One of the topics that has come up in the majority of conversations I’ve had with service leaders battling the challenges of COVID-19 is how it has impacted the way in which they need to serve their customers. The biggest wants and needs of their customer base look far different than they did just four months ago, and this is forcing companies to be creative and innovative to adapt to new demands. Practically speaking, many customers are facing financial strain at worst and extreme fiscal caution at best, which is putting the breaks on large expenditures and long-term contracts. Companies that are reacting nimbly are embracing Servitization and outcomes-based service concepts and looking to move toward OpEx and subscription-based models that guarantee a level of service and ease investment concerns. For manufacturers, the shift to Servitization protects them from a potential loss or slowing of product revenue by taking advantage of the customers’ preference to extend the lifecycle of assets through service – and for service organizations, the move to outcomes provides peace of mind to customers while providing recurring revenue.
As such, our current global crisis is taking the journey to Servitization and delivering outcomes that most businesses we speak with are on and speeding it significantly. This journey is complex and multi-layered, which is why we’ve seen relatively slow progress – but as in other areas, COVID-19 will act as a major accelerator and will spur organizations forward in ways that may stretch them and bring about some growing pains but will ultimately make them stronger.
The Servitization Maturity Curve
Many companies I speak with that are on the path to Servitization have defined their own maturity model – they’ve mapped out where they are, and the steps they will work through to reach the ultimate goal based on their own definitions. In 2019, IFS partnered with IDC to create the IDC Servitization Maturity Framework. It outlines four stages of the journey to Servitization, as outlined below (Source: IDC Servitization Maturity Framework, 2019):
- Splintered. The organization struggles under a myriad of silos that lead to disjointed, manual processes. Legacy, fragmented ERP environments provide little or no visibility on operational performance. The business model is on pure product, with challenges to profitability.
- Side-car. The organization has standardized the two chunks of the value chain (back-office and front-desk) but keeps them separated. Keyword in the company is efficiency and add-on services delivered are few. Field service is based on basic mobile capabilities and IoT stacks are at Proof-of-Concept stage. Growing the business is hard.
- Joined-up. Front-office and back-office flows have been integrated both directions and leverage the power of advanced technologies such as IoT to feed the core systems with real-time data. In some cases, Edge capabilities bring coordinated autonomy to local sites. A suite of digital services is fully available, and business model enhancements such as pay-as-you-use and outcome-based contracts are being explored.
- Borderless. Processes start and end outside the organization and operations and technology enables different elements of the value chain to connect. Co-creation, data-sharing and collaboration with customers, suppliers, partners from other sectors and in some cases even competitor part and parcel of the business model.
Based on IDC’s benchmark, 50 percent of the organizations find themselves at Stage 2 (Side-Car), and another 14 percent are stuck in the nightmare of splintered operations (Stage 1). A third of companies interviewed have started joining-up their value chains (Stage 3), and less than 5 percent have reached “Nirvana” (Stage 4) and already opened up their service platforms to the ecosystem.
4 Primary Barriers to Servitization Success
Looking through these four stages you see some of the changes a company needs to make in shifting from a manufacturer of products to a trusted solution provider. It’s hard to deduce from a short description the many layers of challenges that exist in migrating through these phases, but those on the journey are well aware of the complexities. Despite those complexities, COVID-19 and its impact on customer needs and demands is going to force companies to pick up the pace in progressing through these stages. While the IDC data is specific to a manufacturers journey to Servitization, the barriers in the migration for a service business from break-fix to outcomes aren’t all that different.
Here are four primary areas of barriers that will slow your progression to Servitization or outcomes-based service:
- Mindset shift – this may sound far too simple, but it’s harder than you may think – especially for a long-time product manufacturer. To deliver on the potential of Servitization, you must begin with seeing your company as a SERVICE company versus a product company. This mindset shift cannot happen only at the top but has to be carefully integrated throughout the company culture. This requires significant change management and is where many journeys stall out because it sounds simple but is oh-so-hard in practice.
- Clarity on customer needs – in order to deliver a service your customers want or an outcome they’ll be willing to pay a premium for, you need to be intimately aware of their needs. Far too many organizations try to win the race to Servitization, or outcomes based on their own understanding of what they’re customers want versus a firsthand perspective of the problems customers are willing to pay to have solved. Taking the time to gain real-world customer insight on what they want and need is imperative to Servitization success, and even more so in a post-COVID world as those needs have changed and are continuing to change.
- Lack of enabling technology – you see in the IDC insights provided above that Servitization requires a well-orchestrated collection of technology to enable success. Real-time data flow is critical, and the ability to plan and make quick decisions based on this data is essential. You see described a progression away from manual processes to an automated, real-time environment; intelligent planning and optimization; the incorporation of IoT and asset data; and the introduction of digital services and information sharing. This enabling technology has to be layered on in a practical manner, starting with foundational systems that provide the real-time information flow and automation of manual processes. Many companies get stuck in determining how to appropriately outline, integrate, and execute on a digital transformation strategy, which holds them back from achieving Servitization success.
- Internal alignment & processes – Even with a service-first mindset, clarity on customer needs, and a strong foundation of technology, Servitization success can be elusive. This is because it requires such extensive internal transformation in company-wide alignment and processes. This transformation is necessary in overhauling what’s required of your field force, your R&D team, your marketing department, and – critically – how you sell. It’s an immense amount of change and coordination ripe with many opportunities to be slowed or stalled. However, one of the positive aspects of the COVID-19 challenge is how it is forcing organizations to be more open to change, more agile, and more flexible than ever before – and while that doesn’t minimize the challenges of reaching Servitization or outcomes-based service success, we’ve now learned we can do hard things and that newfound fortitude will help spur companies forward in their respective journeys.