relate pricing to product costing rather than
to market value, also being pushed by traditional
Interviewees told us that within three to five years procurement mechanisms at their customers.
they expect output- and outcome-based contracts
to represent a significantly larger portion of their
business (see Figure 4, above). Collectively, they
expect pure product selling to still account for 45% of
their offerings. The implications of this are important.
Companies will need to continue to be good at
 HOW TO COMPETE 19

How to compete as demand evolves

Selling products Selling output Selling outcome

SITUATION B
UNIONS GOVERNMENT REGULATORS STANDARDS
Customer demand for servitized offerings and
Supplier’s Supplier Manufacturer Customer Customer’s
companies’ confidence in developing and delivering AN
D
supplier customer
M
them are unlikely to develop in perfect tandem. D E
ES YOUR OFFERINGS

INTERMEDIATES
In an ideal world, a supplier’s offering isTCHfully in
A
sync with what customers want. In real G
M life, there
IN
is almost always a discrepancy between ER customer
FF
demand and supplier offer. UnderstandingE : O the size
N
and impact of the discrepancy LI between what they
L
EA
want to sell and what customers
ID want to buy (see
Figure 5, below) can help manufacturers define their
SITUATION A
servitization strategy.
Buying Buying Buying
products output outcome
UNIVERSITIES RESEARCH
YOUR
Situation A: Customer demands more MARKETS
than is being offered:
risk of lagging behind
Figure 6: The market ecosystem, with potential to reconnect with
Situation B: Offering exceeds customer demand: shaping
the customer or the customer's customer
the market or wasting energy

Matching the development of a servitized offer closely

Selling products Selling output Selling outcome

SITUATION B with evolving demand can help manufacturers take

UNIONS GOVERNMENT REGULATORS STANDARDS
a strong position within the ecosystem. By contrast,
D
when customers’
Supplier’s Supplier needs develop ahead
Manufacturer of a supplier’s
Customer Customer’s
AN offering, other parties will step in to fill the need. This,
supplier customer
EM
D almost without exception, leads to eroding margins as
YOUR OFFERINGS

INTERMEDIATES
E
CH each party takes their share. In addition, it makes the
AT innovation cycle much harder, as innovation prospers
M
NG through a direct link between user and manufacturer.
E RI
FF
O
E: “Customers don’t only raise the bar. Along
N
LI
E AL the way, it becomes a different bar.”
ID
BERT KOEK, SENIOR VICE PRESIDENT, ASML
SITUATION A

Buying Buying Buying

products output outcome The relationship between manufacturer and customer
UNIVERSITIES RESEARCH
YOUR MARKETS is changing significantly. Technology enables new ways
of connecting to the end customer. As Michiel Peters,
Managing Director of Moba Group, says: “Monitoring
Figure 5: Comparing manufacturers’ offerings versus demand
is another way of being close to your customer from a
distance. As a result, technology is an essential enabler
Another important aspect to consider in defining to our customer centricity.” This also has a significant
competitive strategy is where to position the company impact on traditional distributors, as manufacturers
within the market ecosystem in relation to the end should seriously consider if and what added value
customer (see Figure 6, top right). these have in their relationship with the end customer.
20 SERVITIZATION REPORT

Lagging behind demand: important advantages: they are organised to cope

manufacturers in danger with the varying needs of the end customer and
reduce complexity for the manufacturer. But they
Manufacturers that lag behind in meeting their
may also dilute the manufacturer’s connection with
customers’ demand for servitized offerings
their end customer. And in the most part, they are
(represented by Situation A in Figure 5) become
also customers.
vulnerable to a downgrade of their strategic position
in the ecosystem. These companies experience
difficulty in maintaining margins, insufficient
“We seek to reconnect with
access to end customers and competition from
unexpected areas. our end customer”

We interviewed a company that produces

During our interviews, several companies told us
fine mechanical instruments for leading they were reconnecting with their end customer. The
manufacturers in the high-tech market. The distribution model has worked well for them in the
company’s offer has not changed much in the past, but pressure on margins had forced them to
reappraise how to go to market.
past decade – they are good at what they do.
But their customers have matured and are now There is another pressing reason to reconnect:
buying more complete modules that combine close collaboration between manufacturers and the
mechanical and digital components. end customer is essential in developing successful
servitized offerings. Distributors and intermediaries
hinder this direct communication and, in doing so,
As the company has never built digital into erode manufacturers’ ability to explore new ways of
their offering, they cannot meet customers’ adding value. So manufacturers need to rethink the
changing demands and now find themselves a relationship they have with their distributors to make
sure they add value to any new servitized offering, and
tier-4 supplier. This was a missed opportunity
recognise regional differences.
and has resulted in a lower position in the
market ecosystem. Once manufacturers have established a straight line to
their end customer, they must organise for this without
incurring huge additional cost. This is a significant
Once distributors, maintenance specialists or other challenge as most manufacturing companies are not
suppliers who have a better understanding of what set up to deal with direct requests from customers. As
the customer wants get in between the manufacturer their role and position in certain markets is relevant,
and the end customer, it can be difficult to regain lost we see an increasing trend where manufacturers
territory. It can be done, but making the right choices acquire distributors.
is a complex game.

Suppliers making medium-value components at Ahead of the game: manufacturers

higher volumes are more vulnerable to this threat
than companies supplying large, high-value assets at
shaping markets
low volumes. But even this group is vulnerable when Manufacturers who bring a servitized offering that is
it comes to maintenance-related services. During beyond what and how customers are used to buying
our survey, we found examples of specialist parties (represented by the blue zone in Figure 5) are ahead
engaging with lower-end customers to service older of the pack. In doing so, they attempt to shape
machines at low prices. These specialists gradually customer demand.
build up knowledge and customer relationships, and
slowly move up to high-end markets. By the time This group sees potential for an offering that taps right
manufacturers realise they have lost significant market into the real customer need and builds a compelling
share it may already be too late. case to convince the real stakeholders to buy in a
different manner. Being successful requires a well-
Distributors represent a particular challenge for planned approach, a thorough knowledge of the
companies producing mid- to high-volume products customer and access to the right decision makers.
and spare parts. Distributors offer manufacturers Making a conscious decision to pursue a ‘shaping
 HOW TO COMPETE 21

strategy’ like this can create opportunities but can also Markets: thinking through
be a wasted effort if done the wrong way. As one of
our respondents says: “We deliver ‘output’, but get
future channels
paid for ‘product’ as we have been using service to Looking at how roles are evolving within ecosystems
negotiate price for years.” can give manufacturers a useful perspective on
possible future target customers and markets. Future
Some of the manufacturers we spoke to are having customers may not be today's. We came across
more success in shaping the way customers buy an example of a company supplying maintenance
through servitized offerings than others. We identified services to chemical plants. Their current customer
five key aspects the more successful manufacturers do is the plant owner and operator. But as chemical
well to make inroads with their new offer: companies increasingly seek to make their operations
less complicated and outsource critical tasks to
1. Connect and engage with the people who will trusted third parties, the supplier’s future customer
actually benefit from the offering might be the engineering company responsible for
developing and installing the plant.
2. Prepare use cases and articulate how the customer
derives value from the servitized offering
We see customers change their position over a number
3. Ensure the offering does not contain potentially of years. Sodexo is rapidly developing from a company
competing and conflicting elements that started off with cleaning services to providing
'quality of life' at the workplace, providing solutions
4. Make sure the offering fits or clearly differentiates
and services that go way beyond their original
from the manufacturer’s brand or image
offerings. This also has an impact on their position
5. Hit the right momentum, tapping into market trends in the ecosystem. They take a role in the design and
or customers’ reorganisation initiatives commissioning of buildings. Recently, they equipped
a new building with thousands of sensors to enable
70% of companies raise the issue that their customers
them to tune their cleaning services. This means not
are initially not prepared to pay for services. We found
only that their role to the end customer changes
these companies tried to sell services as if they were a
by unburdening them and enhancing their work
product, using the same methodologies. But successful
environment, also they become a party of interest to
companies clearly differentiate their servitized offering
architects and construction companies.
and adapt channels, customer approach and even
their brand.
This demonstrates how ‘who the customer is’ may
change in a few years’ time and will have a significant
The framework below outlines these aspects and can
impact on the ecosystem.
serve as a mechanism to validate your new offerings
(Figure 7, below).
Offerings: resetting the
ECOSYSTEM
MARKETS
customer relationship
Even though what customers are demanding is
changing, many businesses today are still focused
on procuring capital assets at the lowest investment
Channels cost. Persuading traditional customers to buy
services instead of products requires a different
Segmentation
relationship between customers and suppliers.
CUSTOMERS
An important part of this involves consultation with
Branding Relations customers to tune new offerings to their needs
– a more subtle form of selling than traditional
product sales.
POSITION OFFERINGS
What you sell will affect who you do business with.
Buying products is the domain of the purchasing
department and buying output is a matter for
Figure 7: The themes to address when evaluating strategic position operations managers. But buying outcome takes place
in the boardroom.
22 SERVITIZATION REPORT

The offering and the conversations around it need not work for servitized offerings anymore, first of
to resonate with a range of stakeholders, such as all because the insight into the cost of the activities
with the operations director on reliability, with the required for services is often not there, second
finance director on cost and investment and with the because the offering delivers a value to the customer
technology director on technology integration. It is no that should be reflected in the pricing mechanism
longer enough to simply interact with the purchasing and price metrics. What we come across with many
director and negotiate the price of a singular item. companies is that, when they start with their first
servitized offerings, they look at individual contracts.
Selling into the customer’s real need, rather than It makes more sense to define the overall pricing
continuing to sell their own products, creates more mechanisms and metrics, define the earn-out model
opportunities for manufacturers, but also creates and review how to tune the business model to ensure
more risks. There is a thin line between offering aspects of effectiveness, efficiency, cost and risk are
added value and encroaching on what customers feel adequately covered. No one will get it completely right
is their core competence. first go. However, it is important to understand the
variables within the bigger picture.
This is especially true when suppliers move into
providing advanced output-based services and
selling outcomes. Some customers will be happy “This thing called ‘price’ is really, really
with an ambitious offering; others will see it as a important. I still think that a lot of people
threat and respond negatively and even emotionally.
don’t think it through enough. The only
Building and enhancing the offering together with
the customer over time is key to being successful. difference between the companies that
For example, a sudden offer from a supplier to take succeed and fail is that one figured out
over maintenance services could be very unsettling how to make money, because they were
for the customer if such an offer means they have to
thinking in depth about revenue, price and
dismantle a large in-house maintenance organisation,
with all the impact on workplace relations this would business model.”
have. Getting the timing right is key to closing the deal
STEVE BALLMER, FORMER CEO OF MICROSOFT
on servitized offerings. Once sold, offerings develop
over time, reflecting the customer's evolving needs
and confidence, and take on a shape very different
to their original form.
Position: do customers trust
your brand?
Some of the companies we interviewed build
Servitization creates a mutual dependency between
for public infrastructure projects. And tendering supplier and customer. Valuable information
is the norm. These companies engage with the and insights are exchanged, so trust becomes
advisory bodies that set the rules for tendering key. We have seen examples where a potentially
powerful position in the ecosystem, based on top-
to influence the way tenders are written. Part of
quality equipment and access to rich data sets,
the game is to change customers’ thinking: does is undermined by a lack of trust from customers.
the buyer really want a contract that specifies Customers need to be confident that the insights
how much sand should be tipped onto the shore they help develop will only be used in their best
interest. This means manufacturers aiming to
after each storm? Or a longer-term contract that
move from products into services must pay serious
guarantees the condition of the shore will always attention to their corporate image – and ensure their
meet certain criteria? image and the offerings they have developed tie up.

Brand and image are also frequently mentioned as a

Another vital component of the offering is price. We barrier to getting paid for services. Customers simply
touched earlier upon the price mechanisms applied don't get it when they see the same company and
by the companies we interviewed. Getting the price the same representatives suddenly selling something
metrics right is a challenge. Manufacturers are often completely new. There is a strategic choice to be made
used to working with cost-plus calculations. That does about branding and positioning of services.
 HOW TO COMPETE 23

Segmentation: a fresh perspective

Segmentation according to customer's buying
Market segmentation gathers prospective buyers
behaviour helps to define their attractiveness.
into groups with common needs and similar
(Figure 8).
responses to sales and marketing actions. It is
a powerful tool that enables companies make
the right value proposition to different target

HIGH
audiences. Traditional segmentation is based on
region, size and markets. But servitization demands INDEPENDENCE PARTNERSHIP

PROFESSIONALISM
a new type of segmentation, with a dimension SEEKERS SEEKERS
that reflects the maturity level of the potential
customer and by the way they buy and other
relevant characteristics.

Judging customers’ buying maturity accurately is FIRE BRIGADE HELP SEEKERS

critical to selling services successfully. Our survey

LOW
shows top performers in servitization segment their
customers according to their maturity and openness LOW HIGH
to buying services. Segmenting by customer buying OUTSOURCING APPETITE
maturity is new for industrial manufacturers. We
found only 10% of respondents take customer Figure 8: Our buying matrix indicates customers’ willingness
maturity into account when they brief customer- to buy servitized offerings
facing staff. In contrast, leaders in servitization
differentiate their offering depending on customer PARTNERSHIP SEEKERS: These companies run
maturity. The effectiveness of this approach is seen in highly professional operations and have a strong
the significant portion of revenues these companies appetite for servitization. They are the only group with
generate through services and the higher margins the potential to deliver sustainable profitability for the
they achieve. They also tend to ‘modularise’ the supplier from full-scope servitization offerings.
offerings to keep costs down.
INDEPENDENCE SEEKERS: These are typically
Segmentation for services requires companies to companies that manage their own services. They have
look for clues that are not immediately obvious. One the potential to be a profitable segment, especially
of our clients aims to sell hygiene services to food if the manufacturer can incorporate the customer’s
manufacturers. The company's use cases were built staff into servitized offerings. Delivering training is a
around cost savings and idle time reduction. They got popular way to engage these companies, and when
feedback that this was not appealing to some clients. trainers are properly briefed, training may deliver
When the team discussed their insights, it became information that results in new sales.
clear that the advantage of more machine uptime
and less idle hours for staff only appeals to those HELP SEEKERS: These companies are usually
customers who have a fully utilised plant. Although troublesome as their requests come at random and
simple and straightforward, this sort of information is often interrupt manufacturers’ support processes.
not normally part of ‘product out’ segmentation but Suppliers cannot organise for this – it is simply too
it is a key differentiator to target the right customer costly. Often, these companies expect suppliers to
base with the right arguments. respond immediately and not charge for their support.
This is not a promising basis for servitized contracts,
A quote we got from more respondents: unless the supplier can gain access to company
management, tap into the real need and convince the
company they could do much better.
“We have always done our segmentation
on a product-out basis, but never checked FIRE BRIGADE: This segment could be open to
low-level services, such as replenishing spare parts,
whether this works for services.”
and can be a source of income if the supplier can
manage services without incurring too much cost on
inventory and supply chain. This type of low-level
need is not usually the basis for starting a servitization
relationship, unless the customer’s own management
sees the need to change.
24 SERVITIZATION REPORT

75% of industrial manufacturers expect delivering services to become a

significantly bigger part of their business in the next three to five years.

Despite the anticipated growth

45% of interviewees expect product
in service provision, only 30%
sales still to remain an important
of the companies interviewed
source of revenue.
have a service strategy in place.
With an increasing share of output-
and outcome-based services next Companies that appointed a
to products, the variety of offerings service director at a senior
increases. As product and service level usually do have a service

30%
offerings are fundamentally different, strategy in place and show
most interviewees find it a challenge better results from services.
45%

to create a sound business model and

organisation to accommodate both. Segmentation of the
customer base for
Almost all parties that are actively developing services is different
servitized offerings acknowledge that reconnecting from segmentation on a
with the (end) customer is key. product-out basis.

Digital technology provides the means. However, many Yet, only 10% explicitly
manufacturers find it difficult to find the right answer if take customer buying
10%

and how to make intermediaries, such as distributors, behaviour and maturity into
part of their successful go-to-market strategy. account when segmenting
customers or when briefing
Getting paid services the sales force.

is a challenge.
Only 18% of the companies interviewed have clear
70% of companies
performance metrics in place.
interviewed have raised
18%

the issue that their Most top performers systematically measure and report
70%

customers are unwilling revenue and profits from services and invest in people and
to pay for services. technology to find low-cost delivery models.

SUMMARY
Drawn by the promise of higher margins, the naturally. As yet, most manufacturers have no concrete
development of customer needs and the drive to gain strategy in place on which route to follow. As we go
strategic competitive advantage, more than 75% of on to address in the next section, thinking carefully
manufacturers expect a growing part of their revenues about the capabilities required to meet the challenges
to come from output – and outcome-based models. from servitization can help bring a coherent strategy
As the trend towards servitization strengthens, they into focus.
have two options – to push out and shape the market,
or hold back and wait for customer interest to develop
 INTERVIEW: MARK ELBORNE 25

INT ERVIEW
MARK ELBORNE

Mark Elborne is President and CEO of General Electric (GE) in the UK and Ireland. He is
in charge of 9 business units, responsible for 22,000 employees at 45 locations in the UK,
including 35 manufacturing sites. We met him in his office at The Ark in London.

A lot has happened since we first met Mark during Applications are what make the Industrial Internet
the Servitization Conference in Birmingham in possible. The community that GE fosters with its
October 2016. Since then, GE has made four partners and customers enables applications to be
significant acquisitions. Each acquisition brings built specifically designed to solve the industry’s most
specific capabilities that enhance GE’s digital complex challenges. GE currently has over 100 Apps
technology and capability and it’s future market on Predix – addressing industrial issues like predictive
positioning. The Meridium acquisition gives GE maintenance, optimising manufacturing operations,
leading-edge capabilities in asset performance field service management and more.
management. ServiceMax provides GE with a digital
platform to support field services, while Bitstew The second is the “Digital Twin.” This enables
Systems and Wise.io specialises in data cleansing companies to build a digital twin of their equipment to
and data integration. help monitor and improve performance. What’s really
important about Predix though is that our customers
Mark believes firmly that new technologies, use the platform to integrate their exisiting software
including digital, will reshape the traditional world systems to further serve their clients. “Creating a
of manufacturing. “There is an overarching need to digital twin of products enables companies to bring
improve productivity in manufacturing. Markets are hardware and software closer together, with endless
getting increasingly tough, with customers becoming possibilities,” explains Mark. “The platform could have
more demanding,” he says. “Technology is enabling been created by software companies. But we have the
new ways of working. We should ask ourselves advantage of knowing the engineering of the product
continually, ´How can we use technology and digital to and how equipment works physically. We understand
help our customers get better outcomes?´” the engineering, the hardware and the issues that
come with operating it.”
In 2015, GE launched its Predix platform, which is
basically an open operating platform to support GE experimented with the platform internally before
data analytics for industrial applications, both in launching publicly, and Mark says it delivered over
the cloud and on the edge. Predix is GE’s platform $730 million of savings globally within GE in 2016. The
for the Industrial Internet, connecting machines, company is targetting to match this saving again in
data and people to under a single, cloud-based 2017. On the back of this, GE has a wide number of
platform supported by an unmatched ecosystem of real use cases from both its own factories as well as its
technologies and partners. growing customer base - which they use to help clients
understand the platform’s potential and persuade
Predix was purpose-built to meet the scale, complexity, them to adopt it. The platform has appeal for existing
speed and security requirements of industrial clients, but it is also attracting new ones too. Recently,
companies and assets. There are two main offerings 145 year old elevator and escalator company Schindler
built on this platform – Apps and the Digital Twin. became a customer, who have never been a hardware
26 SERVITIZATION REPORT

customer for GE. They came to GE because of the to help them with their own digital transformations.
platform. In the words of Michael Nilles, Schindler’s Are they becoming a competitor to consultants? “Yes,
Chief Digital Officer: “If they can do it with jet engines, we are!” is the clear answer. A consulting revenue
they can do it for us.” model is one of the business models embedded in
GE’s servitization plan and a clear signal that traditonal
Mark has a clear opinion on the growing trend for roles in industry are changing rapidly.
automation and data exchange in manufacturing
technologies – often referred to as Industry 4.0. “It is GE Digital Foundries are a model and incubator for
too narrow. Industry 4.0 is really focused on digital and changing the way business operates. GE Foundries,
processs automation - the Industrial Internet is wider. and their respective teams of industrial data scientists,
It is connecting machines and data and the creation of UX designers and experts, enable visitors to change
digital ecosystems. Digital Industrial is about business the way they look at and solve challenges.
relevancy and what digital data can do for productivity
as well as creating entirely new business models. The Our mission is to work with customers to identify,
impact will be huge – we think this can add $8.6 trillion design, test, implement and scale solutions. We also
to the global economy over the next decade” work with start-ups and universities to better understand
Predix and how designing applications on the platform
Mark leads a diverse group of 9 business units in can transform the potential of Industrial Internet of
the UK, all operating in different markets and each Things (IIOT) into reality.
with a specific position on servitization and product
sales. As we found in our survey, this diversity creates The Foundry experience enables customers to see
challenges. But when we ask about leadership, Mark the future in practice today. It’s a place where real
responds that the true challenge for leaders is outside process and machines enable customers, start-ups and
the business, with customers. “Getting the C-level universities to experience IIOT in action, while visually
within corporates to understand what this means to monitoring operations. Our Europe Foundry is based in
their business is absolutely key,” he says. Paris, at the heart of Europe and no more than a two
hour flight from the continent’s main industrial centres.
To achieve this, he regularly talks to the boards of
GE customers about the impact technology and Mark fully understands how important it is to be
digitisation will have for their businesses. What he humble at the right time. When the economic crisis
finds is that they tend to be focused on the business’s started to develop a decade ago, GE was selling
internal IT and underestimate the impact that assets with long-term service contracts. Many of the
technology and digitisation will have from the outside. big airlines and energy providers that had bought GE
Companies also tend to underestimate the culture equipment came back to renegotiate their contracts.
change digital transformation will require. They had planned for 6,000 hours of usage, but were
not even reaching 3,000. “It has not been easy,” says
Mark, “but we have always had an open mind about
“It is incredibly difficult to change culture and what our customers want.” This attitude triggered
behaviour to become a service company.” the thinking that productivity, not the product, is key.
“Of course, the product remains important, but the
key is to understand how the product fits with each
customer’s model and think beyond the immediate
He explains GE is rolling out an education programme
problem of a contract that does not fit.”
across the entire organisation to teach management
and employees what it means to be digital. Everyone
This was one of the triggers for GE’s transformation.
is trained to be a digital ambassador, across functions,
“We are becoming more of a software company, with a
roles, hierarchies, and GE reaches out to customers
 INTERVIEW: MARK ELBORNE 27

robust pillar of ´hardware engineering and technology´

underneath,” Mark says. Software is becoming an
increasingly important component of the business.
In 2016, GE generated an income of $5 billion from
software, and aims to achieve $15 billion by 2020.

What challenges does GE face and what type of

leadership is needed as the company undergoes this
radical change? “Selling software is entirely different
from selling products,” Mark explains. “Traditional sales
executives can sell hardware with software embedded,
but have a hard time selling software alone. Similarly,
software sales staff find it difficult to sell hardware.
The solution is simple – they need to learn from
each other. The only way to win is to be digital and
industrial.” The reality is that only a few people are
capable of making the transition. “In our company,
that is not so much of a problem. We want to keep
selling our hardware to customers who need it. All our
truly digital activities are centered in a digital BU that
is fully P&L responsible.”

It is very clear that GE’s thinking has moved far beyond

products. They are focusing now on what they can do
for their customers – an attitude that is at the very
heart of servitization initiatives.

“There is an energy and a determination

around our company to make it happen.Most
companies do servitization in baby steps.
That doesn´t go fast enough for us”.
28 SERVITIZATION REPORT

HOW
TO
OPERATE
 HOW TO OPERATE 29

HOW TO OPERATE

Strategic direction, the right capabilities and an efficient organisation. An inspiring culture
that rewards out-of-the-box thinking and close collaboration, a clear focus on the customer
and an offer that stands out in the marketplace. Manufacturers need to excel in many
areas to successfully make the shift from products to output- and outcome-based models.
Therefore, capabilities and how to use them are key. This section looks at what the top
performers in our survey are getting right.

OLOGY TO SERVE CU
Figure 9: FT ECHN STO
EO ME
The main aspects US R
R ON DEM AN D
of a servitized D EL IVE
offering and how
NS IMPROVEM
they relate to RATIO ENT
OPE
each other ON
EVELOPMENT

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DATA DRIVEN

The most critical capabilities for companies seeking We use our Servitization Capability Navigator
to develop servitized offerings are technology, data (Figure 9, above) to measure companies’ maturity
and customer skills. Technology in its broadest sense in the three key capabilities (the light blue fields)
– designed to be durable, be serviceable and include and their ability to use them coherently to support
encompassing software – enables companies to innovative offerings for customers (the dark blue
develop sustainable and smart solutions that meet fields). In other words, the light fields indicate the
customers’ needs in a digital era. Data is essential to ‘assets’ a company has to work with, the dark ones
developing new insights that add value for customers. indicate how they use those assets to come up with
Customer skills are fundamental to building a close innovative service offerings.
connection between the supplier and the customer –
the hallmark of mature servitized offerings.
30 SERVITIZATION REPORT

OGY TO SERVE C
C H NOL USTO
F TE M
EO ER
US
R ON DEMAND
D EL IV E

NS IMPROVEM
RATIO ENT
O PE
ON
EVELOPMENT

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IMPROV

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Weighted average:
P RO D

VIC E

TOME
BASE
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RF

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CUS
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> 90% in place

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> 50% in place
AT

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> 30% in place
CONF
IG U RATION DATA

DATA DRIVEN < 30% in place

Figure 10: Key capabilities for servitization
– all survey respondents

When we compare the top 20% best-performing interviewees say they are experimenting in this area,
companies to the rest, the key differentiator is their even if not yet fully focused on doing so to support a
ability to connect the capabilities to drive out value for servitized business model.
the customer. Practically, with these companies we see
intense collaborating across functions and hierarchies. Using technology to serve customers: Using
80% have a good level of enabling technology and technology to serve customers is the core business for
availability of data. However, they fail to utilise the many of the companies in our survey. It is therefore
potential of connecting these capabilities and using unsurprising that 70-90% deliver their technology
them to tap into the customer need – using them in to the customer on demand. But building on this
an integrated way to build compelling offerings. technology to improve operations is done by 50-
70%. Technology has been the core strength of many
Technology enabled: Technology has been a core manufacturers. However, only 30-50% engage their
capability for industrial companies for decades. So it customers in co-development.
is not surprising that 50-70% have already moved on
from producing standalone products to developing Using data to serve customers: Despite almost all
intelligent systems. companies having access to configuration and 70% to
operations data, companies lag behind in using this
Customer centric: 70-90% of interviewees say they data to provide profitable services. Less than 30% say
operate as a service partner to their customer. The fact they use data to improve their products’ performance
that the use of technology and data to support the at the customer site.
‘service partner’ role is lagging behind translates, in
practice, to an ad hoc service model that incurs high cost. Using data to innovate: The ability to use data to
Participants did eventually indicate that a large portion of accelerate innovation is low. Only 25% of companies
the work is still manual. This situation limits ability to scale have a structured feedback loop to R&D. For many
and will not be sustainable in the longer term. companies, this is a result of being too far from their
end customer in the ecosystem. Companies have
Data driven: More than 90% of interviewees say they very different ways of dealing with this. Smaller
own or have access to configuration data and 50-70% companies do not institutionalise. For instance, they
to operations data. But capitalising on this data with bring together engineering, sales, production and
analytics and smart software – essential to creating a service together on ‘innovation days’ to gather all
sustainable business model around servitized offerings relevant issues.
– is still lagging behind. Nevertheless, over 70% of
 HOW TO OPERATE 31

OGY TO SERVE C OGY TO SERVE C

C H NOL USTO C H NOL USTO
F TE M F TE M
EO ER EO ER
US US
R ON DEMAND R ON DEMAND
D EL IV E D EL IV E

NS IMPROVEM NS IMPROVEM
RATIO ENT RATIO ENT
O PE O PE
ON ON
EVELOPMENT EVELOPMENT

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NO
VE

VE
IVE

IVE
VIC

VIC
I MP

I MP
AT AT

L
E

E
RO

RO
STA

STA
V

V
RV

RV
TA

TA
NS

NS
I ON P I ON P
EA

EA
RO

RO
IM IM

SE

SE
PO

PO
TO

TO
IN

IN
BI

BI
VE

VE
TY TY
ES

ES
LI

LI
TO

TO
E

E
R R
I

I
ME

ME
OV

OV
NN

NN
PER PER
FO R M A N CE DATA FO R M A N CE DATA

TA

TA
NT

NT
PR

PR
OV

OV
DA

DA
I I
M

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AT

AT
OF

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E

E
E E
O P E RA
TIONS DATA US O P E RA
TIONS DATA US

CONF CONF
IG U RATION DATA IG U RATION DATA

DATA DRIVEN DATA DRIVEN

Weighted average:

Figure 11: Key capabilities for servitization – > 90% in place > 50% in place < 30% in place
the top 20% performers (left) compared to the rest (right)
> 70% in place > 30% in place

As the inner rings in Figures 10 (on page 28) and 11

(above) represent a higher level of maturity, it is fair to
conclude that only very few companies have achieved
that level.

We see a clear correlation between companies scoring

high on all six capabilities and their ability to work
effectively across functions. This enables them to
shape and reshape their offerings in the course of
everyday business and find ways to add value for
individual customers, before scaling up successful
approaches. We also found companies operating
with strong functional silos score well when it comes
to a specific capability, but poorly on how they use
it. It appears they are driven to excel in their own
domain but are unable to understand their exceptional
capability in a wider context. And it is these companies
where a cry for the leadership is the loudest.
32 SERVITIZATION REPORT

In contrast, companies doing well with servitized Many interviewees were quickly able to identify their
offerings do not wait for top management to give weak spots in terms of the capabilities required for
direction, but are proactive in finding new ways to effective servitization. The top three capability gaps
address customer needs. This typically emerges in reported are:
situations where second-level management has a
certain freedom to manoeuvre, such as business • DATA AND ANALYTICS – companies know this
unit or country directors. Or it can be where top is a key area, but find it difficult to recruit the right
management has a clear focus and drive towards professionals, organise and manage them effectively,
service offerings. and retain them.
• DIGITAL – despite all the talk of Industry 4.0, many
An interesting finding was that companies that have
companies find it a challenge to create a business
one ‘ring’ in place generally perform better than
vision that incorporates digital to offer customers
those that excel in one aspect without connecting to
excellent value at affordable cost.
the others.
• CUSTOMER SKILLS – in nine out of 10 interviews,
companies brought up the ability of the sales force
“I know competitors that will beat us in to interact with the customer beyond ‘selling what is
technology, in data, or in the way they in the catalogue’. Consultative selling skills and ‘new’
account management capabilities are on the wish list
work with customers. But none of them
of almost all the companies we interviewed.
are as good as we are at combining
Most industrial engineering companies have
the three – and that in itself creates
technology at their heart, so they are convinced they
competitive advantage.” excel. But truly new concepts, such as incorporating IP
MENNO KLEINGELD, MANAGING DIRECTOR, VDL ETS and software-based solutions into new offerings, rarely
stem from technical departments alone. The best
ideas are generated by bringing technical, commercial,
And this observation from VDL was also supported digital, data, legal and financial expertise together
in our interviews. Those best at servitization did not under inspiring leadership, in close interaction with
necessarily excel in one of the dimensions. By smartly the end customer. When challenged, most of our
interacting between the domains and working closely interviewees conceded they have some way to go to
together in day-to-day business, these companies are achieving this.
able to shape and reshape their offerings, find ways
to add value to individual customers, and from those
Innovation comes from connecting the dots
experiences scale up.
We performed a small informal test with one of the
leading manufacturers and asked their engineers what
they think innovation is. Over 80% associated innovation
with a physical product. Only a few mentioned
software, data analytics and supporting digital
platforms, which are integral to servitized offerings.
None mentioned market innovation – identifying unmet
needs and developing new products and services
to meet them. This supports the findings from our
innovation research,2 which found companies often
view innovation too narrowly and fail to recognise the
value that comes from connecting the dots.

2 www.paconsulting.com/insights/innovation-matters
 HOW TO OPERATE 33

Technology is no longer just

about hardware
Technology does not only include the hardware From our interviews, engineers still tend to look
that used to be the traditional playing field of many at innovation as hardware innovation. Quite a few
industrial engineering companies; it also refers to engineering companies have IP available at their
how the hardware is made durable and serviceable fingertips, which underlies the design of the hardware
through clever design, and intelligent through but often goes much further than that. It is this
embedding software. Embedded analytics and additional part that the top performers use to enhance
algorithms can greatly enhance the integration of their servitized offering beyond hardware delivery.
the product into the supply chain of the customer.
Servitized offerings only achieve full maturity when
the supplier is in control of performance. That requires
FEI’s services business, spread across more mastering technology, data and software – both
where they are embedded in the products and where
than 30 countries, drives recurring revenues
they are part of the background. Several interviewees
and customer loyalty. The services segment told us: “We need to become a software company.”
represents approximately 25% of total FEI sales Many manufacturers lag behind in building these
($930 million in 2015). skills, although we do see clear moves to address this.
General Electric has carried out four big takeovers
in the past six months – all related to software.
Hein Gijsbers, Vice President Operations, Assa Abloy bought IdenTrust, a digital identity
explains: “FEI (Thermo Fisher Scientific) authentication firm, recently followed by Fargo
manufactures electron microscopes and Electronics, a company specialising in secure identity
card issuance systems. Physical locks will still be there,
has been experiencing increasing levels of
but electronic and digital security is expected to play a
competition for their products. To create dominant role in a few years, and the company set out
competitive differentiation, and bring more a strategy to remain a dominant player.
value to FEI and to the customer experience,
the FEI service organisation began an initiative
“The lifetime of a physical product can extend
to turn data from the microscope into
significantly as software upgrades can add
information. Through the use of proprietary
new functionality to the product with every
algorithms, FEI data scientists have developed
release cycle. Manufacturing companies need
a unique system and environmental parameters
to become much more software savvy.”
that support the internal quality cycle in the
ROBIN STOPFORD, HEAD OF CORPORATE DEVELOPMENT,
production process, as well as bring proactive
SPECTRIS PLC
support to FEI customers.”

At one of their largest customers, a

semiconductor manufacturer, this new service
is delivering astonishing results and value. FEI’s
offer is not about the microscope anymore;
it is about a solution of product and services
to bring better outcomes to their customers
in terms of quality and availability. Using the
new proprietary, industry-leading algorithms
to remotely monitor FEI microscopes, FEI is
able to provide guidance and targeted training
to optimise the use of their equipment at the
customer site and on the factory floor.
34 SERVITIZATION REPORT

Access to data confers

Relative total value of manufacturer’s offering strategic advantage
100%
Data enables companies to enhance the value of their
OUTCOME

ADAPTIVE LEARNING PERFORM

offerings, in particular enhanced productivity. For
example, it80%
can provide intelligence on a customer’s
production processes and enable suppliers to
develop an offer to improve efficiency. This means
60%
having access to configuration, operating and
OUTPUT

performance data is key for any company that wants

CONFIGURATION DATA
SENSORING COMMUNICATION CONTROL

PERFORMANCE DATA
to take a leadership
40%
position in their ecosystem.

OPERATING DATA
Most of our interviewees built or bought the
technology 20%
they need to capture data. With the
PRODUCT

ASSET/EQUIPMENT ANALYTICS decreasing cost of sensor technology, the barrier

to building sensors into almost anything is low.
But getting ownership of data is more of a challenge.
TECHNOLOGY SOFTWARE DATA Customers increasingly recognise theJust
Owner
value of
access
data and are becoming increasingly reluctant to
Figure 12: The relevancy of software increases when moving cede ownership.
to outcome-based offerings

“Today, low-cost sensors are glued onto

The speed at which companies are adapting to anything without having a good concept in
this change varies among sub-sectors, but even
place. What are the most critical variables to
traditionally slower sub-sectors, such as marine, are
adapting. Those moving faster do this by organising measure? How can we capture the data? And
task forces, set out to run pilots with their clients. how can we use it to the benefit of the user
This is something we will touch on in the next section. or supplier?”
But it also drives the need for capability to collaborate
RICHARD LOENDERSLOOT, TWENTE INSTITUTE FOR
between different functional experts and different
MAINTENANCE EXCELLENCE, UNIVERSITY OF TWENTE
types of engineers (design, mechanics, software, data,
connectivity and user experience).
We recognise four sorts of data that deliver increasing
This type of collaboration presents a challenge.
insights that manufacturers may use to enhance
It requires three things: a basic understanding of
their offering: configuration data, operating data,
the discipline of ‘the other engineer’, an ability to
performance data and use data. We inquired into
recognise what you do not know and share this
ownership or access to data and although ownership is
publicly, and a good personality fit in teams. Many
quite low, especially in the categories of operating and
academic institutions understand this and are
performance data, most manufacturers do have access
restructuring to develop engineers who can work
to this data, as indicated in Figure 13 (on page 35).
effectively with colleagues from other disciplines. You
can read more about this in our interview with Richard
Loendersloot of the Twente Institute for Maintenance
Excellence at the University of Twente on page 40.
 HOW TO OPERATE 35

Configuration data: getting it right is the feedback loops. The right information helps suppliers
absolute baseline plan maintenance dynamically based on actual
Configuration data provides an up-to-date record of operations rather than according to schedules.
the hardware and software in place at the customer.
Companies need this data to provide cost-efficient,
Performance data: a power game with trust as the
proactive maintenance services. They usually have
key factor
access to it when they first supply the product and
Performance data measures output from the product,
retain it for some time as maintenance contracts in
such as units produced, quality and yield. Suppliers
place for the first years often prevent changes to
in high-tech industries have the capability to use
configuration by third parties.
performance data to enhance machine performance
even beyond the original specifications. But customers
As an increasing part of functionality and performance
are often unwilling to share performance data as
of modern equipment is defined by software, and the
suppliers could also use it to enhance the performance
IP behind it, version control and monitoring, which
of competitors’ machines. Forcing customers to agree
options are made available to the customer become a
to share data, by making this a condition of guarantees
key component for configuration management – with
on contracted uptime and yield, is one way round
direct impact on revenue and margin. This requires
this. But this really tests the boundaries of how far
a seamless flow between hardware configuration,
customers want to go. Customer trust will increasingly
contract management, software configuration and the
be the key to data access.
invoicing stream. Around 20% of companies indicate
they are unsure they captured all revenues.
End-product use data: currently beyond the reach
of many manufacturers and their customers
Operating data: sharing in the interest of both
Some advanced technology companies are also able to
supplier and customer
access data on end-product use. For example, a chip
Operating data records the use, speed, vibration,
in a mobile phone that lets the supplier know when the
wear and tear and uptime or downtime of a product.
device has become overheated. Or a microprocessor
Manufacturers usually have access to operating data,
in an endoscope that sends a signal to let the supplier
as it is in the customer’s interest to share this, although
know it is no longer being used. These signals can
acquiring operating data of the complete installation
strengthen the innovation cycle, drive improvements in
may prove to be difficult. The way it is made available
the production process or trigger commercial actions.
varies, from logging devices that sit in the machines
For this to happen, suppliers and customers need
and need to be read physically on location, to fully
to work together intensively towards improving the
automated sensors that transfer data through the
end-user experience. For most of our interviewees,
internet, enabling remote monitoring and shorter
either the relevancy to do so was low or their ability to
access end-user data was beyond reach.

ering
100%
General Electric, an industrial equipment
manufacturer, has partnered with Intel, Microsoft
PERFORM
80% and Amazon, among many others (see https://
www.ge.com/digital), to launch their Predix
60% platform. The platform provides a source of data
and insight to enable manufacturers to improve
CONFIGURATION DATA

CONTROL
PERFORMANCE DATA

40%
their products’ operational efficiency, thus
OPERATING DATA

impacting productivity. The platform provides a

source of revenue for GE and a source of insight
20%
and a service platform for their users
NALYTICS

DATA
Owner Just access

Figure 13: An overview of company ownership and accessibility

of three types of data
36 SERVITIZATION REPORT

Get your sales organised

Servitization requires a dramatic shift in the way Manufacturers producing in low volumes for individual
manufacturers sell to their customers. It is less about customers usually achieve intensive customer contact,
selling products, and more about enabling customers typically through their technical sales teams which
to buy by proposing service offerings that are so bring the manufacturer’s and the customer’s engineers
compelling and hard to refuse. together. For these companies, the main challenge is
to change the customer’s existing mindset. It is not
Interviewees identified the capability of their current about owning and maintaining and asset yourself, it is
sales force as one of the three main barriers to moving about how you get the productivity from those assets.
to a servitized business model. They see a lack of Often, the board level of customers is more receptive
consultative selling skills and the ability to extend their to innovative offerings that raise productivity so a
customer network across functions and hierarchies. key lesson for manufacturers is to reach out to the
Individualism was also a major issue. Many sales staff customer’s leadership team to explore potential.
try to close a deal alone without collaborating with
colleagues such as service engineers. But this is not Mid-range manufacturers producing higher volumes
the full picture. face different challenges. Their route to market is often
via distributors or tier 2-3-4 companies that use the
The definition of a sale is different for servitized manufacturers' products in their systems. Distributors
offerings; these are multi-year services contracts, not play a valuable role, speaking to end customers about
one-off product purchases. We found that reward the best technical solutions, directing marketing and
models fail to support this model. And when teamwork sales efforts into specific markets and flattening highs
is not rewarded, why should results-driven people, and lows in demand through smart inventory control.
such as sales, reach out to colleagues? Selling new But they also increase the gap between manufacturers
offerings requires confidence that the offering delivers. and their customers.
This is one of the reasons that General Electric
first applied the concepts internally. Based on this, Bypassing or removing distributors from the value
they started creating use cases and gradually they chain increase the opportunities for manufacturers to
developed a rich catalogue that is now used towards build a stronger, direct connection with customers.
their prospects. Digital technology is increasingly making this a viable
option. Manufacturers can use digital technology to
track product use and performance, and to predict
What you sell matters
accurately when new orders will come in, enabling
Developing the sales capability and supporting them
them to manage their own inventories efficiently.
appropriately is not the whole answer to developing
But the full burden of organising this in a cost-effective
a closer connection with customers. Manufacturers
manner then comes down to the manufacturer. Most
must also adjust their business model to take account
manufacturing companies have no clear channel
of customer context and the position of distributors in
strategy in place for providing services and struggle
the ecosystem.
with the role of their distributors.
 HOW TO OPERATE 37

Reorganising for changing markets

‘The sale is the beginning, not the end’. This BUSINESS MODEL
simple statement, which describes the concept
MARKET MODEL
behind servitization, is set to have a profound
impact on how companies organise to deliver MARKET VALUE
servitized offerings. Business functions that were
traditionally separated, such as engineering and
OPERATING MODEL
sales, will have to integrate to create a better
offering for the customer.
CUSTOMER

What was after-sales service will become the heart FINANCIAL

of the business. Selling a product will no longer be CAPABILITY

considered sales, but pre-sales. And because pre-
sales involves relationship management, the service
engineer might become part of the sales force. To Figure 14: Our framework for business design supports the
support this, R&D departments, which are traditionally systematic definition and design of a servitization business model
focused on the development of the product, will
work in even closer partnership with software and
data specialists to ensure products have the right In his article, ‘How smart, connected products are
data-delivery capabilities built in and to ensure that transforming companies’, Michael Porter3 outlines a
products are durable and serviceable at low cost. new organisational structure that provides a good
reference model for how to organise for services.
It consists of three building blocks:
“We have 400 service engineers. They will
be our future sales force.” • dev-ops, which draws teams from R&D, IT,
manufacturing and service
MARCEL KNOPS, GLOBAL MANAGER OF PROCESSES
AND TOOLS, ASEA BROWN BOVERI • a customer success management unit, which takes
charge of customer relationships and ensures
customers get maximum value from the product
Across the wider business model, other challenges
• a central data organisation, which aggregates
will emerge. Digital security will become a key. Data
data from across the enterprise, analyses it and
will become as important as the physical supply
shares insights.
chain, running back to the manufacturer from the
customer and supplying use data that crosses None of the companies we interviewed have applied
company boundaries. New contractual and legal this type of model in full. But many are making
challenges will emerge, especially around access new connections across the business intuitively to
to, and ownership of, data. The financial model will solve problems created by traditional organisation
transform. Full servitization models leave the assets on models. Aebi Schmidt, for example, regularly bring
the manufacturers’ balance sheet, requiring solutions their sales, engineering, manufacturing and service
to secure operational risk and cash flow. teams together for a full day to exchange good and
bad experiences. They turn irritations into insights,
Many of our interviewees understand they need to which they immediately apply and monitor. In other
change their business model and already have ideas instances, we have seen ´innovation fairs´, where
in mind. Yet few have the bigger picture on their radar different functions present their technical and
that enables them to navigate the change. This is commercial innovations and insights, followed by
where frameworks for the business design can provide an interactive programme to make connections and
help such as the 'Business Model Canvas' (Alexander define initiatives.
Osterwalder) or PA's own framework.
Organising across business units can provide critical
advantages for delivering services. Our interviews
showed that employees in smaller companies have
the advantage of knowing one another better, which
makes it easier for people in different parts of the
business to connect. In smaller companies, issues
travel much faster through the hierarchies.

3 Michael Porter and James Heepelman, 'How smart connect products are transforming comanies', hbr.org, October 2015
38 SERVITIZATION REPORT

For large corporates, changing markets often trigger When manufacturers provide product-as-a-service,
internal debates about role and authority rather than the asset typically remains the property of the
a drive to act collectively and respond swiftly. Many manufacturer and is not sold to the customer.
of these companies have been very successful at This has a significant effect on the manufacturer’s
becoming lean and cost efficient, but they are less yearly income and sales targets, but also on the
adept at responding to gradual changes in demand manufacturer’s balance sheet, as this now holds an
and competition, and the need for new capabilities. asset that would previously have been sold. That
Strong leadership is required to ensure appropriate impacts cash-flow, but also frequently used ratios
action is taken. Having a service board in place can that investors use to judge the financial health of
greatly help to organise the company for services. We a company. Typically, CEOs worry about how the
encountered a machine manufacturer that organised shareholders will respond. The CEOs seek for a plan
a service board across the company departments, of action that ensures them that their revenue from
providing every customer with clear contacts and product sales will not be jeopardised by servitization
services. This ensures that when services are delivered, initiatives whilst also moving towards servitized
all the necessary business units are aligned. offerings within the right market segments.

Many manufacturing companies have historically This is the point where many manufacturers start to
organised their business according to the market explore new financial models. Companies that do not
segments they serve. That made sense when markets have the size to act on their own may collaborate
were stable and demand was clear. When markets with others. In Germany, Trumpf created their own
are changing, rigid organisational structures that bank to supply financing for the assets as part of their
reflect how markets once were can be a disadvantage. business model. Leasing companies have stepped into
Traditional segmentation may even undermine the this market as well and are in the process of enhancing
successful development of servitized offers. their offerings to the specific demands of customers to
support servitized offerings.

One company has been producing and selling

electrical components for the automotive
industry and optical equipment for telecoms for
decades. This is reflected in the business unit
structure of the company with separate business
units for both. But with cars now becoming akin
to data centres, traditional demand changes
fundamentally to solutions where electrical and
optical are combined in a lightweight solution.

Even though the manufacturer can cover the

entire portfolio, their organisation, market
focus, R&D and reward mechanisms prevent
them responding fast and appropriately to the
change in demand.

Customers may not even bother to tell the

manufacturer what they need, as they only
know the company from one perspective.
How would they know the company has
more to offer?
 HOW TO OPERATE 39

The top 20% that are successful in servitization effectively combine and use their

20%
capabilities in the areas of technology, data and customer to shape their offering.

Today's offerings are not only about Many manufacturing companies

hardware, they blend hardware and underestimate the value of their
software into a unique combination. intellectual property.

28% of respondents have indicated The most compelling offerings build

digitisation to be one of the upon unique knowledge the company
main drivers behind servitization. already has, however now applied in the
28%

Software moves to be the value-add form of an integrated software offering.

part of customer offerings.

Companies have more potential 90% of the interviewees indicated

than they actually use. that (part of) the sales force was
unable to sell services.
Companies have capabilities in the areas of
25% of companies indicated this
90%

25%
technology, data, and customer to a good
was one of their main barriers
level. However, value is created through
towards servitization.
collaboration between these capabilities.
70% 30% 25%

Only 25% of respondents have a structured Organising for services remains a challenge.
feedback loop to their R&D.
The move towards servitization requires a
significant change in business model. We
External collaboration enhances found that many companies do not yet see
the bigger picture.
capabilities and offerings.
Over 70% of the top-performing
companies engage in co-development
with their clients, whereas for the rest
this is below 30%.

SUMMARY
The ability to execute the strategy almost without decision makers and most sales organisations are
delay is becoming key when markets rapidly evolve. geared to sell products, not services.
Availability of the right capability is key to support A second challenge is, once on board, to get people
delivery of new servitized models. We have found to work together as one team across functional
that one key step is to recognise what capabilities boundaries. That requires strong leadership, a strong
are required and what is missing. A first challenge business model that is shaped around the customer
for many companies is that they are currently and the services provided while explicitly addressing
discovering what route to take, what they need and cultural issues. In the next section, we will look at what
how to achieve it. Many new software, data and digital we can learn from the leaders in this respect.
capabilities are not the normal playing field of the
40 SERVITIZATION REPORT

I N T ERVIEW
RICHARD
LOENDERSLOOT

Richard Loendersloot is assistant professor of the Chair of Dynamics Based Maintenance

(DBM), department of Mechanics of Solids, Surfaces and Systems of the faculty of
Engineering Technology, at the University of Twente. He is one of the chairs of the Twente Is
Maintenance Excellence (TIME) at the University of Twente and specialises in the structural
health and condition monitoring of materials and structures, based on their dynamic
behaviour.

The DBM chair of the faculty of Engineering provide maintenance. Before they start they want to
Technology was created in 2012, in the same know the current condition, and want to be able to
period TIME was initiated. Currently, TIME covers monitor it. Performing adequate maintenance requires
five areas: mechanical engineering, tribology, civil more than just past experience; you have to know the
engineering, business administration and pervasive material including its failure behaviour and the use
systems. Richard was appointed as assistant conditions to make an accurate prediction.”
professor and started his research in the field of
damage identification in composite materials using Richard highlights the maintenance challenges
integrating sensors. There is a strong interest in stemming from changing use conditions. “Think, for
this topic, especially in the aviation sector, where instance, of our [the Netherlands’] military material
companies see the potential to prevent unscheduled that used to be in Germany, which has more recently
maintenance, or even critical component failure. been deployed in Afghanistan. Maintenance schedules
had to change drastically as wear mechanisms
TIME brings together several chairs covering similar are completely different at both locations. The
fields of research into multi-disciplinary departments. consequences of maintenance are not always clear
This is in recognition of the growing importance of either. When we pulled back our helicopters from Mali
getting engineers trained in different fields working for maintenance, the air support for the UN troops
together across specialisms. “We see that companies suddenly had to be taken over by another country: a
struggle to find multi-disciplined staff that can bridge political issue. This is a non-technical consequence that
two areas of expertise,” says Richard. “The fact is that might have been prevented if maintenance was done
in real life, all teams are multi-disciplined. So we try to in a smarter way.”
educate our students this way. Our new departments
aim to improve our internal collaboration.” It could be Organisations, and especially larger companies, are
highly beneficial if companies would do the same in not always as open to doing things in new ways as
their organisation. they could be. “Companies have a strong short-term
focus on results, which kills a major part of research
Just delivering products is no longer an option and innovation. Innovation has to yield results and
TIME is increasingly working with companies to help have a proven chance of success, as money has to be
them capitalise on data. “Many companies have made quickly,” comments Richard. “A good manager is
gathered a huge amount of data and now want to do willing to take some risks, but stays closely connected.
something with it,” says Richard. “This is something If it doesn't work, he pulls the plug, but at least he
we can help with.” Data is a vital enabler for servitized created a chance for an idea to be conceptualised.”
offerings. Richard confirms that servitization is here Another problem, he believes, is that a lot of
to stay. “Just delivering products is no longer an knowledge is stuck within organisational structures.
option,” he says. “You can see this in the building of This has an effect on innovative capability, as bringing
bridges and roads, or maintenance of our rail network. together different technologies may give birth to
Companies are increasingly aware of the need to new ideas.
 INTERVIEW: RICHARD LOENDERSLOOT 41

“Companies have a strong short-term focus

on results, which kills a major part of research
and innovation.”

How innovation departments are run has an impact on

results too. “There are two extremes,” says Richard.
“One. A manager says, ‘Here’s a bag of money, give
me anything.’ Or two. A manager says, ‘Here’s a bag
of money, tell me exactly what you are doing.’ The first
way does not yield any results at all, just ideas; the
second doesn’t yield an innovative result. There has to
be a balance.”

Could companies do more to take advantage of the

different way engineers see opportunities and risk?
Richard believes they could. “It would be good if more
companies had an engineer on the board. Getting
new ideas on the agenda is difficult. Engineers are
not always effective communicators, so they do not
know how to sell their ideas to the board. Having an
engineer there could help greatly in terms of internal
and external communication, and could increase
innovative strength.”
42 SERVITIZATION REPORT

HOW
TO
TRANS-
FORM
 HOW TO TRANSFORM 43

HOW TO TRANSFORM

In a servitized world, strategy and the capabilities required to execute the strategy both
undergo fundamental change. So what steps should manufacturers follow to achieve the
transformation? And what can they learn from companies that have already made the
transition successfully?

In almost all segments covered by our research, market By contrast, discovery-driven companies start with
demand and the way companies are responding are a practical experiment with a trusted customer
changing. Any industrial manufacturing business that to explore how servitization can better fulfil that
ignores these changes puts their future at risk. The customer’s need. Often these experiments start not
question is not so much ‘why should we servitize?’ because of any particular plan, but just because an
as ‘what will happen if we don’t?’. By reviewing opportunity arises with a particular customer. Often
their strategic position and current capabilities, these experiments stay 'incidental' as no one has
manufacturers can understand the changes they need considered the possibility of replicating the solution
to make to compete successfully and how urgent these or whether it could be scaled up. We have also seen
are. The next step is to realise the change. carefully designed experiments where manufacturers
work with different sets of customers, such as an
end customer, a distributor and a tier-2 supplier, to
Vision driven or discovery driven – understand if and how new servitized offerings could
fill a potential need. They deliberately choose different
success always requires the ability segments in their market to learn what works and
to scale what does not, and scale from there.
In our research. we identified two approaches to
During the interviews, we came across very few truly
change: vision driven or discovery driven. Vision-
visionary approaches where a leadership team sets
driven companies set a clear point on the horizon
a compelling vision and directs. Mostly, vision-driven
and head towards it. They start by conveying a
approaches stemmed from a preliminary discovery
consistent message both externally and internally on
that allowed the company to test the concept. They
what they see happening in the market, supported
then scaled fast, developing a coherent vision in
by a compelling servitized offering that they bring to
parallel, and putting significant budget behind it and
the attention of customers through use cases.
delivering a plan.
An example is General Electric, who have developed
This ability to scale is the key differentiator for
a technology platform that enables users to replicate
generating significant revenue and profit from a
items of physical equipment in a digital space and
servitized offering. Many companies start small, but
connect them digitally. The platform is built with open-
never scale up or do not give themselves long enough
source software, and some 26,000 developers have
to do this effectively. This raises the question: was the
already registered to make apps for manufacturing
changed offering bold enough to be compelling for
companies who want to use the platform to build
potential customers and staff to buy into? Or was it
servitized offerings for their customers. The basic
too bold so that potential customers and staff fled?
questions General Electric goes to market with are:
‘how can technology, digital platforms and data help
solve business problems?’ and ‘how can we embed
that in a compelling offering for our customers?’.
44 SERVITIZATION REPORT

How bold to be – the strategic side

To succeed, companies need to put effort and weight maintenance more accurately. The company noticed
behind servitization initiatives. We have seen brilliant that local councils were interested in the noise data
examples of business unit and country managers generated, as noise is often an issue in populated
who have some autonomy which they use to start areas. With bright thinking, they decided to apply
experimenting with their customers. However, at their skills to the noise produced by incoming planes
some point, explicit support from top management at airports. They are able to relate results from their
is required. The changes required in go-to-market monitoring to wind speeds, aircraft model and carrier,
strategy, in business model, in capabilities and and are now providing advice on noise reduction.
culture are so significant they can only be driven Their smart thinking has generated a new income
from the top level. stream that is only remotely related to the original
product. These ‘bright’ initiatives are usually pushed by
Whether driven by vision or discovery, we found technology, with a compelling service model on top to
companies adopting different strategic approaches to make them attractive to customers.
developing new servitized offerings and targeting new
market segments (Figure 15, below). Right initiatives propose a radically different
offering for existing customers. These initiatives
build logically on the company’s brand name and
image, and make a compelling offer that taps into
DIFFERENT OFFERING

need at the right moment. For example, airlines

RIGHT BOLD
had owned and maintained their own fleets for
RADICALLY

decades. This meant they had to keep up with the

task of ensuring compliance with the latest aviation
rules, certificates and more. Often they operated a
substantial maintenance organisation, even though
maintenance was not their core business. Nothing
changed until cost became a key issue and engine
MARGINALLY

OLD BRIGHT
DIFFERENT

maintenance became exceptionally complex. At this

point, Rolls-Royce identified a compelling case for
retaining ownership of the engines they manufactured
EXISTING NEW CUSTOMERS
and billing airlines for ‘power by the hour’, taking
over full responsibility for engine reliability. The
Figure 15: A manufacturer’s market approach initiative set Rolls-Royce apart and was built explicitly
on the company’s brand name and reputation. The
Bold initiatives create an entirely new offering and supplier works closely with the customer, often for
are geared to attracting new customers. For example, years, to craft the offering and match the pace of its
General Electric is transforming from being a hardware development to the customer’s evolving need. Trust is
company, producing and maintaining equipment, a key ingredient in making this work.
to being a software company, providing technology
platforms for customers to operate on. As a result, Old initiatives are close to the products or services
they have already attracted new clients, such as that a company already provides and are targeted
Schindler. General Electric’s understanding of the at existing customers. They typically occur when
engineering and operating aspects of the hardware customers do not see the benefit of a ‘new’ offering
is critical to differentiating their offer from that of and are reluctant to pay for services they ‘thought
internet and software companies. they already had’. In many of our interviews, we
came across manufacturers who experience price
Bright initiatives build a new solution from pressure on their products and have tried to counter
technology, data and skills for one customer or this by adding extra services for the same price. This
market segment and extend this creatively to another complicates the starting position, but there are ways
market segment. For example, one of the companies around it.
in our survey produces equipment for wind turbines.
They created an offering to monitor operations and
performance remotely. By measuring and interpreting
the vibrations inside the turbines and the noise
levels outside, they can tune operation and predict
 HOW TO TRANSFORM 45

“A lot of experience exists within Royal IHC.

The hidden power of culture –
This enables us to develop new solutions establishing supportive behaviour
for our markets. However, in order to be Behavioural and cultural change does not come
innovative, we need to think out of the box. naturally to many engineering companies. Engineers
themselves often acknowledge that brilliant
Thoughts and ideas must come from outside
engineers can be lacking in communication and
and not just through regular channels.” people skills. So it is not surprising that 30% of
OPERATIONS DIRECTOR, IHC participants indicate that culture is one of the
biggest barriers to transforming the business to
realise growth from services.

A material supplier we interviewed found “Our core ideology is slowly being changed.
themselves at the end of the supply chain, Internally we talk about yield, productivity,
six steps away from the end customer. Sub- and so on. This is new for us.”
contractors in between were rewriting tender COMMERCIAL DIRECTOR AT AN INDUSTRIAL CONGLOMERATE
specs at each step, pushing the manufacturer
into the commodity zone. But the company’s
Technological drive and dedication are often what
knowledge of materials and applications was have made companies successful. But to capture the
unique and often they had ideas for better market opportunities that come with servitization,
solutions than those requested in the tender. the leadership team faces a new challenge. They
need to facilitate the development of new offerings,
So they started talking directly to the end
fill gaps in strategy, capability and business model,
customers and established an advisory unit, and give clear direction. This is often lacking within
which was eventually positioned as a separate companies: 40% in our survey indicate they do not see
brand. Although the company did not recover leaders taking an active role in launching or supporting
servitization initiatives. But the power to cut through
all the market share they had lost, the advisory
barriers and start doing things differently resides with
unit strengthened innovation, generated a new top leadership, so they must become involved and
income stream and opened up opportunities set an example for others to follow. The workforce
with new clients. has a responsibility too. Becoming a customer-centric
organisation capable of delivering servitized offerings
requires a change in culture and behaviours. Service is
not a department, it is a mindset with customers and
their needs at the heart of every plan and every action.

TOP THREE BARRIERS TO

SERVITIZATION
#1: LACK OF LEADERSHIP (40%)

#2: CULTURE AND BEHAVIOUR (30%)

#3: CAPABILITIES OF SALES FORCE (25%)

46 SERVITIZATION REPORT

We found that explicitly addressing culture and Operational-rational

behaviours is a core ingredient for success. In the Challenges are about answering what and how
best transformation initiatives, we see companies questions. What capabilities are required, how should
addressing a mix of rational and emotional elements they be organised and how can gaps be filled? These
and a mix of strategic and operational themes (Figure areas are covered in our ‘how to operate’ section.
16, below). They include how to work with new capabilities,
such as data analytics. This would involve creating
awareness that data is no longer just a matter for the
IT department, but a matter for everyone. It would
RATIONAL EMOTIONAL
also include sharing real examples of how analytics
have helped the company identify and win new
customer opportunities.
STRATEGIC

22 11
Operational-emotional
Challenges are about getting employees to buy into
change. So they should be given guidance on how
they will work together to win customers for the
OPERATIONAL

new servitized offering, and about their new roles,

33 44 including briefings for the sales force (which may
include product engineers). Employees’ worries and
uncertainties should be addressed. They need to know
Figure 16: Our approach to servitization
that it is OK to make mistakes, understand how change
will impact rewards, and how sales and service staff
will collaborate.
Strategic-emotional
Themes tap into how employees feel about the
“In the old days, people made the difference.
company and what it offers. Are they proud to work
for the company and does their pride come across Today, given the high complexity, teams are
to customers? Are they clear on the products and the key factor for success. Organisations that
services the company offers, and what is special can bind teams and have them work together
about them? Mission, vision and value statements
are today’s winners.”
are important here. They may be just words when
on paper, but they can create energy and provide PIM VAN DER KNAAP, DIRECTOR, BOSKALIS B.V.
direction for discussions. For example, a ladder
manufacturer changed their mission statement
from ‘we make the best ladders in the world’ to ‘we
make people taller’. This triggered fierce reactions, Starting the change
ranging from dismissal of the new statement to an
The order in which the different elements are
acknowledgement that there may be another way to
addressed is important. Our matrix suggests a
look at what the company does, unlocking new ideas
logical order, but we have also seen examples where
about the market.
companies moved 2-1-3-4 or 3-4-1-2. A guiding
principle is to move horizontally before moving
Strategic-rational vertically in the matrix – so, to address both the
Themes are about answering why and where rational and emotional elements of strategy before
questions. They touch on all the components of the moving onto operational elements, or to address both
market model discussed in our ‘how to compete’ the operational elements before moving onto strategy.
section: environment, competitive forces, target
markets and competition. For rational analysis to be At the operational level, the rational side should come
persuasive, it should include visits to potential future before the emotional side. People generally want to
servitization customers. Speaking with customers and understand how a new approach will work in real life
exploring new ideas is always inspiring. Engaging the before investing in it emotionally. Use cases are a great tool
right people at the customer at an early stage helps for achieving this. Sales teams will need practical training
build emotional buy-in for the future. in how to discuss use cases with customers (a change in
behaviour) and to give them confidence that the whole
company is behind them (a change in emotion).
 HOW TO TRANSFORM 47

Thinking out of the box is important. You need to General Electric organises their ‘digital’ business as a
be able to imagine what a service could look like, separate business unit, responsible for its own revenue
and how it could help the customer. Simple 'rules and profit. When General Electric provides standalone
of thumb' that can help create the right sort of hardware or embedded software to a customer, for
discussion between sales, service, engineering and example, they do this through the traditional sector
manufacturing staff are outlined below. business units. When they digitise a customer’s whole
organisation, they do this through the new digital
business unit. General Electric recognises and rewards
FIVE WAYS TO CREATE A employees for initiating discussions about digitisation
SERVITIZATION MINDSET with customers. They aim for close collaboration with
customers and, when the market is ready, they may
1. Think function, not product
transfer people to the new unit. This way, there is a natural
2. Think value chain, not customer process for dealing with product sales and bringing
servitized offerings to market under one organisation.
3. Think value, not cost
4. Think opportunity, not constraints Only a small percentage of the companies we
interviewed have appointed a service director at a
5. Think people and relationships,
senior level. The role of service director, with the right
not transactions
mandate, is key to transforming the company. We
are also seeing the introduction of other roles new
to traditional manufacturers, such as a chief digital
Organising for services officer. Often these senior roles are filled by directors
There is quite a way to go before organisations who have built their careers in software companies.
based on the principles of dev-ops, customer success Asea Brown Boveri recently appointed a chief digital
management units and a central data organisation, as officer, who built his career at Cisco.
envisaged by Michael Porter, become common practice.
But we do see an increasing recognition among Although appointing an individual is not the whole
manufacturing companies that different professionals solution, it is a good start. Service directors can fight
need to work together, which is an important first for their case and bring another perspective to board
step. A new mindset and the right behaviours, ideally meetings, as a global director services confirms: “Service
modelled by management, often precede more formal has always been last on the Management Team agenda,
changes in how things are organised. but that is changing now.” Spirax Sarco also confirm the
importance of having someone who takes ownership
Where the service unit is located within the wider of servitized offerings: “The only growth we have seen
organisation is important. There are several options: is in the domains where we have appointed a service
manager.” Another important way to raise the awareness
• AUTONOMOUS – the service organisation is of servitized offerings at the top of the organisation is to
separate and hosted by the manufacturer, or services report revenues and margins generated, something only a
are executed by a third party. small portion of companies do.
• COORDINATED – the service organisation is part of
the company, but set up as a separate business unit, One automotive company we interviewed
with top-down coordination. wanted to design a new business model for a
• INTEGRATED – the service organisation is integrated fast-changing automotive market. The company
with the sales organisation and is part of the wider established a new business unit and recruited
organisational unit.
a single person to start building the vision,
Of the companies we interviewed, 27% have not mission and offering.
organised for services at all. 43% have a coordinated
service organisation. This can work for delivering more
basic services such as maintenance, but may become Within a year, the unit had over 30 employees,
a barrier when companies develop more advanced all working together to build a servitized
servitized offerings. The most successful companies offering. Because the unit was treated as
integrate services with the rest of the organisation to
a profit centre and not a cost centre, with
ensure close collaboration across units. But only 8% of
respondents organise their services in this way. the appropriate KPIs and rewards in place,
employees were fully focused on generating
feasible solutions.
48 SERVITIZATION REPORT

Servitized offerings fundamentally change customer relationships and the way companies
organise and run their businesses. Leadership to drive and orchestrate the change is critical.

Despite the anticipated growth To scale fast, the pilots need

in service provision, only 30% to be chosen carefully.
of the companies interviewed
Successful companies constantly
have a service strategy in place. evaluate and learn from the way
Companies that appointed a the customer buys, and enhance
service director at a senior their offering.
level usually do have a service
30%

strategy in place and show

better results from services.
Creating a compelling offering is important.
When companies stay too close to their current
products and way of selling, they will find
Orchestrating the change
customers unwilling to pay for services.
is key.
Middle management has a crucial
role in making initiatives happen. Behaviour is a critical aspect to succeed.
Top management has a critical The companies most successful in servitization
role in creating the vision, the recognise culture and behaviour as a key
business model and driving and ingredient, and explicitly address this as part
facilitating the transformation. of their transformation programme.

SUMMARY

“We see ourselves as widget manufacturer instead of as a technology provider that resolves
customers’ issues. Unless we develop a new perspective on what we are, we won’t be able
to transform into a service company.”
OPERATIONAL EXCELLENCE MANAGER

To seize the opportunities that servitization brings, There is a lot to learn from the leaders. They sought creative
manufacturers need to look beyond what they do today ways to build on their strengths, have been scrupulous in
and imagine what they can do to contribute to the success recognising and adressing ´what they don't know´ and have
of their customers. With new opportunities identified, they been effective in managing the cultural and behavioural
must work out what capabilities they are missing and act changes needed. Above all, they have started taking steps
quickly to acquire them. Then, top management must play on the journey and by doing that, they get new insights that
an active role in transforming the business, establishing help them get closer to the customer and more effective at
deep relationships with potential customers and creating building the bigger picture and scaling the activities. As a
the right culture for success. result, they are rewarded with a better competitive position
and good margins.
HOW TO TRANSFORM 49
50 SERVITIZATION REPORT

GET IN TOUCH

Interested in speaking to one of our experts about the challenges of servitization? Get in touch today.

Hans Houmes Andy Katz

PA Industrial Manufacturing Lead PA customer strategy expert
Servitization survey Lead
+31 30 28 29 625 +44 20 7881 3604
hans.houmes@paconsulting.com andy.katz@paconsulting.com

Steven Carden Willem van Asperen

PA technology innovation expert PA data analytics expert
+44 1763 285 392 +31 6 52 015 182
steven.carden@paconsulting.com willem.van.asperen@paconsulting.com

Servitization leads per region

Roel Brouwer James Wright

PA Servitization survey project leader UK
+31 6 25 69 5787 +44 20 7333 5183
roel.brouwer@paconsulting.com james.wright@paconsulting.com

Edwin Kock Klas Lindestam

Netherlands Sweden
+31 30 28 29 600 +45 733 10 47 57
edwin.kock@paconsulting.com klas.lindestam@paconsulting.com

Nicolai Broby Eckert Thomas Göttle

Denmark Germany
+45 39 25 5051 +49 69 71702 363
nicolai.eckert@paconsulting.com thomas.goettle@paconsulting.com
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