I discussed earlier this year my thoughts on how COVID will speed Servitization progress and that belief has only been strengthened since. While an incredibly unfortunate and taxing situation, the pandemic is creating more openness to change both within companies and from their customers; greater appreciation of the digital tools that enable not only business continuity but also set the stage for business transformation; and affirmation of the role service plays in more resilient revenue streams.
I first welcomed Tim Baines, Professor of Operations Strategy at Aston Business School and Executive Director of the Advanced Services Group, to the podcast for episode 70 in August where he shared an overview of the Advanced Services Group’s research and explained how the firm categorizes the four forces behind Servitization. Last week, I welcomed Tim back to discuss his thoughts on how the events of this year will impact the Servitization trajectory and his predictions for 2021.
We discussed that, in navigating the complexities of COVID, what’s happened is that the context has shifted for many businesses. This context shift is having impact in several different ways that are likely to spur the Servitization efforts of many companies forth. “What has happened massively for us over this past year is that the context has shifted. And as a consequence, the decisions we’re making inside businesses has shifted also,” explains Tim. “If you accept that a lot of the forces which are shaping industry were there anyway, what COVID has done is to strip away the grayness of those forces. COVID has shown us that forces which are shaping industry have almost accelerated the shift.”
Primed for a Cultural Pivot
This evolution of context leaves companies primed for a cultural pivot towards Servitization and outcomes-based service. “When we think about Servitization inside the context of a broader firm, one of the big inhibitors of progress has always been almost the cultural change, the legacy of the production that’s sitting behind,” says Tim. If ever there’s been a (albeit forceful) nudge in the direction of advanced services, it is in the context of this year.
“I think businesses are at a crossroads,” says Tim. “Some businesses will look at what we have been through over this last year, they will look back at what has happened in the past and say, ‘Okay, as soon as we can get back to the old way of doing things, let’s do it.’ Then there will be others that say, ‘Okay, we’ve come from there to here and have found ourselves in a position where our people are actually quite ready for change. Let’s move forward.’”
Based on the conversations I’ve had this year, I think more companies than not have taken the challenges of this year and channeled them into a catalyst for change – I think the majority are primed for the cultural pivot necessary to bring Servitization visons to fruition. “The reality is, I am sure that the future direction will be a compromise of both decisions, and that’s fine,” says Tim. “But there are so many exciting opportunities to embrace these forces which COVID has made so apparent to us and capitalize on it through Servitization and advanced services.”
Tim predicts that beyond the ways in which context may impact culture in 2021, financial innovation will play a role in advancing companies’ Servitization and outcomes-based service journeys. “Eighteen months ago, I went to an asset financing conference in London to speak about Servitization. And I was really surprised to hear about all these financial institutions who were talking about Servitization,” he says. “We’d never come across this community before. They spoke about things like subscription charging, which we’re familiar with. But then it moves into conversations about asset financing, partnering with a manufacturer. It moves into conversations about ownership, moves into conversations about contracting. They’re looking at Servitization as innovation… almost what I would call the mechanism for revenue capture. When we talk about Servitization, we’re talking about how you’re bundling the service offerings together to build a bigger customer value proposition. Basically, this is all about, to me, the shift to an outcome-based society. The subscription charging can go hand-in-hand with that, but it’s slightly different things.”
Tim explains how he sees this financial innovation having an impact in 2021 and beyond. “Let’s take a practical example. In the U.K., fossil fuel heating on new-build properties will not be allowed by 2025, even retrofitting. The alternative technology is technology like heat pump technology. It’s expensive, so how do you get that new technology into it? If you or I went out and bought a fossil fuel heating system, it might cost us $2,000. The heat pump system for a house or equivalent property might cost us $20,000. How do we do it? Well, we obviously need financing. And if that financing can be bundled together in terms of a subscription charging, where we don’t feel the pain as a big lump investment, but rather, the pain is spread out over multiple, maybe five-year contract. Then, we’re going to feel more ready acceptance of the technology.” Thinking through how the proliferation of financial models like this could impact the ability to combine product, technology, and service sales across a variety of industries is certainly compelling.
Finally, Tim expressed just how big of a role he believes environmental sustainability will play in advanced service efforts over the coming years. “COVID has made the environmental context more apparent to people,” he says. “In the U.K. particularly, people are spending more time at home, they’re spending more time at the gardens, they’re looking around them and they’re seeing what’s happening. They’re more aware of their environment, and they’re saying, ‘Hey, we like this. We want to spend more time with this environment, we want to care with it more.’”
This growing awareness, acceptance of responsibility, and commitment to action is shared by many of the companies I’m speaking with. I do agree with Tim that sustainability will play a greater role in serving as motivation for advanced services efforts going forward – both in the objectives of the companies to minimize carbon footprint and also from the perspective of the customer looking to choose more environmentally conscious companies to buy from. “The environmental pull is becoming more apparent, so how can industry respond to it? Well, you’ve got all the technology which is required to be put in place and got out there, that manufacturing can provide and get into the marketplace,” says Tim. “There are services upon services, whether it’s heat pump technology, whether it’s hydrogen for house heating, whether it’s shift in mobility, all these different technologies which can be got out there through advanced services.”
While 2020 has been an immensely challenging year and isn’t over yet, I take heart that there is a lot of good to come for companies looking to grow their culture of service. And we’re at a perfect point to do just that. “The potential is great. It’s the bundling between the cultural organization to offer the services that the product enables, coupled with the technologies which help us to monitor how the product is used and build up intelligence, coupled with the financing which gets those innovations into the marketplace as quickly as we can,” says Tim. “If you look at the evidence of data coming out of the World Bank in terms of where gross domestic product is generated, the fact is that services supersede products and production. I think it’s extremely difficult to argue against the adoption of Servitization.”