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Wednesday, 6 July 2011

The 5 Myths of Servitization

It's been some time since I've blogged so I thought I'd better start before I get rusty.

Topic of the day. Servitization. I hate the term but for the life of me, I can't find anything else so I'm going to use it. Basically, this term comes from equipment manufacturing (economists would refer to this as production of durable goods) and the move towards more 'added-value services' (another term I detest) to achieve customer outcomes better. So .... the literature says that firms add value by selling consultancy, integration, education, blah de blah... so this is the phenomenon called 'servitization'. In fact, some firms are earning more revenues from selling such 'services' than they are selling the equipment itself so this means more revenue. Some studies have shown that servitizing is difficult and while revenues may be high, profitability is low and some studies have shown that servitizing is so difficult that many have failed. I thought I'll pen down some of my thoughts on this.

Myth no. 1

Servitization is an extension of your company's offering so who better to do it than the original manufacturer right? wrong. that's like saying i can't reach the pears at the top of the tree so I should grow my arm longer. Buy a pole, dummy. Achieving customer outcomes cannot be more different an organisational capability than the organisational capability to make equipment. The value of the former is achieving benefits for the customer through co-creation. The value of the latter is the transfer of equipment ownership. two. completely. different. value. and which would require different sets of resources, capabilities, flexibilities, you-name-ities. So the pole maker could possibly have a better chance of achieving outcomes (getting the pears) than you because your own set of resources (arms) would limit you. ok, maybe not the best analogy in the world but you get it right?

Myth no. 2

Servitization is about solutioning. Remember that your customer has been doing this job long before you tried to do it for them. They've realised your value proposition (equipment) through internal processes, internal education, usage policies etc. Except that nowadays you try to take over some bits of what they have done, call it a solution and sell it back to them. It could work. Strategic outsourcing has earned IBM billions so don't knock it but just make sure you can do it better and cheaper and don't moan about how hard it is. The part that some firms have become smarter at is understanding that it's not solutioning but co-creating because customers often have resources that are more appropriate than yours and collaboration for outcomes could work better (more profitably) than you taking over their job.

Myth no. 3

Service revenues and equipment revenues are different. There is a popular belief that firms should focus on service revenues and less on equipment orderbooks. Actually, equipment have become so d**n complicated that you need a rocket scientist on the customer end just to realise its use-value. To 'help' customers, firms selling complex equipment must therefore provide service. Therein lies one of the greatest moral hazards of the technology surge. Firms can make equipment that are impossible to use (in the name of great technology) then sell all the 'solutions' to ensure the customer can only get the full benefits if they help them. brilliant strategy. Of course, this is not all bad. After all, we have achieved some huge breakthroughs in technology. What it does mean, though, is that service and equipment revenues and resources dynamically interact - the specification of one necessitates the respecification of the other. For equipment customers, the next time an equipment salesman comes calling, check your resources to realise the equipment's use and before you are completely sold on equipment advances, calculate the cost of realising that use value internally. That's the hidden cost. Working with defence, I am reminded of the story told to me that 20 years ago, anyone can drive a tank. Today, you need an engineering degree (and we wonder why our defence budget keeps going up and up?).

Myth no. 4

Servitization is 'wrapping services around the equipment'. We've written on this actually (see Maull, Smith and Ng, 2011; Ng and Briscoe 2011). What we found is that when you wish to co-create value to achieve customer benefits/outcomes better, you cannot believe that your equipment is a sacred cow. I mean seriously - remember the value of the equipment is a transfer of ownership and the value of the combined service and equipment is achieving outcomes. Now if you want to achieve outcomes, sometimes, the way you have designed the equipment actually gets in the way. I'll give you an example. Say you are manufacturing an engine. You manufacture it in such a way that you can hand it over to the customer who will install it on their plane. You then provide service and support for the maintenance of the engine. Simple right? Then you find that the engine requires more maintenance and repair than normal and the costs of service goes up. It turns out that certain monitoring devices within the engine (e.g. device to monitor the health of engine component parts) are not coping very well with the heat within the engine. In fact, if what you really want is an outcome of consistent and reliable engine use, you would redesign the engine such that these devices are on the plane and not in the engine but the plane doesn't belong to you. So the design of an engine for transfer ownership is not the same design of an engine to achieve outcomes. So its not so straight forward that you can 'wrap' service around equipment. What you 'wrap' is dependent on the equipment itself. You could have much more cost effective service if you designed the equipment for outcomes (see Myth no. 5 below).

Myth no. 5

Servitization is not profitable because it requires more human resources and capability and that is just not scalable or easily replicable. Here, too, our research has given some insights and this is related to myth no. 4. Remember the example I gave about the engine? What it means that maybe (and this is just a maybe) that the reason why your service is not very profitable or scalable or replicable is because you designed the equipment wrong, resulting in the need for more skilled human resource that may be less scalable or replicable. This is what Icall the paradox of servitization. The increase scalability, replicability and profitability of the service may not rest in the service but on the equipment around which the service supports. Equipment which are better platforms for co-creation (think iPhone) and which are able to absorb greater customer variety of use, either through modularity or clever engineering design, require not only lower skills and knowledge from your service employees but also less of such resources. In other words, the equipment itself could require redesign for more scalable and efficient service activities. This would eventually translate to greater margins and if you could by some miracle, actually make it easier for customer resources to realise the use value of the equipment as well, you could get better prices and higher demand as well. Now THAT would be the right way to 'servitize'.

One of the reasons why an SDLogic (Vargo and Lusch, 2004, 2008) approach is so useful for 'servitization' (there's that word again) is that it allows one to see the system as a competency for outcomes, whether achieved through equipment or the firm's people or the customer. Service is competencies for competencies and an SDLogic lens allows one to see the equipment competency, the human competency and the customer competency in a way that can help us make better decisions on where the competencies could be material (equipment) or human or even from the customer depending on variety absorption, scalability, replicability etc. Also, through this lens, bringing in external entities (other equipment or team integration or outsourced partner) in a multi-actor network is now framed as a outcome competency decision as well as a marginal revenue/marginal cost decision for a set of outcomes for all stakeholders. Making all competencies endogenous (i.e. up for change/amendments) instead of assuming a piece of material equipment is sacred, is the way forward to better design of the service system. There's more work to be done!